Long Distance, Long Timeframe Supply Chain Management
December 18, 2016 6:29 PM   Subscribe

In a new business with no historical sales data, how do you project how much inventory you will need when working with Far East suppliers needing long lead times?

A friend and I have piloted a new business selling gift baskets for dogs over the internet (It is in Projects if you're curious.). December was our first month, we had the softest launch ever, and orders were good! We want to go full steam ahead with this in January.

However, the supply chain timing is doing my head in. Almost all of our suppliers are in Ireland and the UK and the maximum 7 - 10 days lead time they need are not ideal but are totally manageable. Due to an issue with one supplier, though, we want to switch three of our products to suppliers in China, and they need 21 - 41 days for delivery.

How do I guess in December how much inventory I will need in February? How do I figure out what to order now to fulfill what I will need later? This seems like an impossible thing to do. Either I can order loads now and have a massive storage problem and the possibility that I don't actually sell all of that inventory, or I can order less and run the risk of not being able to fulfill orders, possibly for weeks, while letting down customers and losing sales.

How do people do this?
posted by DarlingBri to Work & Money (5 answers total) 2 users marked this as a favorite
Best answer: I don't think there are any secrets to this - you just have to make educated guesses and get better at them as you go. Count yourself lucky in terms of lead times too. I have suppliers who have to order stuff 6 months in advance.

Right now you have sales figures for part of December. Try to extrapolate from that using the kind of growth you're aiming for. I would imagine your sales would be less in January than December given the type of product, but I don't know. You have to try to factor as much data in as you can gather or guess.

I would also be trying to look at the costs of storage vs the estimated costs of not being able to meet demand. From there you need to decide which way is the least costly to err on, taking into account your cash flow.

Be prepared to get it wrong and welcome to supply chain management.
posted by mewsic at 7:50 PM on December 18, 2016 [2 favorites]

Are you selling the gift baskets via any other channels apart from your web site? Either B&M or online stores would mitigate the storage issue and smooth out the inventory boom|bust cycles. Selling on Amazon, if it fits your business model, is easy as pie.
posted by carmicha at 8:48 PM on December 18, 2016

Best answer: I do this as part of my job. My products take 13 weeks to arrive in the US.

First, I compare unit cost savings against excess inventory. I aim to keep 9-12 months worth of product on hand. I won't go higher than that to get a good deal but a savings could sway me from an 8-month supply to a 12 month supply, for example. That inventory level works for my industry; yours may be less. Since it's hard to determine your demand with no data, set a purchasing budget as part of your operating expenses.

I also figure out the minimum savings or order quantity I need to make it worth the extra transit time and I identify places domestically where I can get it faster but at a higher cost if I need to crash some through. I've done that to cover gaps which leads to out of stock times measured in days instead of weeks. This lowers my margin on that run but averaged over the entire product lifestyle it's just a blip.

Lastly, pre-order sales, Google analytics and comp product research help me forecast demand ahead of launch. I keep a very close eye on demand and sales. I have placed a second order before the first arrived based on new information. When I get close to my minimum stock level, I prepare the product files and PO so I can order as soon as I decide it's necessary.
posted by peanut_mcgillicuty at 4:57 AM on December 19, 2016 [1 favorite]

Response by poster: Thanks, this was great advice. Now that I know there is no magic formula, I am setting up for warehousing and scaling up my orders. We are also looking at markets and fairs where we can sell direct to consumers over the course of 2017 in case we need to unload inventory that isn't moving like we're projecting.

Thank you!
posted by DarlingBri at 11:42 AM on December 19, 2016

It gets easier once you get to year two. Then you can start using seasonality as well as current sales plus trend. I did a lot of sales forecasting, and found that a seasonally-adjusted exponential smoothing method was as good as anything, and easily implemented in a spreadsheet.
posted by SemiSalt at 2:28 PM on December 19, 2016

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