During the gold rush of the 1800s, prospectors chased each other to find gold nuggets in rivers and mines all over the west. They were all chasing gold and the dreams of riches it promised. But most remained poor. Many of the prospectors searched using similar systems in the same or very similar places.
Today ecommerce businesses search for virtual gold. In most cases, we do this within our customer base, with a new customer segment, or by introducing new products or product lines. While these are all good places to search, in this article I will explore mining for gold in the most cash-intensive and underdeveloped asset of many businesses: inventory.
Inventory Is Major Asset
For many ecommerce merchants, inventory is their largest asset. For typical companies, inventory comprises between 60 and 80 percent of current assets. This article is about optimizing that asset with the goal of increasing sales, reducing inventory levels, increasing cash on hand, and reducing operational expenses. Additional side benefits are fewer write-offs, and a lower percentage of inventory sold at end-of-season prices.
While most retailers have an inventory or accounting system, they use simple tools such as Excel and Outlook to manage their inventory reordering procedures and communication with their suppliers. This causes a variety of challenges, as follows.
- Managing the order data becomes a challenge, causing shortcuts and lack of accuracy when determining quantities and timing.
- The communication between the vendors and the retailer becomes cumbersome. As estimated delivery dates change, this can cause shortages, back orders, lost sales, and dissatisfied customers.
- Due to lack of data and fear of lost sales, many online retailers simply buy too much inventory. The thought process is “we will sell it anyways so why not get a few extra units?” This can cause cash shortages, slow-moving inventory, and lack of investment in other areas of the business. In extreme cases, it can lead to the business’s failure.
The reason most online retailers keep using less-than-optimized tools is simply cost. Many retailers deem the investment in large systems too high. Many also feel that the large systems are an overkill and too cumbersome for them to implement properly in their businesses. They’re probably right.
Good System for Supply Chain Essential
A good supply chain system with the needed intelligence is fairly simple and can provide online retailers with incredible benefits. The system must be easy to use and implement. It must provide good communications tools, and it must have the ability to integrate the data needed to make intelligent buying decisions.
Most retailers can use a contractor to build something rudimentary that will provide some assistance and improve upon the Excel and Outlook paradigm. This is what we did in our ecommerce business about eight years ago. It started out as a simple web-based tool we used to send orders to our single overseas vendor. Since then the system has evolved considerably. Today we use it to manage our entire purchasing efforts: multiple suppliers, orders, shipments, and payments are all managed in one place. This simple system gives us a competitive advantage over our competitors, allows us to keep our inventory levels low, and enables us to invest cash in marketing efforts and personnel.
Rules for a New System
For a merchant looking to build a supply chain system, here are a few simple rules to follow.
- Don’t try to have everything at once. Build a small system that will allow you to have some benefits quickly and create incremental improvements.
- The system should have the following four modules: (a) purchase order, (b) shipments, (c) demand planning, and (d) communications portal between internal and external team members.
- Simple data integration between the supply chain and your inventory is a must to prevent double entries that frustrate both you and your suppliers.
Benefits of New Inventory System
Below is a list of some of the tangible benefits an online retailer can expect from this system.
- Inventory reduction and an increase of cash.
- Better measurement of inventory, with easy-to-spot areas of shortage where a retailer is sacrificing sales.
- Reduction of ordering costs. For retailers with many SKUs, the actual time it takes to place orders may be costly. A good system will save a considerable amount of time and allow a retailer to order often and in small batches.
- Improve financial measurements, with increased inventory turns, profits, and returns on assets and sales.
We are developing a ready, cloud-based system called CommunicatorBase.com, which integrates everything in this article in a simple, easy-to-use format. The logic and operability of the software has been tested in our organization for a number of years.
Do you have other methods to manage your supply chain efforts? I’d love your insights and feedback.