In the dynamic landscape of direct-to-consumer and wholesale markets, the past five years have presented us with fluctuating consumer demands. Lifestyle shifts, both pre and post-COVID, coupled with material shortages, have significantly altered purchasing patterns. To mitigate the challenges of surplus inventory and prevent stockouts, it is imperative for supply chain and analytics teams to collaborate on developing an effective supply chain strategy to optimize supply chain costs. Here are some actionable steps we can take:
Efficient Inventory Management:
Categorize Inventory: Classify inventory into fast-moving, regular-moving, and slow-moving items. Establish appropriate safety stock levels for each category, tailored to the expected demand variability.
Adjust Safety Stock: For instance, rather than holding a standard one-month excess inventory, adjust your safety stock to reflect the average of the next three months’ forecasted sales, particularly for fast-moving items. This approach may lead to occasional stockouts for slower-moving items, but it frees up capital to invest in high-turnover inventory, thereby boosting revenues and profitability.
Prioritize Profitable Inventory:
Focus on High-Margin Items: Allocate your inventory budget towards fast-moving items with the highest contribution margins. This not only optimizes fulfillment costs by reducing inventory carrying time but also enhances overall profitability.
By implementing these strategies, we can transform our supply chain into a more responsive and cost-effective operation. In addition, we can improve profitability with the following actions.
SKU Rationalization: Eliminate underperforming SKUs that do not synergize with your top-selling products. Carrying 100 units of a non-complementary SKU incurs unnecessary inventory and minimum order costs. Annually, it’s prudent to discontinue SKUs that lack sales performance and strategic value.
Inventory Preparation: Prioritize pre-warehouse activities such as barcoding, kitting, and bundling, particularly if they can be completed in countries with lower labor costs, to circumvent elevated service fees.
Warehouse Optimization: Enhance storage efficiency by consolidating pallets and refining warehouse operations, which can significantly reduce storage and picking fees. When utilizing third-party warehousing, it’s crucial to understand their billing methodology for pick-pack-store services, as costs can vary widely. Make sure you understand how you are billed and compare different warehousing service providers if your warehousing is not in-house.
Shipping Strategies: Reassess your shipping methods, collaborate with third-party logistics, or implement free shipping minimums to protect profit margins. Opt for less-than-truckload (LTL) shipping over small parcel delivery (SPD) for minor inventory transfers. Utilizing a high cube container (9.5 feet in height) and maximizing a 40-foot container’s capacity, as opposed to a 20-foot one, can yield substantial savings. Additionally, consider slower shipping options to decrease freight expenses.
Economies of Scale: Capitalize on bulk purchases and the resulting lower unit costs for fast-moving inventory as your business expands. Keep in mind this approach may not be as cost-effective for slow-moving items.
Selecting Fulfillment Partners: Choose fulfillment providers that offer competitive rates and the ability to accommodate your business’s growth trajectory. While it may not be an immediate concern, vetting new vendors is essential for future scalability.
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