Why it matters:
- An estimated 70% of supply chain leaders have been stocking up on inventory to reduce the risk of supply chain disruption, according to The Hackett Group.
- In an inflationary environment, freeing up cash by optimizing inventory has grown in importance — it was the No. 1 issue in The Hackett Group’s annual survey of supply chain leaders.
- Companies including teeth-whitening business Snow Cosmetics, fast-fashion brand Freedom Rave Wear, and organic protein powder brand KOS have kept a tight grip on inventory levels using technology that combines multiple data points, from historical sales analytics to promotional strategies.
Liquidation sales might be great for consumers, but they should not be the goal of any retailer or manufacturer.
Increasingly, companies are leveraging technology to help them better plan their inventory demands, reducing their need to liquidate merchandise at reduced profit margins, and maintaining stock levels based as close to real-time customer demand as possible.
Inventory optimization has taken on increased significance in the wake of supply chain disruptions during the pandemic. Many companies have invested in “safety stock” to avoid product shortfalls but are now seeking to streamline their inventory holdings to free up needed cash, according to research from business advisory The Hackett Group.
The company’s annual supply chain survey found that optimizing inventory levels is the top priority of companies this year. Seventy percent of supply chain leaders surveyed said that they have been using inventory to buffer against risk, the survey found. In addition, many businesses cited challenges around having too much inventory or having the wrong inventory in the wrong locations.
“With an inflationary environment, working capital is now a focus, and companies are trying to free up their cash,” said Erin Blair, Associate Principal, The Hackett Group. “So reducing inventory, or really optimizing it, is at the top of companies’ lists.”
Executives at teeth-whitening company Snow Cosmetics, apparel manufacturer Freedom Rave Wear, and plant-based protein powder supplier KOS discussed how they have optimized their inventory levels so that they’re better aligned with their customers’ demands, freeing up cash for other uses.
Snow Cosmetics avoids inventory overstocks by knowing precisely when to purchase goods and how much to purchase
For Trevor Martin, Vice President of Operations at Snow Cosmetics, inventory planning is about finding the right balance of timing and volume to optimize stock levels and cash flow.
With a product such as the teeth whitening systems sold by Snow, moving inventory quickly is essential to staying ahead of expiration dates, but it also helps not to have too much cash tied up in inventory.
“We’re trying to avoid that scenario that a lot of companies find themselves in, where they are just overstocked,” said Martin.
He said the company is trying to establish a relatively rapid cadence of product orders — every quarter or six months for some SKUs, for example, instead of every 12 to 18 months.
Snow uses the Inventory Planner technology from Brightpearl to help it manage its purchasing — when to purchase, how much to purchase, and the cadence of purchases, Martin said.
When buying product, it’s important not to give in to the temptation to leverage volume discounts in an effort to reduce costs, he said.
“I think where a lot of people get into trouble is when they say, ‘Oh, I can drop my cost of goods from $10 to $9 if I order 20,000 more [items],’” Martin said. “But having overstock can be much more costly in the long run.”
Companies need to factor in costs such as the lost opportunities from other, more profitable uses of cash; storage costs; liquidation costs; and, in the worst-case scenario, disposal fees for expired product.
It’s also critical to be able to leverage data such as historical sales volumes and the potential impacts of upcoming promotions, for example.
“The more you can refine the settings within this particular system, the more customized your results will be,” said Martin.
[Read: Forecasters on 5 Key Consumer Trends That Will Drive All Businesses in 2023]
I think where a lot of people get into trouble is when they say, ‘Oh, I can drop my cost of goods from $10 to $9 if I order 20,000 more [items].’ But having overstock can be much more costly in the long run.
Trevor Martin, Vice President of Operations, Snow Cosmetics
Freedom Rave Wear delivers fast fashion via inventory planning tech that produces ‘most of our orders almost in real time’
From its micro-factory in San Diego, Freedom Rave Wear uses inventory-planning technology to help it create the right amount of apparel needed for its customer base of festivalgoers.
