Inventory

7 Supply Chain Definitions Every Founder Should Know

 Closet full of colorful clothes

We work with many young companies started by inspiring founders who often have incredible marketing and branding chops. But, when it comes to inventory, that expertise is hard to hone and hire for. Even if you’re not an expert, there are things you can do like follow our 7 step guide and get familiar with a few basic definitions: 

1. Lead Time 

This is the most basic concept on the list and probably something you’ve already heard from your suppliers. Lead time is simply the number of weeks or months between when an order is placed with a supplier and when the finished good can be delivered. Your fully baked lead time will be not only how long it takes your supplier to make your product, but also how long it will take them to ship it to you. 

2. Minimum Order Quantities (MOQus)

If you’re a small brand, you’ve probably already run into this concept with your suppliers. Minimum order quantity is the minimum quantity in units per SKU, units per category or dollars that your supplier will allow you to order. Although you might do a lot of sophisticated analysis to figure out the exact amount of inventory that you need, it might not matter if this amount is below the minimum order quantity defined by your supplier. While it might not be possible, you should definitely try to negotiate the MOQu down to give you flexibility and avoid holding more inventory than you need or can sell.

3. Buffer Stock (Safety Stock) and Service Level 

No matter how accurately you are, there is always risk that you may have underestimated the inventory you need. To avoid stockouts, companies keep extra stock on hand by setting a service level target which is the probability that all customer orders will be fulfilled. New brands might want to set a high (99%) so as not to damage the brand with stockouts. But, service level does rely on relatively predictable demand which many young brands don’t have. That’s why at Fuse, we rely on a weeks of supply target. 

4. Weeks-of-Supply

Weeks-of-supply is calculated as total inventory / weekly sales. Weeks of supply can be calculated based on historical results or as a forward looking metric based on your forecast. Many inventory professionals consider the forward looking approach to be best practice because seasonality can vary drastically throughout the year. In Fuse, we seamlessly calculate your weeks of supply target and build it into your inventory buffer. We’ll look to your expected seasonality and make sure that you’re always ordering enough for next season.

5. Sell-Through Rate 

Weeks of supply and sell-through, when used together, can help give you a complete picture of your inventory position. Sell-through is defined as total sales divided by inventory stock at the beginning of the period. So, if you sold 500 silk blouses in January but started with 1,000 silk blouses in inventory, your sell-through rate would be 50%. A high sell-through rate and a low weeks of supply number means that you need to restock while a low sell-through rate (5%) and a high weeks of supply number means that you’ve overbought and may need to mark down your inventory. One of the most relied upon concepts in inventory planning, sell through can give you a good benchmark for understanding the health of your inventory. 

6. Reorder Point and Reorder Level

The reorder point is the level of inventory at which a reorder is triggered. This point is calculated as the forecast sales during the lead time plus buffer stock. The reorder point tells you when you need to reorder, but not necessarily how much (the reorder level). Fuse can help you understand both metrics by seamlessly linking the pieces together. We provide a reorder recommendation based on the buffer you set, your lead time and the demand forecast you’ve created using our advanced algorithms.

7. Open to Buy 

An open to buy puts all of the concepts of inventory planning together in one report. It is a budget that highlights how much capital is available to spend in a given period, and how much already has open POs against it. In many instances, a planner may know exactly how much product she needs to order to support demand, but she may no longer have the budget to meet this demand. For example, she might need $150,000 of product next month to reach the brand’s sales targets, but $75,000 may already be allocated to open POs. In this type of example, the planner’s job is to optimize the allocation of the remaining budget to best serve the business. Usually, at this point, the best course of action is to determine how best to optimize margin. The planner will evaluate which SKUs can generate the most profit given the limited budget available rather than simply doubling down on best sellers.

At Fuse, we’ve implemented these concepts and best practices in our software to vastly simplify the analyses that planners have to do. We’re here to help you focus on your business, not your inventory.

Sources: 
https://www.thebalance.com/sell-through-rate-2890389
http://www.threebuckets.com/category/formula-cheat-sheet/
https://en.wikipedia.org/wiki/Service_level
https://www.thebalance.com/open-to-buy-planning-2890318
http://www.businessdictionary.com/definition/lead-time.html
https://en.wikipedia.org/wiki/Reorder_point
http://dictionary.cambridge.org/us/dictionary/english/minimum-order-quantity

What is an Inventory Planner and why is she SO important to your growing brand?

