Inventory planning

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

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.

4 big inventory questions everyone is thinking about

Do you ever wonder, is anyone else thinking what I'm thinking?

Now that we’ve defined planning and provided some basic definitions to start with, it’s time to dig into the more difficult questions. We recently ran a product survey to ask our customers what questions were most important to you and have picked these four topics to expand on based on the results:

Data Anomalies

Data anomalies or outliers are non-recurring events like on-off promotions, PR pieces or stock-outs that may have impacted your sales history. Based on the results of our survey, this was by far and away the biggest concern for the majority of our customers with 40% of respondents citing this issue as their primary focus. 

The underlying reason for this is that data anomalies often go unnoticed in Excel spreadsheets, and when they are identified, their “weird” appearance relies on human memory to go back and analyze what happened. Was the dip in sales the result of a stock-out or poor performance? Was the spike in sales a result of a marketing promotion, or was it related to regular seasonality. Often, if the anomalies are identified, it requires a lot of digging through old emails to figure out exactly what happened in the data.

Fuse helps automate this process by scanning all of your data for anomalies (like big sales spikes or dips) so that none of these events go unaccounted for. Once we’ve identified anomalies, we smooth them out to create a more seamless forecast.

Marketing Data

We’ve written several times about the importance of making sure that marketing is closely aligned with the inventory planning team. Marketing directly impacts customer acquisition and revenue which in turn dictates the appropriate investment in inventory. 

In addition to ongoing marketing spend, promotions are important one-off events to note because they can drive significant spikes in demand, which, if not appropriately noted, can be confused with run of the mill seasonality. A big obstacle to noting these types of events is often a lack of information sharing between marketing and operations. While the marketing calendar might give marketing visibility, it’s sometimes not shared with or not checked by operations. In Fuse, you’ll soon be able to note marketing events like promos proactively in order to take these important initiatives into account in your forecast.

Cannibalization

Cannibalization is defined as the negative impact of a new product on the sales of existing products. While this is a concern for companies of all sizes, it can be particularly challenging for smaller companies that have a limited reach and audience. It can be unclear if launching a new product will expand the brand’s reach, encourage repeat purchasers or simply eat into existing products. Without sophisticated software, the cannibalization question can be hard to answer.

One simple starting point is attribute tagging which involves associating descriptive characteristics with each product. Attributes don’t have to be super complex - they can be things as basic as color. Although tedious to keep track of, if done properly, attribute tagging can allow the user compare how products with the same or similar attributes perform. More importantly, keeping a disciplined system of tags can help abstract away from the subjective elements of a product. 

Interestingly, at times, some of our customers have found that products that are seemingly in completely different categories cannibalize each other. However, when you take a closer look, there are often unexpected similarities on the underlying attribute level.

Procurement

Another big pain point (once the forecast is complete) is managing POs with suppliers so that the raw materials arrive in time for production. For any company that manufactures its own products, making sure that you don’t drop the ball on ordering all of the parts and components is critical. Between varying lead times, reliability, minimum order quantities and case pack sizes across suppliers, it can become a very painful and confusing optimization exercise. 

One way to mitigate the issues that can arise is to hire an industry veteran early on in your company’s history who has great relationships with the suppliers you need. As painful as this scheduling and optimization exercise can be, it’s even more painful if there are production disruptions caused by a company that’s much bigger than yours jumping ahead of you in line. The only real way to prevent this is to grow to become a bigger company (easier said than done), to have the right internal skills to diligence your suppliers appropriately or to have great relationships with your suppliers from prior experiences with them.

As we grow Fuse, we hope to be the primary resource that helps you solve these problems and more. We’re here to help you focus on your business, not your inventory.

Stop fumbling around in the dark with these 7 inventory management concepts

Stop fumbling around in the dark - use 7 inventory management definitions to guide your planning.

In our last post, we defined inventory planning and described why it’s important for your business. Since we’ve covered the “what” and “why”, we thought we’d create a mini-guide that starts to cover the “how”. Here are some of the basic concepts and definitions that you can apply to your business to get you started:

1. Sell-Through Rate

Total sales divided by inventory stock at the beginning of the period. Sell-through is typically calculated on a monthly basis. 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%. If you have a high sell-through rate (75%), you may have underbought and might need to re-stock. A low sell-through rate (5%), would indicate that you overbought and might want to markdown the product. Although it’s a very basic calculation, this metric can help you easily see how well certain styles are doing.

2. Weeks-of-Supply

In many ways, weeks of supply and sell-through rate are two sides of the same coin. 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 planners consider the forward looking approach to be best practice because historical metrics can be misleading. For example, if you’re going into a particularly busy selling season, looking at the prior month’s data won’t necessarily help you make a better buying decision. In Fuse, the calculation is done for you seamlessly - we connect your forecast to your existing inventory levels and provide you with a timely and accurate reorder recommendation based on your weeks-of-supply.

