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Inventory KPIs to Grow Your Business - Recording

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Just as you track sales figures or conversion rates, it’s vital to track key performance indicators (KPIs) in the warehouse environment.

The finer points of how things are being received, handled, and shipped can reveal areas ripe for optimization ahead of the holidays rush.

In this e-commerce panel you'll learn how to:

🎅 Prepare your team for pre-holiday warehouse evaluations

🔁 Adopt tools and workflows that optimize inventory movement

🔎 Identify the biggest challenges during IMS migration

🚫 Avoid common mistakes, and how to course correct

Watch the replay right here or read the transcript below:

 
WBR_Inventory_KPIs_play


Transcript

Chad Rubin:

Alright, We are live.

Taylor Daniel:

Hello.

Chad Rubin:

Thank you everyone. Yeah, Hey Taylor, thank you so much for joining.

Taylor Daniel:

Absolutely

Chad Rubin:

Where are you dialing in from?

Taylor Daniel:

I am dialing in from Miami lakes, Florida, just a few minutes outside of Miami.

Chad Rubin:

Awesome, nice and warm over there for those that are just joining the call, if you can, just in the chat drop in where you're dialing in from, this is going to be super exciting, super informative. We're gonna primarily be discussing inventory. Which is pretty much sitting cash. Before I do so, Taylor, do you mind, I know you have extensive experience in the retail world. Do you mind just sharing with everybody quick background on yourself?

Taylor Daniel:

Yeah, totally. Well, again, my name is Taylor Daniel. I'm the Vice President of merchandising at FOMO agency. As Chad mentioned, my background is in retail planning and merchandise planning. So for the last 15 years, I've done a variety of roles in the retail industry. Starting is a as a sales and visual merchandising associate back in the stores and then I got my undergraduate degree in Fashion Merchandising. And since graduating from University, I have done merchandise planning and buying for brands like Johnston and Murphy, old Navy and Levi's, that was my most recent role. So me mainly focusing on analyzing sales history and demand planning, forecasting, you know, understanding trends that are going on in the industry as well as in our own sales data to make better informed decisions and help continue to grow the business and future selling seasons. So my brain is all about inventory all the time.

Chad Rubin:

That's awesome, and what are you doing today at FOMO? Just to give us some perspective there?

Taylor Daniel:

Yeah, so my background, as I mentioned, was doing retail planning for big giant companies. And today my primary focus is helping small to medium businesses, really leverage those retail insights. Retail math is not something that a lot of people are exposed to until they're, you know, knee deep in business ownership. So it's really important for these business owners to understand the math behind a successful retail business so that they can stay on top of their inventory and make sure that their data is accurate across all their kit, all their channels and you know, really that they're making the most informed decisions that they possibly can.

Chad Rubin:

Got it, well, I love it you're saying math, we're about to get into some math, but before we do hear a word from our other sponsor, which is Skubana. Skubana is running these webinars series to drive value and share insights from across the ecosystem. I am a co-founder and CEO of Skubana. Skubana is an operational platform to run and automate your business. Check us out if you haven't heard of us. We are, I run my own business with Skubana today and hence why we're having a inventory conversation. So without further ado, let's talk about when you get into the weeds, like a company approaches you or FOMO, and they're like, hey, we need some help with our inventory. Where do you spend, how do you start in the engagement process? Just walk me through where you began and where you follow the data.

Taylor Daniel:

Yeah, so the first step in merchandise planning is a process called hind sighting. So basically what that is, is taking a look at not only your sales history over a given time period, but also your inventory levels throughout that period and any other factors that might need to be considered. So when we're going through this hind sighting process, that's when all these KPIs really come into play. We are understanding what contribution of our total inventory was in each product category, or even down to the style and SKU level for many businesses. But on the flip side, we're also looking at our sales results, both retail sales and unit sales, to understand, you know, proportionally, do we have the right amount of investment in this product? Is it balanced with our unit sales? Do we, you know, there's lots of different levers that we can pull as merchants to improve the business. So that first step hind sighting, is where we gain all of our insights. Then those insights translate into the next step, which is your class positioning.

Chad Rubin:

Before we get to class, I just want to focus on the hindsight for a second. So the hind sights are those rolled up on an annual basis Is that a monthly basis? And is that driven, is that rolled up into just a macro view of your inventory position or is it rolled up on a SKU by SKU level? Just walk me through what that data looks like.

Taylor Daniel:

Yeah, totally. It does depend a little bit on the business. If it's a brand that happens to sell 10 SKUs, then they obviously would be doing it in a way that we call bottoms-up planning where you're looking at the performance of each individual SKU and then assume making assumptions to get your top level open-to-buy. Now on the flip side, a company like Levi's, which has many thousands of SKUs every quarter, they might be doing more tops down planning where they're looking at the categorical level first. And then if they discover anomalies, they'll go with deeper level and a deeper layer to continue to uncover additional insights. You mentioned as far as like the timeframe for some businesses, they do this every month. For some like H and M they probably do it every three to five weeks. But for a brand like Levi's, they actually only have two selling seasons per year. So they have a spring season and the fall season, which both lasts for six months. So this hind sighting process happens all the time, but, you know it's twice a year for companies that have two selling seasons or two replenishment seasons, and it can be, you know, much more frequently for brands with higher turnover.