 An inventory planner hard at work optimizing the supply chain of a growing brand

Are you an Inventory Planner? Have you ever tried to explain to your friends or coworkers what you do and had a hard time getting them to really get it?

Are you a business owner building a brand who’s been told that you should hire a planner? Have you wondered to yourself, ‘why?’ and ‘what would she help me with?’

If you fall into either of these two buckets, this post is for you! If you’re an underappreciated planner, we hope you can send this to your friends and coworkers so that they truly understand how much you contribute to your company. If you’re a business owner who’s new to ops but wants to scale, we hope we can persuade you to get an inventory planner before you run into a major operational crisis like stocking out of your top selling SKUs.

First, let’s start with some basic definitions. Inventory planners help companies:

(1) Determine how much inventory they need to order. 

Just like Goldilocks, growing businesses need just the right amount of inventory to survive. Order too little and you risk stocking out, damaging your credibility with your customers and harming your brand. Order too much and you can wind up with hundreds of thousands or even millions of dollars of wasted inventory. The capital you invested may be permanently lost, crippling you from investing in other critical business initiatives like products that are selling well or marketing to attract new customers. Inventory planners do a complex optimization exercise every year, quarter, month and even week to make sure that just the right amount of inventory across all products has been ordered.

(2) Determine when the inventory needs to arrive.

It’s not enough to simply order enough inventory, but the inventory planner’s role is also to make sure that it arrives when it’s needed. If a company has a three month lead time, discovering that more inventory is needed the week before isn’t helpful. Conversely, if the inventory will sell through eventually but is just sitting in the company’s warehouse for six months, that capital could certainly have been put to better use. Timing is a critical piece of the planning equation.

(3) Aligning with sales and marketing. 

Marketing and sales are always trying to drive business. A critical input into planning are questions like “what promos are we running this month?” and “what big wholesale accounts do we expect to win next year?” Inventory planners work closely with marketing and sales to make sure that there is the right amount of product to support and prepare for the big wins expected to come from these initiatives. In prior blog posts, we’ve highlighted the importance of coordinating with operations if you’re in sales or marketing. 

So, why are Inventory Planners important?

Well, we hope that after reading our definitions, the picture all starts to come together. Yet, the unfortunate reality remains that inventory planning remains one of the most misunderstood and least appreciated functions at growing brands. 

So, here’s what we think. Inventory is either the #1 or #2 investment that companies make. If it’s #2, it’s second only to marketing. An investment this big, if not managed properly, can and has been the cause of failure. The less capital you have to play with, the more important it is to optimize that investment. While there is a lot to be done downstream in the supply chain, and we’ve highlighted this in our post on 7 supply chain questions you need to answer, the best optimization on the fulfilment side can’t help you if you’ve ordered the wrong amount of inventory. Because of this, the person who plans your inventory - makes sure you’re investing enough and makes sure it’s coming in on time - is one of the most important people in your company and one of the earliest roles all consumer brands should hire for early on. 

Whether you’re an inventory planner with decades of experience or a start-up founder who’s just coming to grips with the importance of operations and inventory, Fuse is here to help you focus on your business, not your inventory.

What's our ROI?

When we first started Fuse, we had several key hypotheses as to how we could improve the way inventory planning is done by retailers today. First, we were convinced that it’s impossible to plan a growing business in Excel. As the volume of data and the number of SKUs grow, it’s easy to make errors in Excel and, in fact, impossible not to when you’ve linked several spreadsheets and Excel is crashing mid-save. Excel’s capabilities are limited, and thus planners must rely on backward-looking metrics like sell-thru and historical growth rates, which don’t accurately paint a picture of their growing business. Second, an algorithm can better detect anomalies and accurately estimate seasonality than a human whose attention is divided amongst the many other urgent priorities of the day.

After working with our early customers for some time, we’re proud to say that both our hypotheses were correct -- we’ve found that the ROI of using Fuse makes a meaningful, material difference on both the revenue and the cost side.

