Forecasting seasonality is tough for young companies
One of the key inputs into any demand forecast is seasonality. For mature businesses, seasonality trends are well established, but growing business have a notoriously hard time assessing seasonality. Although it’s widely known that many businesses experience a spike in sales during the holiday season, sizing that spike is extremely difficult when you’re just starting out. If your business is growing, the trend might be obscured entirely. What’s more, gaps in the data, like stock-outs, can make it even harder to understand last year’s trend.
So, how does one solve this extremely difficult problem? The bad news is that as a general rule, if your company has less than two years of sales data, it’s going to be extremely difficult. For this reason, Fuse’s inventory management system supplements young companies’ data with trends that we’re seeing in our portfolio. We also note anomalies in the data (like stock-outs) and smooth out the seasonality curve by excluding these outliers. This helps us create a normalized seasonality curve, even for very young companies.
Forecasting and lead times are two sides of the same coin
Another way to solve this problem is to start your business with a focus on crafting a supply chain advantage. Accurate forecasting and shorter lead times are two sides of the same coin. The shorter your lead time, the faster you can react to observed changes in consumer demand. You can order a small amount of product and then watch and learn. If you have a short lead time, you’ll be able to quickly restock SKUs that are running out based on your observations. On the other hand, the longer your lead time, the more accurate your forecast needs to be because you can’t react quickly.
These days, investors are often tempted to look at e-commerce companies as the “Warby Parker” of shoes, hats, scarves, you name it. But what’s often forgotten is that a big factor that led to Warby Parker’s success was streamlining the supply chain, building deep relationships with vendors and vertical integration. If your company depends on a supplier that has given you a three month lead time and might bump you back in the production cycle if an order from a bigger competitor comes in, it’s going to be much harder to be successful competing against the big guys.
Reducing inventory cost by outsourcing has hidden costs
Most growing e-commerce companies outsource to suppliers abroad to lower their costs, but there are many hidden costs to outsourcing, longer lead times being one of them. It is almost impossible to be responsive with an extended supply chain. You might think that shipping from 12 time zones away takes a couple of weeks, but you need to decide on your order quantities and assortment many weeks before the goods are produced and shipped.
Suzanne deTreville, a professor in Operations Management, has spent her career researching procurement optimization and shared some of her key insights on the hidden costs of outsourcing your supply chain:
“Managers often have no idea how much it costs them to have to decide order quantities before they have any insight into what demand is going to be. A distant supplier that requires a decision about what to produce several months in advance might seem to represent an irresistible bargain in offering the product at 20% less than a local supplier. But, all of those apparent cost savings will be wiped out when it becomes clear that you’ve ordered the wrong products. Going with a local supplier allows the production decision to be postponed until the company has more visibility into demand.
The value of having a nimble supply chain depends on several factors. Companies get into trouble when they make simplistic assumptions. We use models to determine the value of responsiveness and to create portfolios that maximize profit and keep more space for innovation. It is typical to lose 25% or more of sales due to mismanaging supply-chain costs, so these models can add a lot to the bottom line.”
Build a supply chain advantage by hiring the right team
In addition to using sophisticated inventory management software like Fuse, companies can also solve the supply chain problem by hiring the right experts early. While not every founder with a great idea will have pre-existing supplier relationships, bringing on folks who have these relationships and the corresponding expertise can make the critical difference between success or failure.
Regardless of where your company is in the supply chain optimization process, Fuse is here to help you focus on your business, not your inventory.