How much inventory should my business have on hand?
How much inventory should my business have on hand?
It’s a question that can easily keep you up at night…not to mention cost you thousands (maybe millions?!) of dollars: What exactly is the right amount of inventory for your business to have available to customers for purchase? If only there were a one-size-fits-all answer, but like so many things when it comes to demand planning, it’s a bit more complicated than that.
Finding the right back stock count for your business isn’t an exact science, but luckily, you’ve got an expert team to help you think through this complicated equation. That’s why we’ve compiled some best practices for inventory planning right here. But if you’re still not sure, we’re happy to provide you with more direct, in-depth support—just send us a note!
Why it’s important to find the right inventory number
Like so many other answers to things about your business, it’s all about the money! Striking the right balance of inventory means you’ll have the proper amount of money invested in product while having enough cash available to handle other business needs that pop up. When your inventory count is out-of-whack, it can quickly cause a domino effect, cascading into other line items in your budget.
When you have TOO much:
Extra stock might not seem like a bad thing on the surface, but when you dig into the numbers, it can be catastrophic.
From paying for extra storage space to missing out on your selling window and now sitting on obsolete inventory that needs to be clearanced, getting stuck with excess inventory may not be the end of the world—but it certainly can hurt your bottom line.
When it comes to overstock, it may not be a problem with your overall inventory, but a more intricate issue on the SKU level, as we recently discovered with a client in the seasonal clothing space. This retailer loved offering a wide variety of colors and prints, but didn’t regularly review their color or style productivity. This led to some styles having a very high week of supply (WOS), without the customer demand. But after Boon did an assortment analysis to identify their top-performing styles, this client understood which items to invest in more widely, and which could be an exciting ‘flash in the pan’ to attract new clients or re-engage churned ones.
Today, this client has a strategy of maintaining a few colors and styles all year round, and then introducing new seasonal colors or styles as a way to keep their assortment feeling fresh. This decision helps them save money by benefiting from excellent costing from their vendors, while also giving their customers a reason to come back. Featuring new colors for shorter time periods also builds their customer’s excitement without leaving the business open to too much inventory risk, which can provide insight into what the client might want in the future.
When you DON’T have enough:
Not identifying your inventory’s ideal level may leave you open to being out of stock, and therefore, missing out on sales!
And while customers may be understanding and forgive you once, if it’s an issue you’re constantly running into, they will soon find somewhere else to get what they need—especially if it’s something they can’t wait for.
We worked with a maternity client that struggled regularly with this: a new e-commerce brand, they had no sales history to build an accurate forecast for the raw materials they needed to create their product, in addition to a forecast for the items themselves! Unsure of where to start, they turned to the Boon team to build several tools that allowed them to better understand production timing, out-of-stock risk, and sales potential across channels. With these tools in place, Boon has been able to support this team through an intense growth period, which is only made better by the team’s understanding of their sales potential!
Where to start with finding the right on hand inventory level
While there’s no perfect formula, there are a few places to start.
For new businesses, we recommend zooming in on balancing inventory, receipt spend, cash flow, and vendor lead times. Because you don’t have the benefit of past sales data or established customer relationships to rely on, you’ll need to balance being particular about your inventory while also being a bit more general in your plans.
Customers may be less loyal or reliant on your product—or, they may love it so much that they’re sharing it with everyone.
At Boon, we’ll recommend new businesses strike a balance between inventory or receipt spend AND lead time. Ultimately, you’ll want to carry just enough inventory to be able to cover sales and maintain your presentation minimums (if you deal in brick-and-mortar), but not so much that you’re cash strapped. For many businesses, this equates to about four weeks of supply at all times, but that’s not a hard-and-fast rule for everyone. Remember to take into account any lead time your vendors need, which may be more or less than four weeks, and review receipts regularly so you’re not waiting until the last minute to order. When in doubt, invest in an open-to-buy tool—which we are happy to help you with!
If you’re an established business with lots of data to back up your inventory decisions, your formula likely looks a little different, taking into account year-over-year growth, assortment review, lifecycle planning, and top down vs. bottom up planning. With a more robust sales history, your result is hopefully more predictable as many long-standing brands have a loyal customer base who will shop on a regular basis, allowing you to easily review seasonal trends and year-over-year growth, benchmark competitors with more accuracy, and rely on established supplier relationships to benefit from more flexible terms.