10% More Revenue

On the revenue side, we’ve found that Fuse helps our customers achieve 10% more revenue. We did a deep dive into our customers’ biggest quarter - Q4. First, we took a look at stockouts in Q4. We defined a stockout as zero sales with 95% confidence. This means that we excluded instances in which zero sales could have legitimately meant no demand for the product. Second, we assumed that our customer’s revenue target for Q4 was equal to actual Q4 sales. In reality, given the number of stock-outs our customers experienced (more on that below), the revenue target was likely most definitely higher than the sales figures actually achieved. Finally, at Fuse, we always encourage our customers to modify the forecast by including relevant details like product launch dates, products that are phasing out, as well as other information they might know about their business that an algorithm doesn’t. For purposes of our analysis, however, we excluded that information. 

Even assuming the above simplifications, we found that our customers could have made 10% more revenue and avoided 450 stock-outs (on average) during Q4 if they’d followed Fuse’s algorithm. In fact, one of our earliest customers who joined the platform in Q4 had zero stock-outs in Q1

What does this mean? Well, for one thing, it means that Excel is definitely not the right tool for growing businesses to plan inventory. In addition, it also means that even without additional input from our customers, Fuse’s initial predictions (based on seasonality) can achieve dramatically better results for our customers.

Reduce Overspend on Inventory by 3x

What we often find with the growing companies we work with is that a significant stock-out in the past, or paranoia about stocking out, leads to panic overbuying. This ties up precious capital and resources in inventory that could be deployed elsewhere. 

In Fuse, we use a forward-looking weeks of supply target to help customers maintain a lean inventory buffer. We often find that many of our customers are managing their buffer using sell-thru (which is backwards looking) or a historical weeks of supply target. For a growing business, these backward looking metrics don’t reflect current trends, and can lead to dangerous overbuying. However, with Fuse, it’s now possible to look forwards instead of backwards, thanks to our accurate forecast and real-time actualization of sales.

We took our customer’s forward-looking weeks of supply target (based on Fuse’s forecast) and applied it to create a recommended inventory buy and replenishment recommendation. What we found was that on average, our customers were overstocked in almost 200 products and spending 3x what they needed to on inventory. By following Fuse’s recommendations, our customers can dramatically reduce their inventory spend and more efficiently manage their working capital, freeing up cash for initiatives that will grow their business, like customer acquisition.

Conclusion

Our data shows that prior to Fuse, our customers were buying not enough of the right SKUs and too much of the wrong SKUs. With Fuse, our customers can switch this around and invest more capital on the right SKUs and less on the wrong SKUs. At Fuse, we’re here to help you focus on your business, not your inventory. 

4 simple rules for streamlining your SKU system

Great idea for inventory

This week’s post is on a definitively unsexy but very important topic, and it was actually inspired by one of our recent conversations with our customer, Snowe. Snowe is in the process of redoing their SKU system, an exercise that almost all of our customers go through as they grow. The main reason this happens is because when you start your business, you’re not quite sure exactly how it will grow and expand. What types of products will you be adding? Will you always stay in your chosen category? 

In the case of Snowe, their SKU renaming was prompted by several factors, according to Erica Peppers, Head of Product Development & Sourcing:

“We decided to overhaul our SKU system because the original structure we started with is no longer the right fit to scale with our business.  The two key components we considered were simplification and easy identification.  The system can be simplified, as our products don't need nearly the number of configurations as a product assortment that is narrow but deep.  Also, because we are not a seasonal or trend based company, our products are introduced with the intention of a long life span.  So rather than being just a series of letters and numbers, our SKU system should provide a reasonable degree of product identification at a glance. ”

While in some cases, renaming your SKUs is inevitable, there are several things you can do to make sure that your new system is successful and lasts you and your company for many years to come:

(1) Don’t rely exclusively on marketing categories

In many cases, we see SKU systems that leverage the marketing category the company uses to communicate with customers about its products. From a marketing perspective, having a clear sense of categories of product and what they mean to the customer is critically important. But, these categories don’t always translate in a meaningful way to the operations side. For example, if you have a children’s clothing brand, you might have marketing categories along the lines of “play”, “sleep”, “celebrate”, and while these are useful to the consumer, the fact that the item is merchandised for play does not mean as much to the operations person as knowing that it is a red onesie at first glance.  

