I recently did an interview with A2x Accounting talking about my experience (or lack thereof) in inventory forecasting benefits and management when I bought my own retail + e-commerce business around 9 years ago. Here you can learn from my costly mistakes and how to be in total control of future inventory.
In this article, StockTrim co-founder Dominic Sutton reveals the most valuable lessons he’s learned about the benefits of inventory forecasting during his career, why it’s essential to get it right, and how ecommerce businesses can make the most of accurate forecasting systems.
Let’s dive in!
StockTrim is an inventory forecasting system that automates the entire inventory planning process.
Prior to StockTrim, I was the owner of a toy company that suffered a two-year disaster. It happened because of the very thing inventory forecasting software is there to prevent.
I lost $1.2 million over 24 months.
When I bought the company, it was already in a bad way. But without access to the data and predictions a tool like StockTrim can produce, I was blind to just how bad things were.
On top of that, I made things worse.
I purchased a lot of stock at cost, trying to finance the business. And I had no idea what I was doing when it came to buying new stock.
My purchasing was based on what I thought we should buy, which is just ridiculous. I had no data to inform my decisions, which led to a massive cash flow issue.
In the end, I stripped the business, sold as much stock as I could, licked my wounds, and carried on.
Now I’m here, trying to help small- and medium-sized enterprises avoid the very mistakes that led to my own losses. Because I know that I’m not alone in having tried the DIY approach to inventory planning; it’s everywhere.
A lot of people get confused when they hear the word inventory; they immediately think of inventory management.
Inventory management should be thought of as an insight. It gives you an idea of your on-hand stock levels, what’s coming in, and what’s going out.
What we do at StockTrim should be thought of as more of a foresight.
Sometimes we’re described as demand forecasting, inventory planning, stock control… even replenishment planning. It’s a confusing category with lots of different names, and one that’s still evolving.
A lot of people are still using spreadsheets to do what StockTrim does. So we aren’t in competition with inventory management software like Dear, Unleashed, and Locate. They’re actually partners of ours.
We draw data from their systems and use it to project what stock businesses should order, and how much, up to two years in advance.
In this way, we help businesses completely optimize their inventory.
At StockTrim, there are three core outcomes – or client benefits – that come with investing in our inventory forecasting solution:
To better understand the value of these results, it’s important to see how each of the issues they resolve can impact a business.
One of the most significant catalysts for small business failure is dealing with capital.
Small businesses often don’t know where their money is sitting, and so they run out. For the most part, their capital is sitting on their shelves, as overstocks. It’s a silent killer.
We reduce overstocking by helping businesses to buy the right amounts of the right stock that we know is going to sell within a specific timeframe.
In other words, we match up supply with demand.
Reduction of overstocking spreads out your working capital spending into other areas of the business.
A lot of ecommerce businesses will show stock on their website that they don’t actually have available in their warehouse or physical store.
This is called understocking.
Understocking really upsets your clients or customers, and negatively impacts profit retention.
When you promise a product you don’t have and must then explain this to a customer who has just tried to purchase it, you run the potential risk of losing that customer to a competitor.
On average, our inventory forecasting solution reduces understocking by 50%.
Less understocking means better customer service, and more profit retention in the long term.
The average business spends about 10 hours per week on inventory planning.
So much time is wasted attempting inventory forecasting DIY-style: Poring over spreadsheets and trying to come up with new formulas.
On top of this, spreadsheets are always subject to human bias and mistakes, and so can be filled with errors. Then these inaccurate projections are transferred through to real-life scenarios.
By automating the inventory forecasting process, we minimize the risk of human errors and reduce the time spent on doing it manually.
Across our client base, we’ve managed to reduce those 10 hours a week by 75%. This works out to around $20,000 worth of savings per annum from time efficiency alone.
Up until recently, most businesses thought they had to do it themselves. Only big businesses were running ERP systems that included forecasting.
