Online e-commerce sales and order fulfillment as a result of Web stores and crowdfunding projects have grown exponentially over the last few years, and with it so too have customers’ expectations for quick and pain-free shopping experiences. A great deal of attention has been given by businesses to timely shipping options and error-free order fulfillment, but many businesses give less attention to one of the more critical aspects of logistics – proper inventory planning.
Inventory planning has become more important than ever for e-commerce merchants. Poor inventory planning can result in a number of catastrophic failures for online sellers, from lost sales due to inadequate stock to dead inventory from over-estimated demand. Inventory planning is somewhat intimidating because it requires the use of some higher-level mathematics and statistics. But even if you’re not an expert in this field, you can use some inventory planning tips to make sure that you stay on top of your inventory levels and avoid potential risks from improper planning.
Determine Your Goal for Inventory Planning
Rather than jumping into equations for determining reorder points, safety stock, and economic order quantity, the best first step for inventory planning is simply to create your overall goals. If you’re a new business or just in the process of launching your crowdfunding campaign, you won’t be armed with a wealth of historical data like some companies. In this case, you’ll have to rely upon more general information for inventory planning, and perhaps the goals center around whether you would rather take on the risk of overstocked product or missing some sales. Conversely, if you have a lot of data, you’ll be able to use this information to perform a more detailed analysis, and your goals may include a much more sophisticated set of parameters. Nonetheless, inventory planning starts with determining your overall goals, so spend some time asking some of these key questions:
- Which would be worse for your company – having too much product due to over-estimation of sales or missing some opportunities due to under-estimated sales?
- How much information do you have to make an informed inventory strategy?
- What channels do you intend to sell through and is there any data or research available to assist you with inventory planning?
- How strong are your vendor relationships and how much flexibility do you have to shorten the product supply timeline is a case of unforeseen demand?
- How is your information structured, or if you haven’t compiled data yet, how will your data be structured in the future? Will you be able to keep updated information on a product and SKU basis to make informed decisions per item?
- Do you have a strategy for dead inventory that isn’t selling?
- How tight are you warehouse controls overall? Can you rely on your order and inventory data to provide you with solid, up-to-the-minute information for inventory stock?
Identify Your Critical Inventory Metrics
Before jumping into the gathering of inventory information, it’s important to understand a few key inventory metrics. These are immediately helpful for companies with historical data, but are also important to understand for start-ups as well.
There are really three types of inventory:
- Productive inventory (product that is moving)
- Slow moving inventory (products that aren’t selling rapidly and may require more data to support further investment)
- Dead inventory (products that aren’t moving at all and might require disposal)
Understanding the unique selling qualities of each unique inventory SKU is important in making the right decisions for inventory planning.
How to Gather Inventory Planning Information
Once you’re determined your risk levels and the overall goals of the inventory planning effort, your next step is to start to compile all potential information at your disposal in order to make the best decisions that meet your goals.
In the case of a start-up business or company utilizing crowdfunding platforms, historical data will not be available. Therefore, you must utilize a more creative approach to planning inventory. For example, many pre-sales organizations utilize surveys, market research, other known examples of a similar nature, or even a panel of relevant decision makers in order to determine demand. Thanks to the rise of social media, surveys, and market research are a more viable strategy for startups, as they can be set up rather easily and useful information can be obtained.
Furthermore, users of crowdfunding platforms can temper their initial customers’ expectations by setting realistic timelines for launch and delivery post funding. It is extremely important to set the timelines for delivery of product within the campaign and add appropriate padding so that backers will not be disappointed. In this case, the age-old adage applies – it’s better to over perform a longer timeline rather than to underperform on a tight deadline.
For those companies with more of a historical set of data, inventory planning becomes a lot more detailed. The purpose of this article isn’t to detail the more sophisticated mathematical approaches, but we will list some of the more widely used concepts that are used to calculate forecasted demand below:
- Lead time – how long it takes to deliver your product
- Safety stock – additional stock above and beyond planned sales to account for additional and unexpected demand
- Forecasted sales – project sales using your chosen method for a given time period
- Reorder point – the level of stock which should result in a reorder of new product
Technology-Assisted Inventory Planning
Fortunately, technology has caught up with statistics and mathematics, offering a variety of approaches for those business owners and operators that prefer not to crunch the numbers themselves. There are a number of inventory planning software programs, some of which plug into your inventory or ordering system, that perform the heavy lifting in terms of calculations. These programs allow you to enter all of your products into their system, including detailed information about purchase orders, prices per item and timelines needed to produce and deliver the product to your warehouse. These inventory-planning programs have built-in inventory calculations that tell you which of your items needs to be re-ordered and even alert you by email when important milestones are complete.
If you’re one of the many companies that utilize an outsourced fulfillment company, an added benefit is that most fulfillment providers have a tremendous capability of helping you with your planning function. Similar to the above-mentioned inventory planning software, outsourced fulfillment services companies utilize warehouse management systems, most of which have much if not all of the same inventory planning capabilities.
One of the most common functionalities of warehouse management systems is to provide low-level reporting, which alerts the customer of scenarios when product needs to be replenished. Of course, warehouse management systems can also help track dead stock (products that aren’t selling), and with historical order information, warehouse management systems can help gauge velocity of stock down to the SKU level.
If you utilize outsourced fulfillment services, be sure to check with your provider to see how they can partner with you to assist with planning, and whether or not these services are included in your baseline order fulfillment pricing and fees. If you are interested in outsourcing but don’t know where to turn, there are a number of online resources thatreview and recommend fulfillment companies online.
A Few Last Tips
There are four other key areas to look into when creating an overall strategy related to inventory planning:
- Vendor relationships and timeframes
- Quality of inventory information being recorded
- Strategies for disposing of dead stock
- Sharing inventory information across all decision makers
First, it is extremely important to develop close relationships with the suppliers or manufacturers of your product. Strong relationships will enable you to obtain greater flexibility in ramping up production quickly when needed for seasonal and unforeseen spikes in demand. Furthermore, local versus overseas suppliers will impact timeframe of delivery.
Second, it is vital to the success of your supply chain to have a reliable order fulfillment and inventory management process in place – one that operates at the highest levels of accuracy. If your process is plagued with shipping errors, receiving errors, and mis-picks, inventory information will not be reliable.
Third, factoring for avenues to dispose of dead stock (e.g. liquidation) in the planning stages will expedite any incremental revenues that you can earn. Not only will selling off some of this excess help you from a monetary perspective, but it will also lower inventory carrying costs as well.
Fourth, it’s important to provide inventory information to ALL parties that are relevant. By sharing information amongst all decision-makers, you’ll increase your likelihood of making the best decision for your company and minimizing any potential challenges along the way.