(2) Keep it flat

It’s very easy to create a million categories and subcategories for each of your SKUs, but this causes additional confusion and complexity. Closely tied into the idea of avoiding using marketing categories for SKU naming, the more you can do with less, the better. Taking our baby products company again. We can have a red onesie with the SKU “ONS-RED-01” or “SLP-ONS-RED-01”. The more layers and depth you add, the more confusion and subjectivity you insert. For example, is our red onesie really for sleep, or is it for play? Instead of making it clear to all of your operations staff where the onesie belongs, you’ve now inserted subjectivity into the mix. With subjectivity comes room for disagreement and confusion. 

(3) Make it mean something

While it is possible to use a sequence of letters and numbers that actually mean something, do it! If you can shorten colors to “BLU”, “GRN”, “YLW”, there’s no reason to create a numbering system that’s associated with every color. By creating SKUs that mean something, you can make it easy for anyone in the company, and especially members of the operations team, to take a look at the SKU at a glance and know exactly what it refers to. On the other hand, if each color has a specific number associated with it, there’s no way to sort through the data intuitively. Moreover, to create any kind of summary reports that mean something to someone who’s not fluent in the SKU system, you’ll need a complicated series of tables and excel formulas to translate the meaningless numbers and letters into something digestible. 

(4) Make it your own

Finally, your suppliers will most certainly have their own SKU numbering system. The last thing you want to do is leverage their system and use it as your own. First, their SKU system is designed to do all of the above things we listed in items 1 - 3 but from the perspective of the supplier. Thus, what means something to them doesn’t necessarily mean something to you. Moreover, at some point, like you, they may find the need to redo their SKU system. If that happens, then the SKU system you’ve been relying on not only doesn’t exist, but it’s made your internal system completely meaningless. While it may seem like more work, having your own system is very worthwhile.

In general, we see this happen a lot with young companies - renaming SKUs is part of the journey and the growing pains. Regardless of where and how big your business is, we’re here to help you focus on your business, not your inventory.

Generation athleisure – what’s next for retail’s fastest growing categories?

 Athleisure is one of the fastest growing categories in inventory and e-commerce, but can this trend last?

As we survey the retail ecosystem, we, like the rest of women in America, are thrilled by the boom in athleisure. Vogue published an article earlier this year highlighting the many ways that one can wear and style athletic wear, even giving us permission to wear athletic clothes all day. If Anna Wintour says it’s OK, who are we to argue?

What caused the athleisure boom?

Out of a combination of curiosity, a passion for retail and of course, self-interest, we asked ourselves, “Is athleisure here to stay?” But before we look to the future, let’s first attempt to diagnose where the trend started. We credit Lululemon (which was started almost 20 years ago) with driving the trend forward by showing us not only how comfortable we can be, but also how good we can look in their yoga pants. The Juicy Couture tracksuit took the trend to a new level over a decade ago by demonstrating how athletic wear can not only be comfortable, but that it can also be a symbol of style and status. As the clothing got more stylish - think cool wrap sweaters and criss-crossed tops - it became even more acceptable to wear athletic wear outside of the yoga studio and a proliferation of brands (like Alo Yoga, Rhone and others) flourished. 

Athleisure will evolve as a category

But can this really last forever? Our answer is yes and no. On the one hand, we don’t think that Athleisure in the way it’s known today - primarily intended as athletic wear but loosely interpreted as work and casual wear - will continue. Instead, as fabric technology improves, we think that athletic wear will slowly make its way back into the gym while new brands rise to take its place. 

We’re talking about brands that take the best of athleisure - comfort, ease of care, durability, functionality - and translate it into more stylish ensembles that are actually intended to be worn to work. Two great examples are Pivotte and Aella. Aella’s clothes are stylishly tailored, machine washable and the fabric makes the clothes feel like something you could wear to the gym with an important difference - it looks like something you should distinctly be wearing to the office. 

