Your business is grappling with increasingly complex inventory needs, from tracking more SKUs to the challenges of moving into new markets. Maybe you’re considering opening a second warehouse to alleviate the space constraints of offering more products or strategizing with third-party logistics partners to assess the feasibility of a fulfill-from-anywhere approach.
At the same time, you’re beginning to see greater impact from inventory-related shortfalls. For example, customers might be placing online orders for items that have recently gone out-of-stock, or a customer service rep may not realize a replacement product they offered to a customer is already allocated to wholesale orders. Many problems like these result from various departments using their own repositories of product data and commitments. Daily updates between sales, inventory management and finance systems are insufficient, leading your business to make promises to customers that it can’t keep.
If this strikes a familiar chord, your business may be coming to a crossroads: Rethink your inventory management strategy, or attempt to make what’s worked thus far continue working. The latter isn’t wise. The inventory approach that gets most businesses to $5 million to $10 million in annual revenue doesn't make the grade for a business ramping up to $50 million.
This installment of the Project $50 Million series provides a roadmap for a $10 million business to improve its inventory management in a way that will facilitate its next growth hike to $50 million — including the people, process and technology changes required. We’ll explain how you can sustain profitable growth as your business expands.
“If a smaller company doesn’t have the right inventory system in place right from infancy, it’ll always be playing catch-up,” says Asad Ahmed, principal industry solutions adviser at NetSuite. “You should always have a future view of things.”
In other words, you must be ready to grow before you grow. An example: If you simply double the size of purchase orders in an attempt to cover rising direct-to-consumer orders and two new partnerships with large retailers, you could end up with either too little or too much product — without precise calculations, most will overbuy to avoid turning customers away. Either scenario can pull down profitability. And if your inventory influx outpaces sales, that could even spell some hard-to-swallow inventory carrying costs.
This is why businesses of this size need more sophisticated inventory control that offers real-time views of every stockroom and warehouse, whether yours or a 3PL partner’s, to ensure products are where they need to be.
Also consider how the actions of other business units can affect inventory management. Automating accounts payable processes, for example, can strengthen supplier relationships by making you a “good company” to do business with. In turn, suppliers may give you a much-needed break in times of need. Meanwhile, you might feed relevant invoice and new sales data into an inventory management system to better track KPIs like carrying costs by item.
Sustained growth is about more than simply managing increased sales. It requires consistently coordinating more people, more processes and more data — all of which directly affect, and are affected by, inventory management. It requires inventory management to be an ongoing, specialized discipline integrated with others throughout your organization, not an isolated task managed as part of someone’s multiple responsibilities.
Put simply, the larger your operation grows, the more value a data-rich, interconnected inventory management discipline adds. How to get started:
You’re ready to open a second warehouse or start using one of your 3PL’s other locations. Now, you don’t just have to worry about whether you have a SKU in stock, but where it’s in stock. And if both locations have it in stock, which will incur the lowest shipping cost within the promised delivery window? This insight into the specific locations of specific products is especially important if you're moving toward an omnichannel strategy, which requires a complete view of all inventory information, including what’s allocated to existing orders.
If you plan to add more locations at any point, then ensure your operation will work seamlessly — no matter how many locations you add or how many sales channels you open up — by instating best practices now, early on the growth curve.
Take for example Henry Bear’s Park, a toy company based in New England. Before the business rebuilt its online store, employees had to manually assign each online order to the store that could fulfill it. Meanwhile, the online store’s inventory system synced with the in-store system only once or twice a day. The result: Often, customers placed an order for in-store pickup but arrived to find the product unavailable. Realizing this approach damaged the customer experience, the company automated the entire process, from order placement and fulfillment to real-time inventory updates. Not long after, the pandemic hit and online orders skyrocketed — and Henry Bear’s Park used its new inventory control processes to keep up with demand.
The more inventory you need to track, the stronger the case for sophisticated inventory management technology that tracks item details, quantity, location and other attributes in real time. These systems should be scalable, empowering you to know which items you have and in which quantities as you start storing inventory in more locations.
Various components are required to achieve that real-time view, like the infrastructure needed to read barcodes or RFID tags on individual items and pallets. Tailor the approach to your organization, with one notable universality: “Inventory control is really about customer expectation,” says Ahmed. “The customer must be happy with you. They’re expecting you to deliver the goods, but how can you do so if you don’t have real-time insight into where your inventory is?”