We recommend an exercise called ‘Top Down vs. Bottoms Up’ for more established businesses. This process looks at inventory from two directions: first, from top-down, which involves looking at the larger market and competitive landscape to predict your company’s market share and revenue. It takes into account macroeconomic trends and other industry indicators like historical outcomes to forecast future performance. This type of forecasting can save time and allows for variability, however, it can result in a more subjective view.
When you look at inventory from a bottoms-up approach, you start at the individual product level and work up to the business as a whole. This perspective uses statistical tools to analyze historical data about sales patterns, promotions, product demand, and other internal factors like marketing and sales budgets. Bottom-up forecasting can be more realistic and accurate than top-down, and it can lead to more attainable goals. However, it can also be time-consuming and may not be as optimistic.
In the end, forecasting is both an art and a science. There’s never going to be a demand and inventory forecast that is 100% accurate. Comparing findings from your top-down and bottom-up forecast and landing somewhere in the middle is best-practice in merchandise planning and the technique we use with our clients.
Other important factors to consider
While we’ve covered the basics, your business may have unique factors that should be accounted for within your inventory count. Here are some factors to consider when evaluating your inventory counts.
Your average week of supply (WOS) level: How much are you selling per week on average? This is a helpful place to start in calculating your base inventory, but our top tip? Be sure to look across categories and subcategories, as well as holistically, so that any over-performing or under-performing items don’t slide under the radar.
Minimum inventory levels: Also known as safety stock or reserve, your minimum inventory level is the bare minimum amount of product you should have available at all times to protect day-to-day sales, prevent out-of-stocks, and insulate your business against supply chain issues, standard supply chain lead times, seasonal peaks, or other demand fluctuations.
Lead time from vendors: Knowing the length of time needed for replenishment from your vendors is essential to proper inventory planning to ensure you don’t have any gaps in product availability. If you typically only carry two weeks of safety stock and it takes your vendor four weeks to manufacture and ship inventory to you—that leaves at least two weeks when you’re out of stock!
Open to Buy: An open-to-buy tool empowers you to calculate your next orders based on your current inventory position, lead time, and forecasted sales. Utilizing this tool prevents you from overspending and becoming overstocked, while also ensuring you keep fueling sales appropriately. Once built, the tool is simple to use, calculating your ideal inventory and receipt spend at a total business level. Your team should utilize sales analysis to determine which items or product categories are most at risk of being out of stock when placing orders to achieve the inventory levels your Open to Buy tool indicates. But don’t let the idea of this tool, or the reporting involved intimidate you—the Boon team specializes in building easy-to-use OTB tools and out-of-stock alerts for retailers of all sizes. We’ve included one in our Sales + Inventory Planning Toolkit!
Cashflow: In order to have inventory to sell, you need money to spend, so before committing to buying inventory, make sure you take a look at the rest of your business expenses so you’re always able to cover costs related to rent, payroll, or other needed services or supplies.
Sales forecast risk: Forecasting for sales and planning for inventory is both an art and a science. While you know every year that customer demand will fluctuate, calculating your forecast with a blanket percentage increase isn’t the best way to do it because certain products may thrive, while others will lose favor. This is why reviewing your past sales forecasts is important, so you can predict future risk.
Top tip: At Boon, we encourage clients to take this risk assessment two steps further by digging into the non-numerical data and figuring out why their forecasts may have varied from their actuals. Factors like website functionality, weather events, or featuring too many variations of one item can lead to forecast inaccuracy that’s not directly recorded in sales data. In addition, we recommend assessing your forecast risk at the category or subcategory level to be as strategic as possible with your business. Summing all of your data up into one total may hide risk, as well as opportunity.
Product newness and its lifecycle: How long will your product feel relevant to your customers? Fashion trends change all the time and you’ll want to invest in them to attract new customers and delight existing ones, but you also need to protect yourself from having too much on hand.
Inventory turnover: As a stand-alone metric, this may not seem like a very useful KPI, however, when paired together with sales performance and available inventory levels, it can offer insight into your company’s financial performance.
Expiration dates: Do you deal in perishables and have expiration dates to deal with? This can extend to beauty items, snacks, pet food, and more. You’ll need to run through these items fairly quickly so that your customers can use them before they’re expired or inedible, and will also likely see more frequent purchases from customers as they’ll need to replenish them more quickly.
Product end use: How often will your customers use the product you sell? Consumer goods like tissues can expect to be used up much more frequently than a bed frame!
Do you have an inventory level in mind? Whether you’re a newbie starting from scratch or a veteran who just wants to back up their math, the Boon Team is here to help. Reach out to us today!
