In any physical products business, cash flow is always a challenge. Running out of stock can kill product ranking and leave thousands of dollars on the table but having too much inventory can tie up precious capital that could have otherwise been used to grow your business. On top of that using Amazon as storage or a 3PL can lead to a lot of excess fees and storage costs. This was a big bottleneck for me in my business and hurt my ability to launch products and scale faster. What helped me to solve this issue was to create a JIT (Just in Time) inventory system.
JIT inventory is based on only carrying enough inventory that is needed for any given period of time. With this system you would replenish your inventory on a consistent basis based only on what you need in stock to sell. The problem is what do you do for products that you are launching or products whose sales keep increasing? The answer for me was to use my supplier as an inventory storage warehouse.
Traditionally for manufactured products requires some sort of down payment and then the balance to be paid upon completion. For products manufactured overseas, often the terms are 30% down and 70% due upon completion and shipment. In this scenario you would negotiate with your supplier to order extra units that you would pay the down payment for, but they will hold for you until you are ready to ship them. Once you are ready to ship them you would just need to pay the remaining balance. I have found that if your suppliers are wanting to grow with you and help you to scale your business, they are even willing to store these products free of charge. This can save a lot of money compared to using a 3PL or Amazon FBA warehouse because there are no fees and you only need to put a down payment for that inventory.
This system acts as a safety precaution so always have extra stock available when needed. If ever there is problems with a shipment or sales are increasing faster than expected you do not have to wait for new product to be manufactured but can ship the stored products right away by either sea or air. Once you can predict the sales volume and amount of inventory needed, you now have a system for consistent inventory replenishment. How we do this in our business is to always have 1 month of inventory in production, 1 month of inventory in reserve stored by our supplier, 1 month of inventory in transit (usually by sea), and 1-1.5 months of inventory in Amazon’s FBA warehouse. Exact lead times will depend on each product and this strategy can also work for products sourced in the US as well.
It may take some negotiation for your factory to do this, but I have found that if they are very serious on helping you to scale your business, they will do it. To most effectively negotiate I recommend visiting your suppliers personally. I am always surprised at the number of sellers who spend tens to hundreds of thousands of dollars with a supplier and have never met them. Wouldn’t it be in your best interest to meet and see the facility of the company you are entrusting the success of your business to? Even if they are in another country building a personal relationship with them can pay off far more than the cost and hassle it takes to visit. I have found when I went to visit and build a relationship with my suppliers they have been much more willing to negotiate, and the speed and quality of service improves as well. If your suppliers are in China, I highly recommend the trip China Magic with Athena Severi. What I have learned there has easily benefited me tenfold.
The JIT inventory strategy has helped me to launch and scale new products quicker without needing to guess at my optimal inventory levels. By using your supplier as a storage warehouse, you are well prepared in case there are any shipping problems or even if sales have increased faster than you expected. Not having too much excess inventory has allowed me to free up cash flow to reinvest in my business and other profit earning opportunities.