Inventory management’s ideal state sounds a lot like Goldilocks seeking out the perfect chair: Having too much or too little is a problem. The goal is getting it “just right.”
That’s a goal that isn’t met overnight.
For most small businesses, effective inventory management is an evolutionary process, one that moves from a physical count and documentation to a more automated system over time. But, how do you get from “point A” to “point B”?
We spoke to three FedEx Small Business Grant Contest winners about their own experience with inventory management; what they’ve learned, and how they manage inventory today. What we got was some excellent, candid advice, each delivered from a different perspective.
Making Sense Of All The Pieces and Parts
Ari Hoffman is an owner of GOBIE h2o, a company that makes environmentally friendly water filtration products. When the business was new, it offered one product — the now-iconic GOBIE water bottle.
“Each water bottle was made up of three main parts that needed FDA approved colorant added to them: the mouthpiece, the plastic container (body) and the FlexFlo® pad, and offered the bottle in six different colors. That means we had 18 color combos we had to buy,” Hoffman explained. “There was a 50-pound, minimum order for each colorant, and at the 50-pound minimum, one pound was $24. If I bumped that up to a 100-pound order, I could drop the per-pound price to $14. If I went with a 1,000-pound order, I could drop that price to $3.50 a pound.”
So, why not just go with the larger order at a much better price?
“One pound of material made 11,000 mouthpieces,” Hoffman said. “If we would have gone with the larger order, we would have tied up our much-needed capital in inventory. So, we paid the maximum price to get only what we needed.”
Initially, everything was handled internally; including packaging, shipping and a very rudimentary, highly manual approach to inventory management.
“In the early days, we did it all ourselves. We’d pull the product from inventory, adjust our spreadsheets, hand-cut our FedEx labels, box our shipments up and drive them to FedEx,” Hoffman said. “Eventually, we grew big enough to justify moving to a fulfillment center. Then, we were able to hook up our shopping cart to the fulfillment center’s back-end operation so we could take/ship orders in real time. This way we always knew what inventory we had, what was ordered and what was shipping out. Our sales were growing continuously, so we had to get more sophisticated. “
Through it all, he stuck with the conservative approach on inventory.
“If you have too little, you can do things to create demand. You can turn it into an opportunity,” Hoffman said. “But, if you have too much inventory, you’re tying up money that you need to grow and run your business. That’s never a good move.”
Managing Flavors, Sizes and Goats
Judith Irving, founder and partner of Fat Toad Farms, has a unique inventory management challenge: using the finite amount of milk produced by the goats on the farm for the right mix of goat’s milk caramel flavors.
“Caramel has a shelf life of about a year. We sell our caramel year round, although the bulk of our sales come during the holiday season,” Irving said. “We have to make sure we have enough caramel, in the right mix of flavors and sizes in stock to fill our wholesale and retail orders year round. However, the trick is, because of the natural cycles of our goats, we can only milk from March through December, and therefore, we can only make caramel March through December. Especially from October through December, when the goats are making less and less milk, we have to be as accurate as possible about what we are making so we don’t have too little of one kind of caramel or way too much of another.
Like most small, family businesses, Irving didn’t invest a lot of money in integrated accounting and inventory management systems early on.
“We used spreadsheets and Quickbooks™ and add capability incrementally. Now, as a business, we’re ‘growing up,’ so, our next step is to integrate the systems we have and put in a more automated inventory management system,” Irving said. “We want bar codes on boxes so we know exactly how many jars of each flavor we have in stock without counting. As a food producer, we also need traceability. Although we’ve never had a recall, as a responsible business, we want to know where every jar of caramel made on a certain day was shipped. The bigger you grow, the more aware you have to be; the more you have to run your business with eyes wide open. “
It’s not only about knowing what’s happening now, but instant access to historical data.
“We have a limited number of production days and we have to use those wisely. We can’t go in blindly creating flavors because ‘Today, I’m in the mood for Salted Bourbon caramel.’ We have to be able to pull up what flavors, in what sizes, we sold during x timeframe the prior year, so we can project demand this year. And we need to have that information now, not five hours later,” Irving said. “The difference between success and failure is so very small — particularly when you start to hit a certain momentum. I think it’s important to be on top of your business enough to know when you’re entering another level, and to respond in kind. That’s what Fat Toad Farms is doing with our inventory system this year. It now makes sense to make the investment.”
The Fine Art Of Managing 1,300 SKUs
When Nicole Snow started recycled yarn and textile company Darn Good Yarn, inventory management was simple.
“When I started the business, I had one product. So, inventory management was a matter of going down to the basement, looking at an empty shelf and saying, ‘It’s time to reorder,” Snow said. “Now, I have around 1,300 SKUs. That changes everything.”
When she created the company, there weren’t a lot of affordable inventory management options for small business owners. Today, the proliferation of cloud and mobility have leveled the technological playing field.
“At the time, ‘cloud’ was something in the sky. Today, there are plug-and-play, software-as-a-service inventory management systems that you don’t have to manage yourself,” Snow said. “Yes, you’re going to spend some money on these systems, but if you spend the money, you’re not going to miss out on opportunities. For me, it’s all about shopping cart integration, because no one — trust me on this — can reconcile this information manually. No one.”
Snow lives in a world of texture and color; a business filled with subjective choices.
“My inventory system helps me forecast. I know when I sell a lot of blue and when I don’t sell orange,” Snow said. “But, it’s really more than that. If you have too much inventory, you’re freezing up money. Too little, and you’re going to miss opportunities. I sell to both wholesale and retail, which are two very different channels. If I get a big wholesale order for 50 or 100 pieces of a specific color, if I don’t have it in stock, I’m going to miss the sale. If I’m not ready for the pre-holiday crafter rush, or if I’m not prepared for the artists who buy from me in April, I will lose that business.”
At the same time, like our other entrepreneurs, Snow is adamant about not overstocking.
“I can make four times the amount of every dollar frozen in inventory, so I can’t have excess,” Snow said. “What we’ve learned to do is work with our suppliers to drop our minimum orders so we decrease our volumes and increase the frequency of our orders. We do three times the orders for the same number of SKUs, but we have less frozen money in the process.”
According to Snow, inventory management is a lot like social media: you have to know why you’re doing it to succeed.
“Social media is not about selling, but connecting with your customers. Inventory management isn’t about documentation, it’s about business insight,” she said. “It’s like doing a spreadsheet. You still have to know the equation that drives the numbers. With inventory management, you have to know how to apply the numbers to help you run your business more profitably and make better choices. You’ve got to know what you’re looking for.”
Note: The information provided in this website does not constitute legal, tax, finance, accounting or trade advice, but is designed to provide general information relating to business and commerce. The FedEx Small Business Center’s content, information and services are not a substitute for obtaining the advice of a competent professional, for example a licensed attorney, law firm, accountant or financial adviser.