“Inventory is money sitting around in another form”
- Rhonda Abrams, Best-Selling Author, Successful Business Plan: Secrets & Strategies
“Don’t work for money; make it work for you”
- Robert Kiyosaki
“Nothing is more expensive than a missed opportunity”
- H. Jackson Brown, Jr., Author, Life’s Little Instruction Book
We all know inventory management is important to our business. Because it is so key to the cash flow and health of our business as physical products retailers, it’s often one of the last things we want to give up control of.
Straddling between an art and a science, it is, along with product selection, the thing that can make or break your business and your bottom line.
If you’ve been in this business for more than a minute, you’ve almost certainly experienced stock outs, as well as the pain of overstocking on a dud product.
The expense of these mistakes, both in lost opportunity and hard costs, can be tough to stomach.
So why does it still seem so hard to get it right?
We see the pattern continue time and time again, stock out for what you claim is “THE LAST TIME!!!”, research and acquire recommendations for inventory management softwares, settle on one, try it for a couple of weeks, ditch it, it doesn’t work for you. Go back to your Excel spreadsheet and old system. The system you know. The system that works.
The system that caused you to stock out…
So what is the problem, really then?
Maybe it’s the way you’re looking at inventory management. Below are some pro management tips that will help you to better dial in your forecasting systems.
And at the end of this article, I’m going to tell you how you can integrate these pro tips into your inventory management practice seamlessly.
Better known as buffer stock, a false zero alert is a trigger that tells you to order before you hit your pre-set buffer amount. So, if your pre-set buffer is 250 units, you will be alerted to start the reorder process in time to fulfill before you hit 250 units left at Amazon, not before you hit 0.
You can see how this would work:
This 250-unit buffer acts as a “false zero” to warn you that you need to replenish inventory sooner in case of any real-world delays.
For example, you have an unexpected customs hold. Or there is a typhoon off the coast of China that delays your ocean freight.
If you are always cutting it close to zero, any delay of a couple days or longer could mean a stock out disaster.
Buffer stocks are your inventory safety net, ensuring you can weather those storms.
Are you still using straight, unfiltered data to gage your inventory needs, whether doing a crude estimate for this quarter based on last quarter’s sales, or something more complex like an average of your 180, 90, 60 & 30 Day averages?
If you had a stock out or sales spike rolled up in there, chances are, you’re making a common inventory management mistake.
It may not seem like a big deal but when you look at the hard numbers, you can see what a difference it can make, and how it affects your bottom line.
REMOVING STOCK OUTS
If you’re looking at an average of 30, 60, 90 & 180 day sales and your average velocity is 100 units per day. Your sales projections might look like this:
|180 Day||18,000 units||100 units/day|
|90 Day||9,000 units||100 units/day|
|60 Day||6,000 units||100 units/day|
|30 Day||3,000 units||100 units/day|
|AVERAGE VELOCITY||100 units/day|
|TWO MONTH ORDER||6,000 units|
But, if in the exact same scenario, you stocked out for 2 weeks in the last 60 days but did not factor that in, your average velocity would incorrectly drop down to 88 units per day.
|180 Day||16,600 units||92.2 units/day|
|90 Day||7,600 units||84.4 units/day|
|60 Day||4,600 units||76.6 units/day|
|30 Day||3,000 units||100 units/day|
|AVERAGE VELOCITY||88.3 units/day|
|TWO MONTH ORDER||5,298 units|
If you placed your order based on this faulty forecasting, for a two-month order, you’d be short 702 units. If your profit was $5 per unit, that would be a loss of $3510.
REMOVING SALES SPIKES
Now let’s look at an example of calculating velocity without removing sales spikes.
Let us say we are looking at a product with an average velocity of 100 units/day but that sold an additional 4,000 units in the last 90 Days during Prime Day.
|180 Day||22,000 units||122.2 units/day|
|90 Day||13,000 units||144.4 units/day||Prime Day +4,000 units|
|60 Day||6,000 units||100 units/day|
|30 Day||3,000 units||100 units/day|
|AVERAGE VELOCITY||116.7 units/day|
|TWO MONTH ORDER||7,002 units|
You’d be over-ordering by 1002 units. If this product cost you $5 per unit, that would be $5,010 in tied up capital not working for you for two months.
For a business so subject to cash flow challenges, $5,010 in tied up capital can be costly.
And if we can take that $5,010 and invest it into another product that gets us a 200% ROI, the real loss in missed opportunity amounts to $10,020.
Lost opportunity costs are one thing and are painful enough. But if you are also paying for increased storage fees or interest on Amazon Lending loans the mounting hard costs could increase those business losses considerably.
So dialing in your inventory needs and really getting them right is extremely important in your business. These missteps could be death by paper cuts or, in extreme examples, death by machete.
We often think of forecasting on too basic a level, looking at only the past in order to forecast the future. If we don’t factor planning into the equation, we could end up in missed opportunities.
Forecasting needs to take a broader view.
To accurately predict your inventory needs, looking at things like Lightning Deals, ranking promotions and email marketing offers and other sales events is a key factor of your inventory planning. Any tool or system you have in place for determining inventory orders must include this as a factor or it could be completely dropped out of the equation until it’s too late.
So if you’re using a software or system that doesn’t allow for percentage or unit increases based on your inventory planning not just forecasting from past historical data, you’ll end up having to do all of your additional calculations in your head.
Or, even worse, forgetting until too late… rendering your inventory management system more of a liability to your business than an asset.
