When a business is just getting off the ground and still small, the process of inventory management is fairly simple and straightforward. At this stage it still might be possible to store your inventory at your house and handle it all yourself.
As you grow managing your inventory can become one of the most important aspects of running a business. It requires a well organized process to ensure that timing and accuracy are always met, and everything is able to run smoothly without any interruptions to your orders.
Once a business expands its customer base more product is required to be on hand to meet the increased demands. This can make it more challenging to make sure your inventory is ready to ship once a customer places an order. At this stage it might become too onerous to handle internally and it could be worthwhile considering outsourcing your inventory management to a 3PL (third-party logistics provider). Having a reputable partner manage your inventory takes away the challenges of setting up the entire infrastructure and providing all of the necessary resources to accurately forecast and manage inventory yourself.
When Should You Reorder More Inventory?
Probably the toughest inventory challenge that you will face in your business will be figuring out when and how much additional inventory you should order to make sure you have enough stock to meet demand, but not too much where it is taking up excess space and costing you more than is necessary. By looking at historical patterns for when and how much of your product sells you can start to get a better understanding of what is likely to be necessary moving forward.
The first step in this process is to make sure that all of your sales data is located in a central database that you can reference. It is important that all of this data lives in a single database and you aren’t pulling from multiple channels to compile the information. This could lead to confusing or missing out on some orders. Once you have this set up you can now monitor your inventory historically to see how much of any given product is sold per day/week/month, and see which products have the highest sales volume. It will also help provide information on which ones are not selling so you can decide whether it is worth it to continue selling that product.
Additional data points that you should keep in mind and track include seasonal trends like sales around holidays, offering special sales/discounts, weather factors that might effect shipping and delivery among others.
You can also track how much your sales are growing month-to-month, or if they are staying flat, to help decide if you need to increase the production and turn-around time for products to be available to ship.
By gathering all of this information you can make much more informed decisions with regards to forecasting inventory production. By having a better understanding of the demand for your products you can stop lost sales that could result from stockouts, and cut down on the need to accelerate production and expedite shipping—which can be very costly.
In order to proactively order more inventory when the time comes it is important to establish what are called reorder points for your products. To do this you need to calculate the total days for each of the following processes:
- Lead time of your manufacturer to ship inventory to you
- Your, or your 3PL’s, turnaround time
- The number of days of safety stock you have in case of a spike in order demand
Then you add those three numbers up and multiply it by the average number of sales you have per day and this will give you a fairly accurate estimate of what your reorder point should be.
A good 3PL should have software that can help you set the reorder point for each of the products you have on hand, and in turn automatically notify you when you get to a predetermined stock level.
Should I Distribute My Inventory?
Splitting your inventory across multiple fulfillment center locations, known as distributed inventory, can offer many advantages to a seller. If you are able to track where your products are being shipped, it could save you money on shipping costs as well time that it takes to ship products to your customers. A 3PL can assist in determining the best geographical locations to store your products, based on the highest concentration of orders that go to specific regions of the country. Once you know that, you can cut down on the number of shipping zones that you products must cross to reach each destination. When an order is placed, the fulfillment center that is in the closest proximity to the end customer will be alerted and the order will be fulfilled from there.
Identifying Patterns Within Your Product Orders
It is important to understand both how much of any given product is being purchased, but also if there are any identifiable trends that exist between your products and customers. Do they order a single product? Are they buying multiple products in one single order, or bulk orders of each product individually? Is there a pattern of customers ordering a certain product first, and then placing additional order(s) for more of that product, or ordering different products all together?
Monitoring and watching out for these trends can help provide you with a better understanding of your future customers likely behavior. This information can be utilized to offer special bundles or promotions that help increase your sales volume and reach new customers, or offer specials to existing customers to entice them to order more.
Forecast vs. Reality
All of this data and information should be able to help you to estimate how much product you sell over any specific time period to make sure that you always have enough stock on hand to meet demand. However it is important to keep in mind that it is just an estimate, and as the saying goes, past performance is not a guarantee of future results. In order to ensure that your inventory forecast is as accurate as you can make it is important to review all of your data periodically to see if your estimates were largely accurate. If they weren’t and you ran into issues having the right amount of inventory on hand, you must try and establish what caused them to be incorrect. Once you have a better understanding of what the issue was and why it occurred you can better predict the next inventory cycle. Over time you should be able to have the data and tools necessary to make sure there aren’t any unforeseen surprises that impact your business negatively.
Bottom Line
Inventory forecasting is a crucial aspect to the success of any business that sells and ships physical products. If you don’t make sure you are doing the best to have products on hand to meet customer demand it could quickly affect your sales as well as customer satisfaction. By carefully analyzing trends to help make more accurate forecasts, you are giving your business the best chance to grow and be profitable in the long run.
Help with inventory forecasting is one of the many benefits to working with a 3PL. If you are seeking logistics support we’d love to hear from you. You can read DCL’s list of services to learn more, or check out the many companies we work with to ensure great logistics support. Send us a note to connect about how we can help your company grow.
Tags: Calculators & Formulas