We’re at a stage where the market needs to be educated of the availability and benefits of inventory forecasting for SMEs.
To compare it to, say, health: Inventory forecasting ought to be considered before the symptoms show up.
Unfortunately, in many cases, businesses are unaware of the dangers in their inventory until it is too late. They overstock and their business becomes illiquid, then the tax department goes after them.
All because they didn’t invest in an inventory forecasting tool early on.
At this stage, the only thing stopping it from being a standard requirement is awareness.
Until recently, inventory forecasting tools were only available or understood at an enterprise level. This left small- and medium-sized businesses poring over spreadsheets and likely creating errors that could cost their company thousands of dollars.
Now the solution is available, in affordable subscriptions, ready to help SMEs fully automate their inventory planning. It’s a no-brainer.
All that remains is to further educate the public.
While it’s possible to produce forecasts against SKUs, and load that as hypothetical data, it’s not ideal.
We generally require three months’ worth as a minimum. A full year is best.
The maximum amount of data we would take is two years’ worth; we’re not interested in anything beyond two years.
Once a business has started trading, the system takes over and begins to add real data which it uses to start creating predictions.
Our system has some machine learning in there that allows it to relearn according to changes such as lead times or SKU patterns. It will pick up the new behaviors, instead of running on the old data.
Not at all – it all depends on the specific needs of each business.
Originally, we developed integrations with big inventory management systems like TradeGecko (now Quickbooks Commerce) and Cin7.
But we quickly realized that some smaller businesses don’t want a full inventory management system. Some people just have a fast-moving inventory. So we created integrations with QuickBooks Online and Xero.
We’ve got one customer that only has 12 SKUs, but they’re fast-moving.
He supplies supermarkets; if he doesn’t have the stock, he’s in trouble. A supermarket isn’t going to front the stock, so an inventory forecasting system like StockTrim is a great investment for him.
Lead times can vary by supplier, SKU, seasonality, delayed materials… all sorts. The system reads all of these things.
You can jump in and adjust lead times as needed, overriding the system so to speak.
But lead times are a core part of the demand element of inventory forecasting, so we’ve got to get it right.
For small-to-medium enterprises (SMEs), it’s essential that our system is accurate, affordable, and easy to use. Our customers are not inventory planners or purchasing officers; they’re often business owners, perhaps working with an admin assistant.
For sure.
We work with accountants in more flexible advisory roles – accountants that are looking out for their clients and want them to achieve maximum efficiency in their business.
For accountants with the bandwidth to delve into aspects of their clients business beyond their accounting systems, ours is a solution that they can pass on to those clients to help them better optimize their business.
All we require to work with them is a single source of inventory data.
How you handle your inventory directly impacts your working capital, and working capital is a part of the accounting and financial elements of business. It’s all interconnected.
There are rooms within the StockTrim dashboard that let you forecast for adjusted lead times, over and above what the system would historically tell you.
Should a lead time for a product suddenly change from four weeks to seven, it will tell you exactly how much stock you will be out by and how many orders you will still be able to fulfill before you run out.
All of a sudden, you’ve got the power and time to prepare for events that can create serious problems for businesses if they’re left unchecked.
It also has the ability to forecast for one-off events like discounts, special offers, and ad campaigns.
Or if, for example, your business suffered during the March lockdown in 2020 – we can normalize that.
Let’s say you decided to run a ‘buy one, get one free’ campaign in October.
We tell the system that we’re actually going to sell 20,000 units of the SKU that month, but at the profit rate of 10,000.
The system will then recalculate and adjust all your purchase orders based on your suppliers’ lead times.
Furthermore, it will work backwards for everything – appropriating the bills of materials so that they accurately reflect the real quantities and costs.
Then the power of automation takes over, and StockTrim begins to produce new purchase orders for you.
If I could leave you with only three pieces of advice, they would be this:
If you’re interested in giving it a go, you can try out StockTrim for free with a 14-day trial.
You can find the original article here.