This is a guest post from Joannes Vermorel, Founder of Lokad.
While inventory optimisation is one of the cornerstones of eCommerce profitability, it is often easier said than done. The reality is, when it comes to eCommerce, the demand can be both intermittent and erratic, after all the number of items sold is often much larger than a traditional store of a comparable size. As a result, traditional forecasting methods and traditional inventory optimisation methods simply aren’t effective.
In 2017, Linnworks and quantitative supply chain optimisation software, Lokad, are joining forces to deliver next level inventory performance capabilities for your online business, with a rock solid eCommerce management platform on one hand and an awesome predictive analytics platform on the other.
Effective inventory optimisation does in fact start with a couple of simple elements, obvious in hindsight, but that are all too frequently ignored. Below, we are sharing some of the key lessons we’ve learned with regards to reducing stock levels and avoiding stock-outs.
- Master your lead times
Your lead time, in other words the delay between your purchase order and the actual delivery date by the supplier, is of critical importance. Indeed, the sole purpose of your inventory is to cover the lead times of your suppliers, after all if they were capable of teleporting goods in your warehouse (zero day of lead times), then your business wouldn’t even need to hold inventory in the first place.
As such, inventory optimisation starts by properly measuring the lead time. In practice, this relies on making sure that both the purchase order date and the delivery date are accurately tracked within Linnworks. By following a rigorous process, you will not only gain a much better understanding of the reliability of our suppliers, but you will also start getting good lead time numbers which are the first step towards inventory optimisation.
- Consolidate your purchasing constraints
Most suppliers have specific ordering guidelines. It might be an MOQ (minimum order quantity) expressed in units, or similar constraints associated to the total amount of the purchase order. Those constraints are very important because they shape the inventory problem: if the MOQ is so large that you can only order twice a year from a supplier, then inventory should be sized appropriately. Too frequently, all those constraints only exist in the head of the person in charge of the purchasing process.
At a minimum level, all of those constraints should be consolidated into a few clean and well-organised Excel spreadsheets. By having the data organised and to hand, you will waste much less time getting access to those data points the next time you create a purchase order. This time saved can be immediately re-invested in refining the actual quantities to be ordered.
- Back of the envelope inventory costs
Inventory is a trade-off between too much stock and too frequent stock-outs. Achieving 100% service level is usually not economically feasible: your business would keep generating dead inventory in large quantities. Thus, it’s a balance. Too many eCommerce businesses fail at optimising their inventory because they have zero, not even approximate, estimation of their inventory costs.
The carrying cost of inventory and the stock-out opportunity cost must be established. The figures can be very rough, that’s okay, however the figures should reflect what you are selling. For example, if you are selling consumer electronics, then goods will typically lose their value very quickly and your carrying costs should reflect that. If you’re selling pet food and your clients are highly recurrent, the stock-outs are deadly and again, the stock-out opportunity should reflect that as well. Those insights are the starting point in making inventory decisions for your company.
At this point, we are still only scratching the surface of inventory forecasting, therefore if you would like to get some more guidance on supply chain optimisation, don’t hesitate to get in touch with the Lokad experts.