merchandising

7 Easy Steps to Set Up Your Supply Chain Correctly

Learn how to set up your supply chain and manage your inventory correctly from the start

Supply chain is incredibly daunting, especially if you’re new to it. While it might seem confusing and complicated at first, you can tackle this complex field by breaking it down into a series of simple steps. 

1.       Choose Your Inventory Assortment

This is where your genius as a founder comes in. You know your customers best and you can use your judgement and qualitative insights to hone in on that next best thing. Of course, if there’s any data you can use to supplement your intuition (like what’s sold well in the past), we encourage you to do so!

We always recommend that young companies start with a simple assortment of SKUs. You can always add more as you grow, but it’s incredibly hard to manage a wide product assortment right out of the gate.

2.       Forecast Demand

This step is critical because you need to have an understanding of what sales of each product (down to the size and color level) will be. Without this analysis, you could wind up vastly over or under buying inventory. When you’re just starting out, it’s completely OK to use an Excel model. Hopefully, you’ve taken our advice and kept your product assortment simple, which will make it easier for you to forecast demand.

However, as you scale, there aren’t really any sophisticated tools out there to help you that don’t cost a small fortune. That’s why we created Fuse - to help algorithmically forecast demand at a price point that doesn’t break the bank.

3.       Size Your Inventory Buys

Once you’ve completed your demand forecast, you need to translate this data into an inventory buy and replenishment plan to make sure that you have enough inventory to fulfill expected demand. As a young company, you can’t afford to stock out - it disappoints customers and damages your brand.

To avoid stockouts, you want to link your demand forecast to the inventory you have on hand and the inventory you expect to receive from suppliers in the coming months. You need to order enough to make up for the gap between what you have on hand, what you expect to receive and how much you plan to sell. You’ll also need a bit of buffer just in case.

Many companies do this work in Excel, but Fuse can automate the whole process of translating your forecast to an order recommendation that’s consistent with your buying cycle.

4.       Track Your Purchase Orders

Now that you’ve placed your orders with your suppliers, you’ll need some sort of tracking system to track these POs. If there are delays or something arrives to the factory damaged, you’ll want to make sure to stay on top of it or else you may stock out.

Many companies use Google Sheets, but with Fuse’s PO module, Fuse has a simple way for you to seamlessly track your purchase orders. Unlike a google sheet, once the PO change is logged, we can seamlessly link it back to your current inventory position and demand forecast in order to give you a clear picture of what this means for your business.

5.       Track Your Inventory

Now you know that your inventory is somewhere between your supplier and your warehouse, but the question is, where? Is it on the boat, is it at the dock, is it in the warehouse? Flexport can help you track where your goods are. This type of tracking is critical because there may be delays at customs or in other parts of that shipping process that neither you nor your vendor can anticipate. Having visibility can help you make adjustments and communicate with your customers.

6.       Understand Your Inventory Position

Your inventory has arrived. Now, it’s critical to understand exactly how much of it you have and where it is. There are two possibilities - you can do it yourself at your own warehouse or you can work with a third party logistics provider (3PL). Most young companies choose to work with a 3PL rather than managing their own warehouse. With a 3PL provider like Quiet Logistics, you can completely outsource both the tracking and fulfillment piece of inventory management. While this might seem expensive, unless your core competency as a business or a founder is warehouse management, you may be better off outsourcing.

If you do choose to run and manage your own warehouse, you’ll need a warehouse management system like Fishbowl to help your employees in the warehouse know what’s where and also track goods as they come in. 

7.       Fulfill Your Orders

Finally, your products are in your warehouse and you’re ready to get products into the hands of customers. This is one of the most critical questions in the supply chain. There are two parts to this process - order management part and shipping and logistics.

On the order management side, there are many great systems out there like Stitch Labs that can help you make sure you’ve allocated the right amount of inventory to your e-commerce site, your retail store and your wholesale business. When you process an order from a customer on your website, you want to make sure that you have enough inventory to fulfill that order. You might have a lot of inventory on hand, but perhaps all of it is already allocated to your wholesale channel. These systems can also notify you when you’re running low. As your company grows, you may want to expand into more robust ERP systems like NetSuite. These types of systems are typically what people think of when they refer to an “inventory management system.”

Finally, the shipping and logistics piece is a whole separate beast. Smaller companies aren’t well resourced to do this, which is why a 3PL system can be extremely useful. Not only can they take care of your inbound goods, but they can also pack and ship goods to your customers. There are also new software providers like Shiphawk that can help you and your customers track where the shipment is. This piece is critically important because it’s how your customers will interact with you and your brand, so you want the experience - from packaging, to shipping, to tracking, to delivery - to be flawless. 

