Inventory Management and Forecasting

Lisa Kovner will be blogging all month on beauty brand strategies, from The Cost to Launch a Brand to Brand v. Branding. Be sure to read Kovner's previous posts, "Who Needs a Business Plan? You.," "Beauty Distribution 101: Getting Your Products Into Their Hands," and "Ops are Essential to Your Beauty Brand." -Editor 

You wouldn’t leave heaps of cash in a corner of the garage and write down on a piece of paper every time money was added or subtracted, so why would you do the same with your company’s inventory? If managing inventory was easy, everyone would want to it.

Inventory management essentials

You’ve placed an order with a contract manufacturer and you’re waiting for your finished goods to arrive. Are you ready to receive it?

Strong inventory management practices are essential to profitability. Best practices include:

• Unique SKU numbers for each product or item
• Barcodes assigned to each product or item
• Accurate item descriptions—Be descriptive such as face cleanser--hydrating, eye shadow trio—blue, hair spray—strong hold, etc.
• Inventory management software
• Accurate start count
• Inventory management policies, including how to receive inventory, how to accept returned inventory, how to hold inventory for future use, how to reserve inventory for future product development, loss prevention, etc.
• A place to properly store inventory to preserve shelf life
• A plan to sell through inventory before it expires

Inventory management software

The best inventory management software is going to be a platform that easily integrates with your accounting system, your fulfillment partner (or future fulfillment partner), your website’s e-commerce platform and your retailers’ inventory management systems. The more you can automate, the more efficiently you can manage inventory and the more time you can spend selling through inventory.

Before investing in any inventory management software, learn the details of its integration flexibility. Application Programming Interface (API) is essential. This is the code that lets one program talk to another. Request confirmation of API keys for your other platforms (accounting, website, fulfillment house, etc.). If the API keys don’t exist, find out what it will cost to have one custom coded. Without an API key, you’ll have to manually export and then import into another platform.

Forecasting inventory needs

If you’re placing your first product order with the contract manufacturer, your forecast is simple. It’s the MOQ—or minimum order quantity. After that, inventory forecasting becomes a bit more detailed. To accurately forecast, you need inventory movement history, but if you’re a new brand with no history, how do you accurately forecast future inventory needs? Two over-simplified examples are:

• Example 1: Let’s say you only sell at your website, and you move 100 units of Awesome Beauty Product (ABP) each month. If your MOQ was 2,500 units, it will take you 25 months to sell through. Do you wait until Month 24 to re-order? Absolutely not! If it takes three months to get tubes from your offshore supplier and one month to decorate, fill and ship the tubes within the U.S., then you need to re-order when you have at least five, preferably six, months of inventory left in stock. In other words, you should re-order when ABP inventory approaches 500 to 600 units (Month 19 or Month 20).
• Example 2: If you sell at your website in addition to retailers, and your web inventory for Another Awesome Beauty Product (AABP) sells 50 units a month, but your cumulative wholesale movement is 200 units a month and your MOQ is 2,500 units, then it takes 10 months to sell through. Assuming re-order time is four months, you should re-order AABP when inventory approaches 1,250 to 1,500 units (Month 4 or Month 5).

Neither of these examples includes product loss, product samples, returned product, product on hold for placed (but not shipped) wholesale orders, etc. Don’t you wish you paid attention in math class?

The reality is that as you implement effective inventory management controls and create an inventory movement history, you’ll learn your daily, weekly, monthly, quarterly and annual inventory burn, which helps accurately forecast future inventory needs.