Inventory Planning for the Holidays

Posted on Sep 19th 2016

Who’s got a rich uncle?? Not I, and I’m guessing maybe not you… so we can’t bleed cash on overstocking the warehouse. Overstocking can also lead to waste – which we loathe here at EcoEnclose!

But, we can’t get caught with our proverbial pants down – with items on backorder, leaving customers to find products at other, lesser companies.

How to manage this craziness?!

As always…there is no perfect answer. Here are some helpful steps.

Forecast your holiday sales: Build reasonable estimate for your sales in the fourth quarter, for each product you sell. You can do this by calculating your quarter three sales and adding a bump – perhaps whatever bump you saw between Q3 and Q4 last year, or a standard 30% if you don’t have access to such data. You might want to be aggressive with your forecast if you have cash on hand, ample storage space, and produce goods that can be sold after the holidays and into 2017. And more conservative if none of these things are true for you!
Assess your current inventory levels for finished goods and work-in-progress or raw materials: How many units do you currently have on hand of each of your products that are finished and ready to sell. How many goods can you produce with the raw materials you have on hand?
Determine the right balance you should strike between finished goods, work-in-progress and raw materials: Do you hold raw goods that can be converted into a bunch of different end products? Do you sell a lot of custom or semi-custom goods? Or do you sell a few stock items? The answers to these questions will help you determine the optimal balance for your company.
Understand your lead time: How long does it take for you to receive raw materials once you’ve placed an order? Once you have supplies in place, how long does it take to create finished products that are ready to ship to customers?

Then do some math…Here is the part where it is always best to just present some clear formulas. If we were authoring a textbook on operations for a large manufacturing company that is exactly what we include here.

But unfortunately this doesn’t always work for small, unique, artisan businesses during the holiday season. So this is easiest illustrated through an example. Here goes…

Background: The Unique Boutique sells beautiful handcrafted jewelry made from fair trade beads. They offer a small set of items and do not offer customization. They forecast selling 1,000 pieces this holiday season, from November 1^st through December 31^st. They currently have 500 pieces on hand and have the raw materials to make another 200 pieces. While it normally takes one week to receive beads they order, during the holiday season this lead time is longer – up to two weeks. Their pieces take about two weeks to create.

Now what? Again, there is no perfect answer, but here’s one way they could approach this.

Be ready on November 1^st to sell and ship the 500 finished pieces currently on hand
Start producing the 200 pieces they have raw materials for on November 9^th, so they are complete on November 23^rd, before Cyber Monday
Order beads to make 300 additional pieces by November 11^th. These will arrive by November 25^th, and finished pieces will be complete by December 9^th.

This approach balances the importance of having product on hand to sell with The Unique Boutique’s need to manage their cash – so that by the time they have to pay invoices for their beads, they are already in the midst of their holiday sales.

And we'd be remiss not to remind you of the importance of inventory planning for all the other supplies you need to get products out the door - boxes, mailers, tape, packing slips, note cards!