The company, which designs, prints, and assembles its lifestyle apparel products from the facility, has been able to more accurately forecast demand based on the analysis of real-time and historical sales data.
The company does weekly product drops, launching an estimated 60 to 180 new SKUs every week.
“The ones that do really well, we respond to immediately, using [Brightpearl’s] Inventory Planner,” said Michael Hodgen, Co-founder, Freedom Rave Wear.
The tool connects with Google Analytics and the brand’s Shopify e-commerce site to provide real-time data about site visits and conversion rates, which help the company modulate its production to meet demand.
“We can predict that we need to make 34 of this item in medium, and six in extra-large,” for example, said Hodgen. “We can look at it in real time, push those orders out, and generate the product and ship it to the customer.
“We produce most of our orders almost in real time,” he said.
The fast-fashion company fulfills an order in an average of 1.2 days from when the order is placed, and it takes an average of 4.2 days from when a customer places an order to when they receive it.
“With the right tech stack, we have been able to provide a positive customer experience, reduce waste, and deliver an exceptional product,” said Hodgen.
As a result, Freedom Rave Wear’s business soared 108% in the first few months of 2023, compared to the same period last year, he said, and the growth pace has been accelerating.
When it comes to liquidating inventory of those few items that are overproduced, the brand creates an online outlet store using its Shopify Plus account, which it activates for a limited time period to customers who are given a password via email.
The dedicated outlet stores help the company manage its image, Hodgen said, and avoid creating an impression that products “are always on sale.”
In its core apparel manufacturing business, however, Freedom Rave Wear’s ability to respond quickly to customer demands is key to its business model and competitive positioning, said Hodgen.
“Right now, we are focused on figuring how to survive as a vendor in California,” he said. Labor costs are high and competing against labor from overseas. The flip side is that we are much faster.
“We continue to bet on U.S. manufacturing and bet on people who make informed decisions about the brands they support,” he said.
[Read: How Supply Chain Tech Helped 3 Growing Companies Drive Profitable Sales]
KOS inventory management mantra for its organic protein powder: ‘If we aren’t turning over our stock every six months, we’re in trouble’
KOS, a supplier of organic protein powders, has been shrinking its inventory costs while growing its sales and profits, the company said.
It uses the Inventory Planner solution from Brightpearl to more accurately forecast demand, optimize its stock levels, and plan its cash flow, the company said in a case study report.
The fast-growing company — sales have increased 2,100% year over year — launched in 2018 by selling products on Amazon. It soon expanded into the direct-to-consumer and retail channels, with products available in retailers across the U.S., including Whole Foods, Target, and Walmart.
“We’d been seeing great success and rapid growth and, while that was happening, inventory became a problem that bubbled up to the surface,” said Kevin Dalaeli, President and Chief Operating Officer of the protein powder brand.
The company previously had been using another tech platform to manage its inventory but wanted a more intuitive solution, he said. Inventory management is especially critical for products that have an expiration date, said Dalaeli, adding that many retailers require the date to be at least 18 months out.
“If we aren’t turning over our stock every six months, we’re in trouble,” he said.
The granular insights that KOS is able to obtain around key performance indicators (KPIs) and other metrics have helped it streamline its product inventories to better reflect consumer demand, even as that demand has soared in recent years.
Minimizing inventory has also been critical to freeing up cash for better uses, Dalaeli said.
“Say you spend $100,000 on ‘safety stock’ that then becomes obsolete and has to be binned or liquidated,” he said. “That’s $100,000 you could have spent on an employee that would have brought in $500,000. That’s a huge opportunity cost.”
The company’s strategies around driving sales and profit growth appear to be working, as it approaches more than 100,000 total points of distribution in retail and its online sales continue to grow.
“For us, the future is all about being able to stay nimble and to build steadily while being ready for the next digital wave,” said Dalaeli.
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