This is a strange time we are living in. Some businesses are barely limping along. Others have exploded and are trying hard to keep up with demand. Inventory management has become a huge focus. Especially in the face of fractured supply chains and global port congestion.
While no one can wave their hands over a crystal ball and tell you what is going to happen with the global economy or when things will start to get back to normal, you can start to build out inventory planning contingencies that will have you much more prepared than your competitors. The key is to be flexible and to have several plans in place that you can readily move on.
With the proper preparation, you could find yourself winning your space in Q3, Q4 and into Q1 2021 over competitors who merely operate in the panic management band. You can position yourself to slide in and take the top spot when they run out of inventory.
So, what should you be doing right now to make this happen?
Improve Your Cash Flow
In inventory management, everything begins and ends with cash flow. Now is the time to analyze and assess yours and do everything possible to improve it both short and long term. If your sales are suffering, you’ll need to improve cash flow. And if you’ve spiked and are finding you need to place larger and larger orders, you’ll also need the cash to do that.
Immediate actions, if you haven’t already would include deferring any payments you can right now. Even if you can pay all of your bills now, you can’t predict what will happen in the future. If the banks are offering and it makes sense to your business, putting payments on pause will help to free up cash flow for inventory orders. Read on and you’ll see why cash flow is more important than ever now.
Lead times are much longer right now, which means you’ll have a longer time gap between your supplier payments and when you can sell the inventory and make that money back. Having more money available means you can continue to place orders and stay in business. As a physical products business, when you’re out of inventory, you’re out of business.
Prioritize top sellers to ensure your money makers are always in stock. This may mean reassessing whether to reorder products with high MOQs but low velocity. If you have products that take 3+ months to churn through MOQ, you may have to consider stocking out on those products in favor of your real movers.
Finally, now is actually a great time to re-evaluate your entire supply chain. While continuing to keep in stock by ordering from your current supplier, you may want to work with a sourcing agent who specializes in working with local Chinese factories. A good sourcing agent has been known to lower cost of goods by as much as 30%.
Adding margin back to your bottom line will improve your cash flow as you are keeping more of what you make. Establishing new relationships can also help your agent to negotiate better payment terms to further improve cash flow.
Build Out Multiple Forecast Contingencies
As the real importance of planning right now is flexibility, building out multiple contingencies will help you to understand possible scenarios and what you need to get in place to be able to pivot where the market leads you.
You should be paying attention to what is being said about the economies in the countries you sell in and about when they might start opening back up. Then model out scenarios for each instance and how it might play out. This will give you a few predictions on the types of orders you should be placing and by when.
Include within this contingency the ability to ship by high speed ocean as needed. The cost is higher than standard ocean but much, much less than air freight, especially now that air rates are 3-4x the normal.
You may also ask your supplier if you can store inventory at their warehouse temporarily. Most suppliers will allow this free of charge for up to 3 months. As Amazon is restricting the amount of inventory it is allowing sellers to ship in, this combined with high speed ocean might be a viable option to keep costs down while keeping in stock.
Next – and now this is the big one – increase your Q3, Q4 & Q1 2021 orders by 20%. It may sound crazy but this is the linchpin in the plan to crush your competition. As your less prepared competitors run out of stock, having 20% more inventory allows you to scoop up their lost sales, increase your ranking and lock you in at the top position for the rest of the year.
Don’t forget to factor Prime Day, Lightning Deals and other planned sales periods into your calculations. It has happened to too many sellers that they forget to add this to their equation and find they have to cancel Lightning Deals or pump the breaks on sales momentum just to keep in stock due to improper planning. Now that lead times are longer, your planning has to be on point much more than ever before, and that means carefully plotting and planning everything out so you are ready.
Model out these predictions and share them with your supplier. Send them a predicted order schedule for your inventory needs over the next 6-9 months. Chinese factories run on a first come, first served basis, so this can act to lock out competitors who are still in a quandary as to what to do.
Change Your Op Basis
You need to adjust the way you operate right now. It is not business as usual. Start putting systems in place to safeguard your inventory from recurring stock outs.
If you haven’t been, start factoring buffer stock into the re-order calculations of all your products, especially your top sellers. Buffer stock acts as a “false zero”. It is the cushion that you add to your inventory to ensure you are ordering with enough time so that your inventory arrives to Amazon before you hit your buffer stock, not before you hit zero. If you buffer is 500 units, your order should arrive before you hit 500 units based on your lead time. It’s sort of like your empty tank warning on your car. If anything goes wrong with your shipment, you will still have enough gas in the tank to get you to the station.
That said, you do need to be shipping much earlier than you normally would to avoid getting caught up in delays. Adjust your lead times across your entire logistics timeline, from supplier to freight forwarder to FBA check-in. Expect delays all down the line and act accordingly. Lead times from overseas could likely be increased by up to 6 weeks on average.
Finally, add to that timeline enough time for inspections. Even if you do not normally do inspections, now is the time to start. As the entire Chinese manufacturing industry rushes to catch up and keep up with demand, orders will be more rushed than ever. Minimize defects, keep from shipping damaged goods, and avoid negative reviews that could ruin your listing by implementing an inspections company as soon as your next order.
Track Like a Hawk
You need to build in a habit of studying your inventory patterns weekly, especially now. Your patterns will help to inform you on what you will need to do and which game plan to pivot to when. It is the habit that is important. Even if your inventory levels are fine week after week and no orders are needed, keeping in the habit is crucial. Otherwise, missing one week could turn into 6 weeks and suddenly you are discovering that you should have placed orders 2 weeks ago!
Another warning on the tracking front is with regards to warehouse inventory. Having extra inventory in a third party warehouse can be a good safety net, but it can also be a crutch. If you have “plenty” of inventory at your warehouse and don’t watch it carefully, you could find (too late!) that you should have reordered from your supplier to replenish your warehouse inventory weeks ago. That safety net turns into a safety hazard if you’re not careful!
As for velocity tracking, start out using short term velocities such as 15 or 7 day velocities as even the steadiest of products has likely seen massive change. Studying and applying short term velocities now, while projecting out more normal sales velocities in June and July based on your various likely scenarios will help you to put your plans in place.
Use a spreadsheet or a software such as SoStocked to track your inventory and to build out your models to create various scenarios. Any system you use should calculate to remove stock outs, level out sales spike anomalies and include buffer stock in your calculations otherwise your numbers could be wrong.
Learn more about this tool here.
It is also important to know how your tool calculates these things such as stock outs. If a tool looks at stock outs as simply when your FBA inventory went to zero, it could be missing out on crucial low sales dates such as listing suspensions or the low sales days just before and just after a stock out, or the day or two during stock out when Amazon found an extra unit and sold it.
The last thing to add to this is to stay on your suppliers and freight forwarders. A common missing link to why lead times get out of hand is that no one was on top of the supplier to keep them on track. It’s too common for the solopreneur to look up and realize that his inventory should have shipped out 2 weeks ago. So, where is it? And why hasn’t his supplier reached out? All of your planning and on-time ordering can be for nothing if you don’t ensure your supplier is hitting those targets.
And if he isn’t, you need to consider either adjusting your lead times or finding a supplier who will.
Tracking your numbers diligently, understanding them and making decisions based upon correct data keeps you from making mistakes that can cost you dearly. Having a game plan in place that creates flexibility and plans well enough for the future means you’ll be ready when the time comes while your competitors are busy scrambling to catch up.
Stay in stock and win the game.