Chad Rubin:

And so how about for those clues that are digitally native brands? Well, right now they're getting a COVID bump. How would you use hind sighting currently for a modern day brand that's just direct to consumer?

Taylor Daniel:

Yeah, so another one of these, you know, formulas that we use a lot in retail math is percent change. So we would want to take note of, you know, the same timeframe last year, what did we see? And, you know, were there builds or declines in certain months in certain categories? And then we would wanna do the same exercise with what's going on in 2020. Obviously we all know 2020 is a little bit of an anomaly it's, you know, for businesses all around the globe inventory and sales figures are way different this year than they might have been more easily predicted and forecasted in the past. So for brands that want to, you know, better prepare for this massive rapid increase in online shopping, you know, compared to brick and mortar shopping because of social distancing and everything, it's important to understand percent change. So when you look at what's happened this year, compared to what happened last year, there's going to be a calculation, oh, here we go so build or percent changes, the new figure minus the old figure, divided by the old figure. So if we're looking at your retail sales, we wanna look at the number of retail dollars you did this year minus the number of retail dollars you did last year, and then divide that by the number last year. That will give you the percent that you have changed in your retail sales from last year to this year.

Chad Rubin:

But if the percent is so different because of COVID right. You getting that COVID bump, then how do you bake that in? How do you properly make the right assumptions? Are we not making changes yet or we're just hind sighting?

Taylor Daniel:
Hind sighting and class positioning are, you know, they are separate processes, but they're so interconnected. So some of those thought processes that technically live in the class positioning do start to happen during hind sighting. However, obviously the bump that, the lift that some of these businesses or the decline that some of these businesses have been seeing as a result of the pandemic, is going to be exacerbated because it's gonna be the most dramatic right now because we're in the middle of it right now. We all understand that as things progress in the next, let's call it in the next 12 to 36 months, things are going to start to stabilize a little bit more. However, the thing that will remain and many experts agree with this is that online shopping will continue to take more contribution of total commerce in the US. For anyone who's not familiar, total commerce has been, in the online space has accounted for between five to 10% in the last 15 years. And in this year, it has grown more than the last eight years combined. In online shopping specifically because people aren't going out to the stores, they're just purchasing things online. So that's really important to consider as you're demand planning and forecasting for next year. I mean, we're already at we're November is now. So, you know Q1, I know we're talking about Q4 today, but Q1 is coming and many retail brands, especially brands that only have, you know, two to four selling seasons, they've already placed orders for Q1, Q2 some have even started planning for Q3 already for next year. So while you're doing all of that forecasting and that, you know, that scenario playing and all of that stuff to try and understand what's the right balance of inventory between all your different categories, It is important to buffer that percentage. If you're looking at straight up this year versus last year, this year is gonna be the hardest hit, whether it was good or bad for you this year is gonna be the hardest hit because we're in the middle of it now. So I would say hedge your bets and probably buffer that down by about 25% for your Q4, if you can still take action for Q4.

Chad Rubin:

Yeah, I was going to say, is it too late to plan for Q4?

Taylor Daniel:

That depends on your supply chain, right? I mean if you have, if your suppliers are, you know, flexible and they have additional capacity to continue to, you know, meet your increased demand or even better yet say that you have, this is a strategy that we used when I worked at Old Navy, we had an assortment of graphic T-shirts that we would just buy inventory that were blank. And they would just be like our top five colors. And anytime we needed to chase into something, because it was like, oh, the rate of sale is really high on that T-shirt, let's get more. We already had all of these blank T-shirts ready to go. So the manufacturer was easily able to just screen and ship. And we got the inventory in a matter of weeks where if we had started from scratch with no on-hand blanks, then that would have taken, you know, 60, 90, maybe even a hundred and 120 days. So that definitely makes a big difference.

Chad Rubin:

So I appreciate that. So, Taylor, we're on this journey with you. We're hind sighting. Anything else you want to share in hindsight, before we move into the next pass. Whenever, I know you mentioned a word, I forgot it already, but.

Taylor Daniel:

Class positioning but we'll get there.

Chad Rubin:

Class positioning, so let me know when you're ready to get there.

Taylor Daniel:

Yeah, so the last couple of things to note on hind sighting is that it's really important to, you know, a lot of people have the ability to open a spreadsheet or a report and look at it. But the important thing is to understand the relationships between certain numbers. I've mentioned in a lot of my blog articles and social media posts that there's this idea of merchandising levers and the four main merchandising levers, which we'll touch more on in a little bit are price, product, place, and promotion. And every decision that you can make in merchandising, affects one of those four things in some way that can either stimulate or inhibit sales or slow down sales. There are reasons where someone might need to slow down sales. So it's really important to consider while you're hind sighting that you really dig deep under the covers to try and find out, okay, where are the anomalies? Where is something that is not typical? Where am I seeing something that I'm not used to seeing? Where is there a percent change that's traumatic in my rate of sale, or my on-hand inventory, or, you know, if your unit sales have slowed down in a category that's typically bread and butter for you, but you also noticed that your unit inventory was way down. That's probably why your unit sales were down because you didn't give enough supply to satisfy your demand so that's where your demand forecasting comes in. As I said, it's all very connected with, you know, the whole process. It's a cycle of merchandising.