That’s why a single source of inventory data is crucial. Businesses must make sure inventory data is reflected in not only the ERP system but also CRM, ecommerce, order management systems and the like. That will help warehouse managers keep track of incoming orders and available inventory while sales managers and customer service teams keep an eye on order status, while they all work from the same data.
Going a step further, set up reports and dashboards that track KPIs — like how fast products are moving, or inventory turnover — to help decision-makers understand trends in performance. This insight, combined with a view of product costs, can help them identify products that are stagnant and costly to your business and those that are moving quickly — which can benefit related processes like demand planning.
To limit carrying costs, closely monitor the performance of individual SKUs and look out for trends. More accurate inventory forecasting can limit stagnant inventory. A capable inventory management system can help with each of these tasks. It should do much of the work for you, monitoring the data for you to easily review.
A system that provides full “inventory visibility,” as it’s often called, can also reduce obsolete inventory by lowering the chances that issues will be overlooked. If you know that 100 units of a given item are in stock but only 10 have sold in the past month, then you can reduce the price or promote that item in marketing campaigns to move the units before they lose some or all of their value. Similarly, better demand forecasts and more strategic purchasing decisions can drive down the chances of products becoming obsolete.
Monitor these metrics and look out for these issues early and often. Carrying costs, and perhaps obsolete inventory, will increase as your business grows — but they shouldn’t climb at a rate disproportionate to on-hand inventory.
As your company runs its regular cycle counts and physical counts, Ahmed notes that other players in the mix — for example, third-party logistics partners — need to perform cycle counts, and your system must reflect their numbers as well as your own. Look for an inventory management system that can automatically process partners’ updates.
The past few years have displayed how crucial a strong supply chain can be to the overall health of a business. Volatility has led many companies in inventory-intensive industries to reconsider “lean” practices in favor of more safety stock. But finding the balance between just-in-time vs. just-in-case is trickier than ever, and perfection is an unattainable goal, especially if orders are late or short.
Plus, companies of all sizes are facing forecasting challenges unique to the current climate. Many $10 million businesses, however, don’t have the tools necessary to track the progress of shipments from suppliers or the funds needed to place larger orders as a counter to uncertainty.
“Forecasting has always been an imprecise art and an imprecise science,” says Matthew Crespi, co-founder of Carnegie Mellon University’s Corporate Startup Lab. “But in times of supply chain disruption, the variance across possible outcomes increases. These days, you’re likely to be more wrong than you used to be. … It’s because there’s more noise. The needle moves around more.” Products and materials that once took between three and five days to get to you might now take between three and 16, for example.
According to Crespi, it’s more important than ever to crunch the numbers to determine which risk you’re more comfortable with: not having enough inventory or having too much. In some cases, over-ordering may not even be a realistic option. Some of this will of course depend on what you sell, including the price and size of your items and how quickly you can secure more goods.
“You really need to think through the economics of [purchasing inventory] in a more sophisticated way,” Crespi says. “The basic rules of thumb you have been using in a less volatile world are no longer sufficient.”
The current moment requires businesses to make the most of the inventory they do have by improving inventory allocation. There are a variety of routes to take — perhaps preferred customers or the most profitable channels will get their orders filled first — but however you decide to allocate inventory, you need the flexibility to move it around accordingly. Spreading inventory across locations rather than stockpiling it in one location can help.
More companies are making their products available everywhere and honing the ability to fulfill from anywhere, regardless of where the customer makes a purchase. As you forecast sales, keep each of these unique channels in mind, and consider which ones may see a seasonal boost or account for a higher or lower portion of sales over time. For example, you wouldn’t use in-store sales data to project online sales for next quarter. Recognize the patterns unique to each channel, and plan accordingly.
However, having the flexibility to occasionally pull products allocated to a certain channel for an order from another channel can be valuable. Forecasts are never perfect, so one area of the business will likely have leftover items that another can use. Any company striving for omnichannel fulfillment must have visibility into all available inventory across locations and the ability to quickly reallocate items.
“Many companies look backward more than forward and try to predict demand based on that,” Ahmed says.