Comfort isn't just for the gym anymore

We sat down with Eunice Cho, the CEO of Aella, to ask her what inspired her to start the brand. When she first started working on Aella, “...there weren’t brands like ADAY, or other athleisure concepts that bridged the gap between activewear and ready-to-wear. Fashionable activewear started pushing the envelope, but everything still very much had a gym aesthetic. However, brands were popping up in menswear that were focused on comfort and versatility. Finally, the activewear sector was just growing and growing. I knew it was just a matter of time that this trend would bleed into other categories. We see Aella as the workhorse of the modern woman’s wardrobe: it’s the trusty essential that you can go back to, again and again.”

We’ve also seen this desire for comfort seep into other areas of women’s fashion, namely, lingerie. Several up and coming brands like AdoreMe and True & Co strive to disrupt Victoria’s Secret by providing a comfortable alternative that allows women to look and feel great. 

All in all, we think there is a lot to look forward to. While we might miss wearing our Lululemon pants everywhere, we’re excited to have a more stylish and equally functional alternative. Most importantly, we’re here to support all types of businesses, whether you’re an athleisure brand or not. At Fuse, we want to help you focus on your business, not your inventory. 

Inventory - tackling your biggest investment

 Companies with the best supply chain management practices thing about inventory as an investment, not a cost.

After conducting almost 200 customer interviews, we’ve gained some insight into what separates the great from the good when it comes to inventory.

We started by asking our advisor, Oseyi Ikuenobe, the Senior Product Manager of @WalmartLabs’ Smart Forecasting product for his thoughts. At @WalmartLabs, Oseyi and a team of data scientists and engineers plans the inventory for Walmart’s $13 bn e-commerce business. 

Inventory management should have ROI benchmarks

According to Oseyi, "The best inventory strategy is one that allows you to buy the 'right amounts of the right inventory' to maximize revenue, profitability and growth. Instead of trying to simply control costs, it is better to think of inventory decisions the way we think of marketing spend - in terms of ROI. Once you have that mindset, you quickly realize that the ultimate smart inventory solution is one that can synthesize the collective wisdom of the organization and deploy it to drive decision making."

We’ve gleaned two insights from Oseyi’s thoughts:

  1. Best-in-class retailers think about inventory as an investment, not a cost center
  2. Collaboration between key functional areas is key to successful inventory planning

Reframing inventory as an investment

We work mostly with start-ups and all too often we see them allocating a fixed budget to inventory. But, inventory is an investment, much like marketing. The investment that a company makes in its inventory supports the company’s sales target. We’d propose that companies go through a series of questions to set their inventory budget:

  1. What is our marketing budget?
  2. Based on our marketing spend and our organic reach, what is our revenue target?
  3. How much product do we need to sell to support our revenue target?

This third question is the start of the planning process. Once the revenue target is established, a planner can go through and make a determination regarding the product mix and volume of product needed. 

Collaboration improves inventory planning

The process described above only works if there is tight collaboration between all of the functional areas that impact sales like finance, marketing, merchandising and operations. 

Unfortunately, we have seen a lot of avoidable crises caused because one functional area forgot to tell operations about planned changes. Things like changing the discount amount on a promo or A/B tests planned on the site. While these lapses might seem small, they can have a big impact if there isn’t enough product in stock to support these initiatives.

So What?

We want to encourage our customers to reframe the way you think about inventory: it’s not your biggest cost center, it’s your biggest investment. At Fuse, we’re designing a tool to help automate the grunt work of planning so that you can focus on important, strategic decisions. 

We’re here to help you focus on your business, not your inventory.

Why we believe in the success of online first brands

 We believe that digitally native online first brands will be the future of all commerce, not just e-commerce.

At Fuse, we are excited about the wave of online first brands that we’ve seen succeed over the past decade. In a recent post by Andy Dunn, he called these brands “digitally native vertical brands” and later, “v-commerce”.

Will digitally native e-commerce brands succeed?

We asked Matt Heiman, a consumer investor at Greylock to share his perspective: “My view is that vertically focused direct to consumer online brands are better positioned than pure 3rd party e-commerce concepts over the next few years. Particularly as Amazon approaches 40% of US e-commerce, competing with them is extremely difficult, so the idea of creating a new brand and owning your own customer experience is a better position. Some examples of brands I think have done this well are Casper, Dollar Shave Club and Warby Parker.”

