Free up your finances by avoiding the pitfalls of overstocking

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Most companies have a lot on their plates these days. Rapidly changing social and economic elements have brought challenges to raising funds, sustaining cash flow, finding partners, and handling virtually every other aspect of running a startup.

Supply chains don’t usually make the headlines for startups. But in the current climate, the chaos of global supply and demand means that supply chain management is one of the most important skills that early stage teams need to get right.

Even the biggest retailers – like Target – have recently been public about their supply chain issues and the impact of excess inventory. They are announcing drastic price-cutting and order-cancellation strategies to restore inventory balance and free up warehouse revenue.

And if giants like Target are having trouble forecasting demand, smaller companies and startups are in even more precarious situations, often without cash reserves to support wasted materials and orders.

Related: How Advanced Analytics Could End the $50 Billion Retail Excess Inventory Problem

How does overstocking happen?

When your inventory strategy relies on meeting demand instead of considering replenishment lead times, you end up over-ordering. Buying in bulk seems cheaper in the short term and less risky than leaving orders unfulfilled. Still, eventually you’ll probably end up with a chair mess: you can’t change inventory fast enough, it piles up, and you have to store or move it because there’s no room left for the new product you’re trying to impress. the market with.

This is also due to the lack of accurate demand forecasting, but forecasting tools only work when they can find patterns. When you have an inventory management solution in place to make deliveries and consumption more predictable, you can order more frequently in smaller batches. That way, you’ll have less stalled and stalled inventory, and you’ll have more ability to be agile – step in and course correct – without saturating your warehouses. The biggest shortcoming in demand planning and forecasting systems is their inability to support real-time interventions.

Why is excess inventory significantly affecting early stage companies?

A staggering number of startups find that money tied up in excess inventory can amount to a round of funding. This is funding that could support the startup’s research, survival, growth, or next phase of development. What might seem like a temporary failure becomes a significant obstacle to a startup’s long-term success and lifespan.

Managing material assets should be of vital importance to startup founders; without it, they simply won’t be able to remain financially agile enough to take risks and grow.

Take Peloton, for example. This VC-backed company found itself with products with huge physical components (bikes and treadmills) that no longer sold in bulk. Peloton faced dire financial consequences because of this wasted inventory and had to take emergency measures, including laying off thousands of employees and canceling plans for a new factory.

Rivian, an electric vehicle maker, is the latest victim of overstocking. The inability to sell its physical product meant it had to raise prices before it had even developed enough to sell at scale. The last nail in the coffin? The company made the critical mistake of asking customers who had already ordered the lower-priced vehicle to make up the difference.

The sad thing is, this could have been a very different story; the company admits that if it hadn’t struggled so hard with supply chain issues, it could have produced twice as many units.

Related: 3 ways small businesses can survive the supply chain crisis

How should startups deal with the immediate problem of excess inventory?

Before startup leaders can start practicing better demand forecasting, they need to deal with the immediate problem of excess inventory and insufficient cash.

How startups resolve this initial state of affairs will depend on their unique financial situation. If they need the money to stay alive, a faster cash velocity is better than having stock as an asset on their balance sheet. For most inventory-heavy startups, there are more dollars in excess and waste tied to inventory than the savings they are realizing from laying off employees right now.

An immediate step that can lighten the load is to cancel all future orders that exceed your needs. If you can access actual lead time data, you can redirect or cancel inventory. You shouldn’t consider laying off employees when there is excess inventory that can be monetized.

How do you know when it’s time to do this type of intervention? You may be seeing changes in demand, unusually long lead times, changes in shelf availability, etc. Keep an eye on materials passing through (and getting stuck in) your supply chain.

Related: How Better Inventory Management Can Improve Your Finances

How can startups use AI to forecast demand?

Newer retailers and early-stage startups can use AI-powered tools to better plan for demand going forward, and that doesn’t necessarily mean retraining or relearning everything you know about supply chains. Consider these strategies:

1. Keep an eye on lead time estimates

Looking at actual delivery time estimates for your products can help you plan for potential overstocks. Understand how often a supplier can deliver. Look at global shipments to determine whether you will receive your materials in time for distribution or manufacturing. This information can set more accurate expectations for the rest of the production and beyond. It also helps to let customers know ahead of time rather than apologizing after letting them down.

2. Don’t underestimate your closeout inventory

Price your days off properly; there’s no need to price something at 50% off when a 40% discount would result in the same volume purchases. The great thing about being aware of deadlines is that you don’t have to take desperate measures. You can see the big picture ahead and implement smaller, incremental measures to deal with excess inventory.

3. Actively manage inventory buffers

Inventory buffers shouldn’t just stagnate because excess inventory (even in the form of a planned buffer) can oversaturate your supply chain, causing the flow of goods to stop. If you can actively manage inventory buffers for critical goods, factoring in demand and carrier disruption patterns, you can create a healthier flow even when the market environment is turbulent.

Overstocking happens to the best (and biggest) of us. But when you’re an early-stage company struggling to make its way with venture capital funding and struggling to find enough extra cash to make changes, excess inventory can hurt your business and threaten your future. By focusing on your supply chain and reading lead time estimates to manage the flow of your material goods, you can take back control and free up your finances.

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