Ideally, you should be able to link your forecasting and demand planning capabilities with other business applications to help your team develop collaborative forecasts that are more accurate. Incorporating data from sales planning and a CRM system, for example, can show you exactly which items your customers are requesting and when those orders need to be fulfilled. This way, you can predict demand based not on historical data but on whether you just landed or lost a big customer, for example. Meanwhile, marketing might factor in its next promotional effort. You can fold all of this information into demand plans and then ensure your supply chain is capable of providing the stock you need.
In addition to better gauging future demand, Ahmed recommends incorporating forecasting methods like linear regression and moving averages to understand more current trends, as well as seasonal demand planning. These can drive more accurate forecasts that improve your ability to manage inventory.
As a business grows, the average number of roles each person serves decreases, notes Crespi. If your small business is like most and has people wearing multiple hats, then think critically about the point at which you’ll need someone to look after inventory management exclusively. This responsibility may currently fall on a purchasing manager, but at some point, inventory management needs to be its own job. This could require retraining existing employees or bringing in hires with expertise in this area. Either way, the investment should quickly pay for itself.
As you rearrange management accordingly and eventually spread inventory management responsibilities across a specialized team, remember that inventory is dependent on multiple business functions and therefore can’t be an island. Software that can easily integrate inventory management, accounting and CRM functions, such as an ERP system, helps the many departments with a stake in inventory — finance, procurement, sales and the C-suite, among others — communicate and work together.
Inventory optimization doesn’t “end” once you’ve found ideal levels to suit present conditions and forecasts. Business ebbs and flows, supply chains are dynamic, and customer demand can be hard to predict long-term. Make small, frequent changes that add up to larger gains, and prepare for multiple potential outcomes — i.e., practice scenario planning.
However, avoid fixating on issues with no real solution in the current environment. The rising cost of materials or shipping goods, for example, are issues you will likely have to work around for the foreseeable future. But you may have more control over keeping items in stock — and in turn building customer loyalty — by establishing relationships with alternative suppliers.
If you’re not already tracking KPIs that gauge the effectiveness of your inventory management practice, then get started. Doing so can help you pinpoint problems and identify areas that need improvement, supporting the philosophy of continuous, small improvements that add up to larger gains. And as your company grows in size, it will have more historical data to harvest — allowing you to look back monthly instead of weekly, or yearly instead of monthly, for instance.
Naturally, it can be easy to get caught up in the vast number of inventory management KPIs that you can track. The guide linked above runs through nearly all of the most common ones — and while the metrics that matter most to each specific organization will vary, we especially recommend looking into:
Scaling from $10 million to $50 million and beyond means developing an inventory management system that improves every essential function of your business — warehouse management, production, purchasing, sales, customer service, accounting and potentially more — while enhancing your ability to meet customer demand and minimizing costly overstock.
It’s worth seeking an inventory management solution that enables you to start small and gradually implement more capabilities as necessary. Ahmed compares this to building a house: “You want to make sure you have the right-sized lot, because if you plan to add an addition later on, you’ll need the room to do it.”
Many entry-level inventory management systems simply won’t grow with you. They might be able to display stock levels at your warehouse at the end of each day but unable to track inventory across multiple locations or when goods are in transit, in real time. What happens when you need to replenish stock and have no idea what’s on store shelves without manually checking in with each retail location, hoping their inventory manager got the count right? Without access to the full picture of your inventory, it’s all but impossible to pinpoint ideal inventory levels and purchase-order sizes.
Must-have inventory management system features for a business cruising past the $10-million mark include:
If you have two warehouses and five brick-and-mortar stores, you need to see available stock in each location for that black hoodie in a size medium, so you can identify the best fulfillment option. If you’re out of that exact hoodie in both warehouses, for instance, you can still fulfill the order from the store location closest to the customer. If you didn’t have the ability to fulfill this order with in-store inventory, you might end up placing a rush order with your supplier to get more hoodies — and pay a premium for them.
Best-in-class inventory management systems track dozens of popular metrics out-of-the-box and allow users to customize dashboards and reports based on the data that they store. This is essential because as discussed, different numbers matter to different businesses.
A good inventory management system is not only easy-to-use and reliable but also tightly integrated with systems for financials, order management, procurement and other key business functions. That connection facilitates the teamwork and cross-functional processes required to better manage your inventory.
It’s hard to break the mold, especially the mold that brought your business success in the first place. But organizational growth requires change, and for inventory-intensive industries, that means making inventory management its own business department — with a deep connection to others — and uniting people, processes and technology.