We agree with Matt, and we think that the sale of Dollar Shave Club to Unilever earlier this year for $1 bn has convinced others that it’s possible to build a valuable brand that caters to a different kind of consumer online. Dollar Shave Club’s true value is in the company’s fantastic brand and it’s ability to appeal to and engage with Millennial consumers in an authentic way over social media and other digital marketing channels (1).

E-commerce platforms make it easy to build a brand

We’re seeing this trend first hand at Fuse. Our target customers are fast growing companies with at least 25 employees and anywhere from $10 - $100 million of revenue who are excelling at building their own online first brands. One company, Ipsy, knows all about brand building. Ipsy was started by Michelle Phan, who built her own personal brand as a make-up guru on YouTube. As the company has evolved, the brand which originally appealed to Michelle’s followers and the make-up obsessed, has started to reach more casual consumers looking to expand their horizons.

The good news for many of our customers is that it’s much easier to build a strong brand online today than it was five years ago. Due to the proliferation of front-end e-commerce platforms like Shopify, BigCommerce and Squarespace, it’s much easier to build a great brand with minimal upfront investment. With the emergence of Shopify Plus as an enterprise e-commerce platform for companies looking to scale, we expect this trend to continue.

Inventory management systems haven't kept up (until now)

Although this is good news for many aspiring brand builders, the unfortunate reality is that back-end tools and platforms haven’t necessarily kept up with the front-end. Shopify has done a great job building an ecosystem around its API, but there are still a lot of gaps on the back-end. That’s where we at Fuse come in. Our goal is to help simplify the inventory planning process to help companies answer the key question related to their biggest investment: “How much should I order?” We’re really excited about the growth of online first brands in the market, and are just as excited to be able to help those brands focus on their business, not their inventory.

Struggling to forecast your inventory in Excel? Don't worry, you're not alone.

 What are the current systems that customers are using to manage their inventory? The vast majority are using Excel, Google Sheets or have built a custom system.

At Fuse, we have the privilege of helping our customers enjoy their work more by providing an easy to use, beautifully designed inventory planning tool. As we’ve gotten to know our customers, we’ve been deeply impressed by how thoughtful, sharp and hard-working you are. 

We’ve compiled data from over 150 customer interviews to send you one message: you’re not alone. In every single interview, our customers inevitably ask, “Are we the only ones using Excel and Google sheets?” 

The answer is no, you are absolutely not. You’re not alone. That’s exactly why we at Fuse decided to tackle the challenge of inventory planning and management head-on.

90% of customers manage inventory in Excel

Almost 90% of our customers manage their inventory in a combination of Excel and Google Sheets, while just under 10% have moved on to build a custom system -- a costly and lengthy process. Typically, companies start thinking about a custom system at the 100 SKU mark when they’ve pushed their existing Excel models to a breaking point. Excel is crashing on a daily basis and procurement is nearly impossible to track in Google Sheets. 

We asked Karan, Director of Ops at Boxed, a company bringing bulk wholesale shopping to mobile, why they built a custom system: “At Boxed, we needed backend inventory forecasting systems that were customized for our business model and flexible. We searched for a solution on the market and didn’t find anything that met our needs. This is why we chose to design something in-house.”

Custom inventory management systems have drawbacks

Of the companies we spoke to that have built a custom system, the top three reasons for building something in-house were not being able to find a system that meets their needs, not being able to afford existing systems and not wanting to spend a long time implementing an external solution.

Unfortunately, custom systems come with their own challenges. Most require at least one full-time engineer to maintain them, taking away valuable engineering talent from important product initiatives that could grow the business. This is exactly why most companies don’t devote a full-time engineer to maintaining their system. Inevitably, it fails to keep up with the growing organization’s needs and ultimately needs to be overhauled. 

Building a custom system is expensive. The companies we’ve spoken to have spent anywhere from $200,000 to over $1,000,000 just to build it, excluding the cost of ongoing maintenance. 

Fuse's mission is to change the frustrating status quo. Our favorite part of our job is talking to customers and improving your quality of life. Working at a fast-growing company is exciting and fun. We want to help you spend more time focusing on your business, not your inventory.