It’s a business owner’s worst nightmare: too much inventory sitting in a warehouse, collecting dust, eroding capital, and counting down its days until obsolescence. Then there’s the opposite problem: a sudden spike in demand that your inventory is too meager to meet. How do you regulate your inventory to hit the sweet spot?
We like to call this The Goldilocks Principle––not too big, not too small, but juuuuuust right. Here’s how we work through the inventory management question with our clients to help them determine a solution that fits their needs:
1. Know Your Demand
Knowing how much inventory to have on hand is as easy as knowing your audience, the market trends, your past sales, and making accurate projections. Okay, so maybe not so easy after all. But, breaking it down into simpler tasks can help.
Take a look at your past sales. Average out your sales of each product by month. Chances are if you sold 5 teddy bears in August for the past 5 years, you’re likely to do the same this year. Or better yet, review sales fluctuations over a longer period of time to reveal any performance trends.
Take stock of your audience. Is your current customer the same person as she was 5 years ago? Or have things changed? Knowing your current customer and her shopping habits can help you better project both inventory and pricing.
Pay attention to the market. Dedicate some time to check out your competition. Note how they are stocking shelves or online stores and what products they’re carrying. Even a few hours of research can serve as a great metric for your own inventory choices.
2. Know Your Timing
The market fluctuates just like the seasons. And, in fact, the seasons can play an important role in how you stock inventory. Ask yourself the following questions:
Is my inventory altered by the weather or a change in seasons?
Are there any events that trigger a spike in sales?
What are sales that I project participating in for the year? When do they take place?
Are my sales linked to particular holidays?
3. Know Your Limits
The equation used to measure inventory is simple enough:
But when combined with fluctuations in the market, the unpredictability of demand, and the inflexible nature of production, the equation becomes all the more complicated. There is good news, however: you’ve figured out much you will sell. Now you just need to decide on how much inventory you should have on hand and when to purchase it. Try answering the questions below to help place and time your orders:
How much inventory can you afford to have in stock as a buffer against potential surges in demand? Consider cash flow, storage costs, degree of unpredictability of demand, and production constraints.
What is your product shelf life?
What are the production (if you are manufacturing) or purchase (if you are reselling) minimums? What is inventory lead time from the moment you order it to having it physically on-hand? The longer the lead time, the more inventory on hand you need to have outright.
Where you are in the sales cycle? Are you in the beginning when you are most likely selling at full price? Or at the end, when you are nearing sales period or inventory obsolescence and soon will have to liquidate everything on hand at a (severely) discounted price?
4. Know Your System
Your best asset in better predicting your sales and stock is a healthy inventory system. Searching for, evaluating and selecting inventory systems can be daunting. There are a number of questions you can ask yourself to make the process easier.
Do you need to use an inventory system to build or assemble finished goods or to track goods that you are re-selling as is?
Does your current bookkeeping system have a built-in inventory system? Or does it connect to external inventory systems?
How frequently do you make a sale? Once a day or many times a day? The more you sell, the more automation you need.
Does your third-party sales processing system (POS) track inventory?
Do you need cloud access?
How many users will be using your inventory management system and to what end? Does your staff on the warehouse floor need access on the go? Will your sales staff need access on the road?
What are your cost constraints? How much can you comfortably spend on your inventory system per month? Keep in mind, the more bells and whistles you put on it, the higher the cost.
Bottom line: it may seem daunting at first, but just like Miss. Goldilocks herself, testing things out, and using some of the tips and tricks above will help you find a fit that’s just right.