How Much Inventory Do You Actually Need?
For small beauty brands, managing inventory is a delicate balancing act. Too little stock can lead to missed sales opportunities (recurring customer sales, subscriptions), while excess inventory can lie around for a very long time, tying up capital and risking product expiration. So what’s a business owner to do? How do you purchase “just the right'' amount of inventory?
If you’re just starting your business, how will you determine the right inventory levels without any prior experience? While many entrepreneurs take on the challenge on their own, it can be a strenuous act to balance. We’ve worked with many new and emerging brands and advise on the topic of inventory; here’s what you need to know:
First Production Run
The first production run is arguably the most important investment you will make and probably the one that you have the least control over. You are an unknown risk to the vendors and manufacturer and most likely you will need to pay upfront and accept their minimum order quantities and lead-times. For this reason, it is vital that you do your research and find partners that are willing to work with start-ups. In the Health & Beauty industry, if you can find a partner willing to produce < 1,000 units this might be a good place to start. Packaging vendors tend to have higher minimum orders due to the nature of their equipment and initial set-up costs. If this is the case, you should be able to work with your manufacturer to hold the extra inventory so that you are not forced into filling all the packaging until you need the inventory.
Understand Your Sales Patterns
Start by analyzing your sales data. Look for:
- Average monthly sales per product: track these numbers from analytics reports via platforms such as Shopify, SquareSpace, Wix, Google Analytics. If done manually, create a solid spreadsheet.
- Seasonal fluctuations: in which quarters/seasons do you notice an uptick or drop in sales? Are there particular SKU’s that are affected by seasonality?
- Best-selling products: your hero product(s) are a big hit; stock up on inventory to prevent “out of stock” issues.
- Slow-moving items: make an estimate of the MOQ for complementing merchandise or seasonal sku’s. If these items do not sell well, consider sunsetting or archiving to save money.
Consider Lead Times
How long does it take from placing a vendor order to receiving the products? Factor in:
- Production time: Vendors and manufacturers typically provide you with an estimated production schedule. If you need to provide any packaging or materials to the vendor, ask them how far in advance they need it and make sure it arrives on schedule. If not, this could lead to delays in your production.
- Shipping duration: is your product coming from a domestic or international vendor? Consider that imported product or packaging can take months to arrive. Set up reminders for yourself for when to restock on your inventory. Longer lead times may require you to keep more inventory on hand.
- Customs clearance (for international orders): this is an important step to consider if outsourcing inventory. Consider hiring a customs broker to handle importation as it is a complex process and if you lack experience this could lead to delays or even destruction of your goods.
Negotiate Minimum Order Quantities (MOQs)
Many CPG manufacturers have high MOQs, which can be challenging for small brands to afford. Try to negotiate lower MOQs or explore options like:
- Finding vendors specializing in small-batch production: research vendors well. This can take months to years before launching a brand and it is important to make this a priority. There are plenty of suppliers that will work with you if you are just starting.
- Negotiate as a sales rep or broker: mention that you are looking for a long-term business relationship with them and as your business grows, you will purchase higher MOQ’s. Vendors appreciate a recurring customer just like you would with your own customers. Try this tactic, there is no harm in negotiating.
Utilize Technology
Inventory management software can help you track stock levels, set reorder points, and forecast demand more accurately. It may be an expense you will need to take on if inventory tracking becomes too much of a burden on your time and business. Connect with us if you need assistance on finding the right inventory management solution.
Regularly Review and Adjust
The CPG industry moves fast and finding the right inventory balance is an ongoing process. By continuously refining your approach as you grow and scale your business, you can optimize your cash flow while ensuring you have the products your customers want when they want them.
To chat with a professional on how much inventory you need, speak to one of our experts by contacting us here.