Staying sane

As a growing company, to stay sane, you need to take it one step at a time. There are some basic things you can do when you’re starting out to make life easier and help you succeed. First, find a 3PL provider you trust and rely on them to do the blocking and tackling. Second, while going into wholesale can seem attractive, you need to be careful about doing this early on. Working with retailers that are 1000x your size can be extremely challenging and time consuming, so you want to make sure to pick the right partner. Lastly, be thoughtful about how much inventory you buy and how you finance it. Making big mistakes early on can literally take down your company. 

We created Fuse to help companies transition from managing their demand forecasting and inventory planning process in Excel and Google Sheets to using sophisticated software. Start with Excel, but don’t stay there too long. As your business becomes more complex, mistakes become even more risky and costly. Make sure to invest in inventory planning software like Fuse to avoid drastically over or understocking. We’re here to help you focus on your business, not your 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

The 3 things ecommerce brands can learn from Amazon Prime Day

Here's what small ecommerce brands can learn from Amazon Prime Day's success

This year’s Amazon Prime Day was record breaking generating $1 bn in sales. Not only did Amazon beat it’s own Black Friday and Cyber Monday sales, but sales also increased 60% year over year relative to last year’s Prime Day. Amazon continues to dominate e-commerce and will continue to do so for the foreseeable future. But, as we said in our last post, we definitely believe that there is room in the market for digitally native brands to succeed. They just need to compete on a different dimension rather than trying to beat Amazon at the game that it’s mastered - convenience.

As Amazon continues to grow and dominate, we think that Amazon Prime Day has valuable lessons for growing brands that they can apply to their own business models successfully.

(1) The membership model works really really well if you’re fulfilling a real need

While subscriptions of one sort or another have long been in vogue for ecommerce companies, not all of these companies have been successful over the long-term. This year, a record number of customers signed up for Prime Day, demonstrating that the membership or subscription model can work really well, but it needs to have several key components. Namely that the benefits have to be unique, exclusive and drive significant value to the customer. 

The thing that makes Prime Day so special is that it is available to only Amazon Prime members. Most e-commerce subscription providers tend to provide a subscription for the sake of stabilizing their own revenue and cash flow and not necessarily because they offer something unique, exclusive and valuable to the customer. 

That being said, companies like Stitch Fix and Dia & Co. have been successful because they provide exactly that. In the case of a company like Dia, they’re meeting an untapped market need for plus size clothing and have a unique offering in a space where there’s a clear market gap. Literally the perfect use case for a membership model. 

(2) Don’t be afraid to run experiments

In a way, Prime Day is one big experiment for Amazon. The company has used it to test new product lines and releases or supply chain innovations with the focus shifting slightly each year. Once it becomes clear what worked and what didn’t, Amazon can use the plethora of data to improve throughout the remainder of the year. 

While most e-commerce brands do have a strong ethic of A/B testing whether it’s landing pages, marketing copy or other initiatives, it can be hard to run potentially game changing experiments and take big risks as a small company. But, that being said, what Amazon and other successful e-commerce players like Jet have taught us is that big bets can pay off. In an ecosystem where retail continues to be challenged, those who innovate successfully and take bold steps to reinvent their business models even when they seem to be working will be the ones who come out on top. 

(3) Make sure your supply chain and logistics are in order before ramping up marketing

While in the past Amazon has had some technical snafus related to Prime Day, the company has certainly succeeded in making sure everything went smoothly this year. While Amazon has a particular strength in supply chain and logistics, the lessons from its past technical malfunctions can teach smaller brands a thing or two.

Similar to the Amazon example, you don’t want to spend a ton of time, effort and money driving traffic to your site when that traffic can’t convert due to a shopping cart glitch (back in 2016), or, on the supply chain side, when you’re out of the inventory you’re advertising. At Fuse, one of the most common problems we encounter is a lack of coordination between the marketing and the supply chain teams. 

While marketing may launch a meticulously planned, omni-channel campaign, too often we find that these campaigns don’t take into account critical questions like if the campaign has the desired impact, can the company actually fulfill the orders? Will there be enough inventory to satisfy demand? While it seems obvious in hindsight, it usually takes a crisis or two for e-commerce brands to streamline the coordination between functions. 

As your company grows and scales and focuses on putting these lessons into practice, 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. 

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.