Being able to include all sales planning on a per SKU level allows you to dial in your projections to develop more a precise reorder forecast, so you can avoid expensive emergency air freight or canceling Lightning Deals or promotions due to improper planning.
Hey, we get it. Sometimes you have to air freight an order. But often, you only need to send a partial order by air to avoid stocking out.
Stocking out can be expensive - from the lost sales when out of stock to the time, money and extra inventory it takes to re-rank. For all these reasons, you will elect to pay an arm and a leg to not run out.
But how much should you send by air? And how much by sea?
Well, you shouldn’t just send in as much as you’ll need before you run out based on current velocity. You should be adding a buffer stock into that equation too in case anything goes wrong with your sea freight. Because it would be a real bummer to pay for express shipping, only to run out again because your sea freight got held up in customs.
And it almost goes without saying that factoring your sales spikes and stock outs into the equation is another key element to calculating a correct express order.
Losing track of inventory timelines can become a common way of stocking out. Oftentimes, we started working with our supplier years ago when they wanted to impress us and their priorities were maybe a little bit different, or their systems have changed.
Over time, it can happen that lead times change. Yours may have changed already and you just haven’t been told.
The supplier himself may not even realize that it has changed. But, gradually, it sometimes happens that your lead time has extended out 5, 10 and even 15 days longer than you expect.
If you’ve been running out of inventory, thinking it was your lack of foresight or that your sales velocity was higher than you predicted, it can at times be found it’s just a longer lead time from your supplier while you’re still operating off the old one.
It becomes valuable to reassess to last 3-5 orders from your supplier to see how long they generally have taken to get your shipments out the door. This may be investigated as crudely as, when you wired the payment for the order to when they emailed you that it was ready to ship. You may be surprised to see what you learn.
From that audit, you’ll be able to see if you have to adjust your lead time accordingly to order sooner than you have been. Or better yet, dig in to find out why the shipments have been running late.
It may be that their raw materials provider runs late in delivering materials and all you need to do is to order a bunch of raw materials up front to speed up your lead time.
Or your accountant isn’t paying them immediately but waiting until the end of the week. Fire him! Just kidding, simply enact a policy that payment to suppliers needs to be immediate same-day to avoid delays.
The more knowledge you have, the more control you have over your business. So blindly trusting forecasting softwares that don’t (or won’t) reveal to you their “magic” forecasting algorithm actually removes a level of control from your business.
When using algorithms, you should, first and foremost, understand and trust the data going into the algorithm.
If you can’t breakdown the numbers into their component parts, sales, spikes, stockouts, Lightning Deals, seasonality, (or how they calculate these!) you won’t readily trust it.
This is one main reason most sellers who start with an inventory management software, ditch it shortly after, they don’t trust the numbers. (The other is that they can’t manipulate ALL of the data points.)
If you can’t recreate the results fed back to you, if you can follow the numbers, you’re not likely to trust the recommendations that are spit out to you.
I don’t know about you, but running on blind faith was never part of my business plan.
Inventory management is not mysterious. It shouldn’t be made to be. But that’s what some software companies do in order to make you feel they know something you don’t.
It’s just numbers. And if you’re going to be able to trust those numbers, you need to know what they are. So be weary of any software that doesn’t give you full visibility in the numbers within their forecast calculation.
You know your business better than an algorithm does. Don’t let anyone make you believe otherwise.
Doing All the Work Yourself?
If you, like most sellers, still run your own inventory management and forecasting via Excel, chances are, you’re downloading a half dozen reports, uploading them into a tricked-out spreadsheet and analyzing, estimating, tweaking (guessing…) at the calculations, having to remember that you stocked out last month, had Prime Day the month before that, and had an odd, unexplainable sales spike a month earlier...
How much time do you spend on inventory management? Do you feel it's too much? Do you ever wonder if there were a quicker way to analyze your data?
How much money are you losing in importing and tweaking data that you could be spending on things that make you more money, like product development?
How much is your time worth? Lost opportunity cost factors in in just the time invested alone.
Paying a VA?
And what about the hard costs of paying a VA’s salary to do this? It may not be much but it adds up. And then there is user error that factors in...
If you aren’t accounting for buffer stock, sales spikes, stock outs & Lightning Deals, if you’re spending too much time buried in spreadsheets - or blindly following algorithms - if you’re over or under calculating your express freights, you’re bleeding money.
To become expert in inventory management involves a lot of factors. These factors are important. But don’t let anyone let you think they are above your pay grade by making you think they have the “secret” algorithm that will solve all your problems. They don’t.
The above are some of the top reasons many businesses currently struggle with inventory management. It is these short-sided omissions that are the achilles heel of forecasting.
But these are all things you can get a handle on. These are all things that can be built into a spreadsheet and calculated and accounted for.
And it is the very rare forecasting software that can do all of these things.
But whether you use a software or go it the Excel sheets way, you need to be sure these things are taken into account, especially if you intend to scale.
Otherwise, your inventory (mis)management can be your downfall. Don’t let it be the golden noose around your neck. Adopt these vital inventory techniques and keep more money in your pocket.
Chelsea Cohen is an Amazon seller, consultant & co-founder of SoStocked.com, the first & only fully-customizable inventory management software for Amazon sellers. She has been a featured speaker at the Amazing.com Seller Summit & Seller Events and on podcasts such AM/PM Podcast, Seller Stories with Jungle Scout & Amazon Seller Secrets Revealed.
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