Why Hold Stock?
The ability to hold inventory has become extremely important for online retailers in the last couple of years. Retailers who maintain stock have a competitive edge, as keeping stock enhances customer experience and the ability to deliver fast and free. Moreover, it enables retailers to provide competitive cut-off dates in high-volume, time-sensitive seasons.
A fantastic example for the need to hold stock could be found in the increase of Zappos. The first business model involved drop shipping directly from vendors to clients. However, this approach quickly became problematic because of irregular availability and unpredictable delivery functionality. Eventually Zappos needed to carry inventory.
Why Not Just Buy Large Amounts of Everything?
Some online retailers believe that you must purchase a lot and in bulk so you never run out, together with the premise it will equal more sales. It’s true that in the event you don’t have it you can not sell it. But more money invested in stock creates potential problems of less cash available for operations. . Additionally, if an organization is heavy in a specific thing it may not have the cash available to purchase another item that’s also needed. Balancing your stock for demand is vital to increasing sales. Additionally, the less stock a merchant holds while maintaining the very same revenues, the greater the return on investment and the higher the expansion potential. For many retailers, holding inventory represents their best investment, so handling it especially for your needs is a remarkably critical aspect.
Forecasting What They Will Buy
Now that we know in theory why we ought to decrease inventory levels, the major issue is how to do it without running from what the shoppers are searching for. I am a great believer in building simple systems which are simple to follow. The system we have invented at overstockArt.com is straightforward and doesn’t need complicated math. The only tool we need is a spreadsheet. But using an inexpensive supply chain applications or database is the way to go.
We’ve got a huge selection of SKUs, a shallow stock amount, and a fairly long lead time. All this complicates the management of stock. Therefore we’ve invested plenty of time and effort at creating a very simple solution.
- Step 1. Analyze annual earnings and find an average daily earnings value (ADS).
- Step 2. Calculate average Supply Time (ST). This is the time it takes from when you place an order to when the items are received.
- Step 3. Calculate sales per unit for the past month. This will be utilised as a comparison and to gauge seasonality, particularly unforeseen changes in demand.
- Step 4. Make an optimum stock level. The calculation is based on double your Supply Time in days multiplied by your daily earnings:
Optimal Stock = 2 X ST X ADS
- Measure 5. Order after a week. Decide on a regular ordering period. By ordering once a week and ordering in smallish batches you reduce the possibility of running out of inventory.
- Step 6. Order to finish to optimum stock level.
- Measure 7. Compare with last month earnings. This is done as a point of reference. If you see a particular item is selling more or less than anticipated, then it is possible to adjust straight away.
Reducing Slow Moving Inventory
For any company who holds inventory, slow moving inventory (SMI) is a reality of life and a problem to contend with. Most of us want to improve the speed of our inventory turns because it raises our return on investment. The number one strategy that we must reduce SMI is to not have SMI in the first location. If you purchase in small batches on a regular basis (such as after a week), you will be able to spot trends quickly so you are unlikely to be stuck with large amounts of inventory on things that don’t move well.
Additional options to reduce or remove SMI are:
- Closeout class;
- Deal of the day;
- Sale on particular items;
- Cross selling SMI.
Purchasing in Small Batches
Many companies take the standard route and try to purchase as late as possible so that they can make as big an order as possible. This provides them with possible savings from vendors. When we began ordering weekly I communicated with our vendors to make sure we didn’t pay higher prices. My primary communication was based on annual volume. I told them our orders will shrink but will end up more frequently. We promised the identical yearly volume, and emphasized the benefits of smaller consistent orders from us, which were as follows.
- Predicable order program. Once a week they get an order.
- Smaller order batches. Does not place as much stress on their own operations.
- Improved cash flow. We pay based on the same agreed terms, they get their payments faster and at a more predictable manner.
- Assist with managing their inventories. We can provide an annual projection. Additionally, by tracking our orders, they can now get a better estimate of the volume.
Applying this strategy will help to make your business more profitable, increase cash on hand, enhance return on investment and enhance customer experience. Properly managing your stock in a very simple but effective way can make a massive difference in your own operations.
I hope to see how others manage inventory levels in the comments below. What methods have you found to work?