3. Buffer Stock (Safety Stock) and Service Level

No matter how accurately you predict demand, there is always some risk that you may have underestimated the inventory you need. For this purpose, companies keep some extra stock on hand. Some companies set a service level target which is the probability that all customer orders will be fulfilled. Younger companies might want to set this level quite high (99%) so as not to damage their brand. However, the flaw with service level is that it relies on relatively predictable demand. That’s why at Fuse, we set a weeks of supply target. So, if your target is to have five weeks of supply on hand at all times, we’ll prompt you to order more when you begin to dip below that threshold. 

4. Lead Time

Perhaps the most basic concept on the list, lead time is simply the number of weeks or months between when an order is placed with a vendor and when the finished good can be delivered. Lead time is often not only based on how long it takes to produce the good, but also how long it takes to transport the good from the factory to your warehouse. 

5. Reorder Point and Reorder Level

Closely tied to safety stock and lead time, the reorder point is the level of inventory at which a reorder is triggered. Typically, this minimum point is calculated as the forecast sales during the lead time plus safety stock. Although the reorder point can suggest when to reorder, it is difficult to know how much to reorder (the reorder level) without a robust demand forecast. Fuse seamlessly links the pieces together by providing a reorder recommendation based on the buffer you set, your lead time and the demand forecast you’ve created using our advanced algorithms.

6. Minimum Order Quantities

Depending on the size of your business, you might at times find yourself constrained by 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 optimal quantity you need to reorder, your vendors might completely throw that analysis out the window by insisting that you meet a minimum order quantity.

7. Open to Buy

An open to buy puts all of these elements together to help you re-order more easily. 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. For example, a retailer might need $100,000 of product next month to reach its sales targets. $75,000 may already be allocated to open POs, so the planner’s job is to optimize the allocation of the remaining budget ($25,000 in this case). In some instances, the planner may not have the budget that he or she needs to be able to meet the sales target. At this point, it often becomes an exercise in maximizing margin. The planner will evaluate not only which of the SKUs are the best sellers, but also which can generate the most profit given the limited budget available.  

At Fuse, we’re implementing 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.

Your company may be young, but you don't have to plan like it

Just because you're a young company, doesn't mean that you can't define and build out the planning function early on.

At Fuse, we define ourselves as an inventory planning tool for growing retailers. We work with many young start-ups who have a diverse set of experiences with the areas we touch like demand forecasting, supply chain and inventory management. Some have experienced planners who come from a background at big companies like Target, J.Crew or Gap. Others are general athletes who’ve had inventory planning and supply chain management thrust upon them. To level the playing field, we decided to answer some basic questions in this post.

What is inventory planning?

Given this disparate set of experiences, we thought we’d take a step back and answer, “What is inventory planning and why is it so critically important?” According to the Business Dictionary, inventory planning is, “The process of determining the optimal quantity and timing of inventory for the purpose of aligning it with sales and production capacity.” 

In our last post, we defined supply chain through a series of seven questions. The key questions answered by an inventory planner are questions two and three: "How much inventory will I sell? How much inventory do I need to order?"

We asked Jeffrey Awong, VP of Planning at BarkBox, with prior experience at both Jackthreads and Lord & Taylor for his input:

“Planning functions differ across companies, but at the core, it's really about ensuring that there is a perfect match with the supply of goods and the forecasted demand, with a heavy emphasis on efficiency. As a result, it sits right in the middle of Marketing (understanding demand levers), Finance (P&L and cash flow implications) and Merchandising (to understand the magic of what's being sold).”

Why is inventory planning important?

Cash management is critical for young companies, and planning well can help significantly mitigate inventory risk which can be especially fatal for young companies. It is a function that manages one of if not the biggest investment that a company will make. If a company buys too little of a specific product, then it can lead to stock-outs and lost revenue. If a company buys too much of a product, it can lead to too much cash tied up in working capital that could otherwise have been put to good use elsewhere. 

Skilled planners look not only at sales, but also at other metrics like profitability. In a given month, the company may have a certain budget to spend on inventory (typically called an “open to buy”). While you may want to buy $100,000 of product to meet your sales target, you may already have placed POs against that budget. As a small company, you might frequently find yourself in a situation in which you need more product than you can afford. An inexperienced planner might simply replenish the top selling SKUs, but an experienced planner will also look to see which SKUs are the most profitable. This is a critical question to answer, particularly if cash strapped. 

How can you improve?

From experience working with our customers, the two most common planning mistakes we’ve seen are:

  1. Focusing on revenue instead of margin. We see far too many companies re-ordering products that are high volume, but low value
  2. Investing in marketing without connecting that investment to inventory. Marketing can drive customers to the site, but that traffic can’t convert into revenue unless there is enough product there to support it. If you’re out of your top selling SKUs, all of the marketing spend in the world might not make a difference

For our young companies, we always recommend bringing on an experienced planning hire early on to save time and money. From day one, you don’t want to be placing your orders based on instinct. Once the planner is on board, Fuse is here to support him or her in crafting the critical pieces of the puzzle, marrying the demand forecast with the initial inventory buy and replenishment recommendation for each season. Our sophisticated algorithms help smooth out outliers and do the grunt work for the planner so that he or she can focus on the more interesting, strategic and analytical work. We’re here to help you focus on your business, not your inventory.