Ok, for me personally, I like to start with the most exciting number of all. I want you to really ask yourself how much you eventually want to make in this business. I can break down everything else and see what I need to do to get to this magical number.
In the video below, I walk you through step-by-step how to calculate and come up with numbers for your business. In this case, your inventory turnover rate would be 7. According to CSI Market, for example, the average inventory turnover ratio for the retail apparel industry is 8. First, you need to have a firm grasp on supplier lead time, which is how long it takes your suppliers to deliver inventory after you place an order.
Does it take two weeks or 30 days? Does the estimated lead time always align with the actual lead time? You should also factor in internal lead time, which is the amount of time it takes your team to process items, conduct quality control inspections, complete production, package, and ship everything to customers.
If, for example, it takes you a week to process 50 boxes of candles, but you typically receive orders for twice that amount every week, then you need to carry at least two weeks worth of ready-to-go stock — or boxes — to cover yourself. Safety stock refers to the extra inventory you keep on hand in case of emergencies, seasonal changes, or event-based spikes in shopping.
A company that sells yard maintenance equipment, for example, should keep safety stock in case of snowstorms that drive up the demand for shovels and ice picks. A sports apparel company, on the other hand, may want to hold safety stock for games like the Super Bowl, when more people want to rep specific team paraphernalia. Review your sales records and inventory data from previous years to determine which items, if any, go up in demand during specific times of the year.
Our best expert advice on how to grow your business — from attracting new customers to keeping existing customers happy and having the capital to do it. Entrepreneurs and industry leaders share their best advice on how to take your company to the next level. Getting your inventory levels right is a tricky balance.
Here are some ways to estimate how much inventory you need on hand without overstocking. Managing inventory is a bit of a balancing act.
On one hand, you never want to sell out of your most popular items. On the other hand, you never want old inventory to pile up, and if you run a restaurant or cafe, using inventory before its sell-by date is critical. Costs related to poor inventory management pile up quickly.
Overstocking and understocking are equally problematic. The simplest way to estimate how much inventory you need is to use inventory management software. Technology can help keep tabs on current stock levels, reduce storage costs for excess inventory and improve relationships with suppliers and vendors. It can also help you organize your customer and vendor information. Inventory software comes in many shapes and sizes.
Some solutions can be integrated into your POS system; some come with a mobile app that can scan barcodes, manage stock and interface with suppliers while on the go. Many products are cloud-based, which can cut down on your hardware costs and make the tool more accessible. Estimating how much inventory you need starts with customer demand planning. This is the practice of forecasting how much your customers will buy from you over a certain period of time.
Again, there are plenty of events that can throw off your demand planning. But starting with a basic understanding of how regularly you sell out of a product can help establish a baseline of how much stock you need to keep on hand.
They understand return on investment, but in managing the day-to-day urgencies of their business they are much more focused on sales, believing that maximizing sales will lead to positive cash flow. Let me explain why. Thinking about inventory in terms of time is the essential starting point in effectively managing inventory.
Stated in simple terms, the goal of effective inventory management is to have on hand at any given time only enough inventory to support planned sales until the next delivery arrives, plus a safety stock to cover any short term sales spike and the possibility of a late vendor delivery. This quantity can be stated at any point in time as forward weeks of supply; that is, the number of weeks of planned sales going forward that the current inventory represents. When thinking in terms of weeks of supply the focus is on maximizing the return on the inventory investment by linking inventory levels directly to planned sales.
However, many small retailers instinctively focus on how much they might be able to sell if they had the stock on hand, rather than the amount of cash they are committing to inventory. And unless they can quantify the number of weeks of supply they have on hand, and the number of additional weeks of supply they are purchasing, they have no way of projecting when they can expect to sell that inventory and convert it into cash.
Clearly, a critical component of forward weeks of supply is planned sales.
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