In our monthly series Know your data series, penned by Scott Bagnall, Head of Product at Volo we are looking at how you can use data to grow your business. Detailed in a webinar earlier this year, if you’re a Volo customer then the reports are all available to you in the Vision reporting and analytics module, but for non-Volo users you should still be considering the same factors in order to scale and grow your business. We are collating all of the articles here so if you missed one you can find them all in one place.
We’re roughly half way through this series, having covered the actionable insights you can get from your best sellers, your product sales velocity, your slow or dead stock and looking at your margins. In this article we’re going to look at stock forecasting, with examples from one particular industry.
About a dozen years ago, a guy called Tim Ferriss published a book called The 4-Hour Work Week. It became a best seller. The central premise was this: how cool would life be if you could find a lucrative way of working that meant you only had to put in 4 hours a week? 90% of your work you outsourced or automated.
To someone running their ecommerce business or division, this will sound almost mythical, but setting up some basic rules in your reporting system will mean that you can save a lot of time managing your stock levels, and a lot of money by having the right amount of stock at all times.
Nowhere is this more telling than in the business of selling parts, tools and accessories for motor, powersports and marine vehicles. Distributors and resellers represent a lot of brands, which means they need to carry an awful lot of stock. Throw in the complexity of fitment to particular vehicle types for the consumer market and you’ve got an even more awful lot of SKUs. For example, we have a customer with over 25 million (not a typo) SKUs in the Volo Origin system. Clearly there is much to gain by being able to forecast when you’re going to run out of thousands of different items.
Now you could employ someone to walk around your warehouse all day monitoring stock levels and reporting back to you so you can decide what you need to order when. Or, you could deploy a system that automatically publishes stock levels in real time across the channels where you sell and put some basic rules in place in your reporting system to automate stock forecasting and even stock re-order.
The Basic Rules for Stock Forecasting
Here are your three basic rules for stock forecasting:
- How fast is my stock selling?
- What is the lead time between pushing the button to re-order and getting the order in?
- What buffer (if any) should I keep so I don’t ever run out of stock?
(There’s also ‘What’s my current stock level?’ which your system should be able to tell you.)
The key metric governing forecasting is the number of days before you need to re-order a product or product line, based on stock level, stock run rate, and re-order lead time. For example, if you sell 20 items over a 7-day period, that’s about 3 items a day. If you have 145 items in stock, that’s about 50 days’ worth and if the re-order lead time is 10 days then you’ve got 40 days’ stock left.
So, let’s say you’re a parts, tools and accessories reseller. Let’s also imagine you’ve got 500 SKUs you want to keep an eye on. Maybe they’re your best sellers, or maybe they have a long re-order lead time, 30 days or more.
First, decide over what period are your run rate sales relevant for each product. Is it 7 days, 14 days, 30 days or more? Is seasonality a factor? The longer the period, the more you’ll even out any spikes, but the higher the risk that a spike will skew your forecasting. Record this run rate period.
Second, set the re-order lead time for each product. You’ll know this from your order history and your suppliers. Maybe build in a couple more days to be on the safe side. Third, decide how many days’ stock you’d like to keep in for a product – your buffer – if you want a buffer.
Fourth, import this information into your reporting system and tell it when you want it to notify you of the need to re-order; perhaps 5 days before you need to place the re-order. Some reporting systems will let you set time bands on a RAG status – Red-Amber-Green – for your stock re-order times. Some systems will also automate the re-order process and either place the re-order for you or get you to sign off on it first.
Finally, you might want to get the system to send you a daily email with stock re-order notifications. Perhaps it could notify all the items at ‘red’ status, signifying perhaps a re-order needed within 2 days, as well as ‘amber’ status, perhaps a re-order needed within 5 days.
Then your stock forecasting is done, at least for your important 500 SKUs, and your reporting system should calculate the rest. On a daily basis you see how much you’ve sold, your current stock levels, how many days’ stock you have left and what quantity, if any, you already have on re-order. If you’ve set a buffer of a certain number of days’ stock you’d like to keep in for a product, you get a recommended re-order quantity based on run rates to maintain your days’ stock buffer.
If your reporting system can’t do this for you, or to discuss how you can free up your time and cashflow by automating your stock forecasting, please get in touch.