inventory management system

Are You Financing Your Inventory the Wrong Way? Here are 3 Ways to do it Right.

Make sure to finance your inventory the right way!

Over the past year, we’ve learned that many young companies are financing their inventory completely the wrong way. What’s the wrong way to finance inventory? With venture capital funding. 

Why you don’t need VC funding for your brand

First and foremost, unless you have a completely new business model (like Dollar Shave Club or Birchbox when they were first starting out) or something else that’s extremely innovative about the brand you’re building, venture capital funding is probably not right for you. If you do take VC funding, it should be used exclusively to drive your business’ hiring and marketing needs. These are important investments in growth and worth selling a piece of your company for. But, given that there are many other ways to finance your inventory, selling a big chunk of your company to do so doesn’t make any sense. 

At this point, you might be asking yourself, well if I can’t use venture funding, what should I do? Here are three options:

(1) Your Suppliers and Manufacturers

Our advisor, Lisa Hom, who’s starting a new brand called Kaleido Concepts and has been an executive at multiple $100 mm+ brands, plans to finance her inventory by, “...getting creative when working with manufactures and suppliers. It all comes down to cash flow. The strategy should be to pay your manufacturers for the goods after you sell them. I asked a manufacturer for terms of net 120 days, meaning that I didn't have to pay him for the goods until 120 days after he shipped the product.  So it gave me 90 days to sell it and not have to pay for the goods out of my cash.”

While it may take a bit of leverage to get that type of accommodation from a supplier, most founders don’t even know that they can ask. Many manufacturers feel that they are falling behind and are eager to partner with founders who can educate them on the world of e-commerce. When starting a new brand, you need to talk to suppliers from a place of strength, so getting creative about what your strengths are is super valuable. Moreover, we’ve seen several start-ups partner with their supplier by letting them take an equity stake in the company. Not only does it give you capital, but it also completely aligns your incentives.

(2) A Letter of Credit

Now that you’re in business and actually have sales, you can go get a letter of credit from a bank. The letter of credit will demonstrate to your suppliers that you will be able to pay them. This letter of credit not only allows you to purchase more inventory than you otherwise could, but it also allows you to negotiate better payment terms with your suppliers. Now that you have more inventory, you can drive higher sales, increase the amount guaranteed by the bank, buy even more inventory and do it all over again. So long as the inventory is selling, you’ll continue to be able to use this approach to finance your business.

(3) Inventory Factoring

Finally, although inventory factoring sometimes gets a bad name, there are great companies like Dwight Funding, who are revolutionizing the world of inventory factoring and taking a modern approach to working with young companies. Inventory factoring is when a company takes on debt to finance inventory against its future sales or accounts receivable. This can be especially effective when you work with large retailers like Sephora, Nordstrom and others that commit to purchasing large amounts of product for the upcoming season well in advance. These receivables can be leveraged to get a loan in order to be able to buy the inventory that will support these large contracts. 

What do you need to be successful?

If you pursue these strategies, you need to maintain trust with the third parties you work with by forecasting your demand and inventory needs accurately. If you’re unable to pay your supplier because you’ve vastly overestimated the sellthru rate of your inventory or your factoring partner can’t get a straight answer on what you expect this year, these partnerships won’t be successful. That’s where a tool like Fuse comes in to help you forecast demand and inventory more accurately. Planning inventory and getting it right is our bread and butter. As a scrappy start-up, our tool can help you gain leverage and continue to forecast easily and accurately as you grow your SKU count and monthly order volume without throwing more bodies at the problem. No matter how you choose to finance your inventory, Fuse is here to help you focus on your business, not your inventory.
 

Who are we and why are we doing this?

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

Whenever we speak to a new customer, the question of who we are and how we got into the business of building inventory software always comes up. Given how frequently you ask, we thought we’d share our founding story with all of you.

Listening to you

When Anna was getting her MBA at Stanford, she pursued her passion for e-commerce and retail between her 1st and 2nd year. She set out asking companies, “What’s your biggest problem?” and was shocked to find that universally, almost every company said “inventory”. 

Upon returning to school, Anna decided to investigate the need more deeply. She started with a small user study that has since expanded to 150 user interviews. She interviewed planners, merchants, buyers, warehouse managers, logistics, managers, operations managers, COOs, CEOs, and anyone else who could possible touch or care about inventory. 

Her key takeaways were:

  1. Supply chain is needlessly fragmented with many handoffs between systems and an inordinate amount of time spent compiling data
  2. There was a big gap in planning - while people complained about their order management systems, their warehouse management systems or their 3PL, at least there was a system. However, when trying to answer the critical question of “how much inventory should I order?” all they had were Excel and Google Sheets

Anna knew that there must be a way to help the businesses she loved be more successful. This is where the idea for Fuse was born.

Personal experience

At that point, Anna sought out a partner who had deep expertise in supply chain and computer science expertise. Through the Stanford alumni network, she met Rachel. Rachel has a CS degree from Stanford, and after working as a software developer, transitioned to overseeing supply chain given her love for process oriented work and physical products. 

At Kiwi Crate and Parasol Co, Rachel dealt with the trials and tribulations of managing supply chain in Excel, even building out custom python scripts to streamline the process. At Parasol, Rachel was so dissatisfied with existing systems in the market that she ended up commissioning a custom system which cost her over $200k just to build, let alone to maintain.

When Anna approached her to seek her input on the gap she’d observed in the market, Rachel was immediately on board. It made so much sense, and she felt passionate about building the product she would have wanted to use. 

Solving a hard problem

When Anna and Rachel decided to add a CTO for the team, Rachel knew that there was only one person she wanted to work with. Having worked with Bridget in CS classes at Stanford, Rachel knew that Bridget would be the perfect partner. Not only was she an amazing technical talent with a CS Masters from Stanford, but she also had worked on new products within Google like Waze. This gave her the perfect balance of big company and small company experience.

When Rachel and Anna approached Bridget, she was excited by the sheer challenge of the problem. What could be harder than predicting the future? Not only that, but it was a real, visceral pain point for so many companies. And finally, given the advancements in technology, like machine learning, Bridget was excited to be able to take full advantage of her technical background to create the best algorithms for Fuse’s customers. 

Why we’re here

Coming together to build Fuse has been one of the most fulfilling experiences of our lives. As customers rely on Fuse and leverage the technology to streamline and increases the accuracy of their planning processes, we’re privileged to continue helping 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.

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.

How to revisit seasonality this holiday season

Young companies face many forecasting and supply chain challenges, including forecasting seasonality. The best way to forecast might be to instead focus on shortening your lead time.

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.