Chad Rubin:

It's so connected to marketing too, right? Because if your marketing team is starting to push super heavy on a SKU, same creatives into Instagram or to Facebook, or you're running lightning deals on Amazon, that could throw off percentages, especially if they start to bring that budget back down. So how do you actually manage that balance or that synergy between inventory planning and the marketing team?

Taylor Daniel:

Yeah, that's a really great question. And having a background in, you know, big corporate enterprise retail brands, that was one of the biggest challenges is that marketing design product development and merchandising were separate departments. And so small businesses, especially are at a little bit of an advantage, I would say just because their teams are smaller so it's very likely that their teammates are collaborating a lot more. And one of the things that I worked on a lot at Levi's, which was very refreshing, you know the marketing team was very open to us interacting with them as the merchandising team where previous groups of team members may not have been quite as involved with marketing. And, you know, we had very open lines of communication. That is one of the most important things I would say, try to remove the siloed culture of those four departments, product development, design, merchandising and marketing Those four if they work together often I mean, magic is bound to happen because you're using insights from different perspectives, different points of view, and they all have different goals, right? I mean, design has different goals than merchandising has different goals than product development and marketing obviously is totally different than all of those. But the shared common goal is to improve the business grow sales. So, you know, if we're all looking through that lens and collaborating together, then that's definitely a strong approach to your seasonal plan.

Chad Rubin:

I'm a big fan of cross-pollination. So I think it's super helpful

Taylor Daniel:

Are functional relationships for the wind.

Chad Rubin:

Nice, so you mentioned four P now I'm familiar with three Ps from Marcus Lemonis he always says what a people, process and product. Now you're mentioning four new Ps. Can we break those down? And where is that in the process? Is that still hind sighting or we're now moving into the class process?

Taylor Daniel:
This is lives with you all year long. This is in and out you live and breathe every day. If you are an inventory manager or a business owner who manages your own inventory, the four piece of merchandising should be what your live and breathe whenever you're working.

Chad Rubin:

And what are the four Ps again?

Taylor Daniel:

Product, price, place, and promotion. And I'll break those down a little bit. Product obviously is what you're selling. You know, what products you're going to assort and how much of it you're going to invest in. The next one is price, obviously what ticket price you're gonna list your products for and any additional discounts, promos, or markdowns that could be taken. And in place, what physical locations might carry it. If you have brick and mortar stores, where physically is the item placed in the store? Is it in the front window? Is it on a, you know, a T-stand, right when you walk in the store? Is it sitting right by the cash wrap? Or for E-commerce stores is it in your, you know, editorial banner right on the home page? Or is it only visible on your PDPs or, you know, where are you place these products and how easily the customer can interact with that product plays a huge role on your unit sales velocity as well. And then the last one is promotion. And again, touching on the marketing, this is how you promote your products through social media, marketing, advertising, website, photography, and different things like that. So when you are evaluating your sales history, inventory levels and various KPIs, we discover these insights and those insights help us make merchandising decisions that improve the business and give it the best chance to flourish.

Chad Rubin:

Okay, you know your stuff. Well, I'm so happy I brought you on. So we move from a hind sighting right, into this class positioning what is that?

Taylor Daniel:

So class positioning is exactly what it sounds like. You have different classes of product, so let's say that you carry denim and blouses or woven tops and knit tops those three classes. So you would want to, you know, after you've done your hindsight, you will have understood what percentage of your unit sales and your retail sales contributes from each of those three categories. And from there you can balance your stock to sales by saying, okay, last year, the woven tops accounted for 15% of our total unit sales, but it was only 10% of our total unit inventory for that timeframe. So, you know there that there's an imbalance that those two numbers are not as close to a one-to-one ratio, as you might want them to be. So there's opportunity to invest more depth in that class of products, because you know that your unit sales outpaced your inventory contribution with me?

Chad Rubin:

Yeah I'm with you, I'm loving it.

Taylor Daniel:

So, you know, that's one, a quick explanation of what class positioning is.

Chad Rubin:

Just real quick, is class positioning, is that the same as the ABC inventory planning? Have you seen like where you grade your SKUs.

Taylor Daniel:

Sort of, yes, it's very similar. So, you know, during your hindsight process, you're probably going to have uncovered enough insights to at least cue to yourself, certain categories, or maybe even SKUs or styles that you definitely know you might wanna consider walking away from completely, or at least reducing so that you can exit a product over time if you need a little more than one season to exit something. So, you know, as I've mentioned, a couple of times, this is the, all of this cycle is very connected and all of the pieces rely on each other. And even when you're done with hind sighting, you might go back while you're in the middle of class positioning like, oh, you know, I want to dig a little deeper into this one category 'cause I'm seeing something else that maybe I can affect. And when you, as a merchandiser or inventory planner can affect positive change, that's using retail math to the best of its ability.

Chad Rubin:

And so is the class positioning, is this one of the levers that you're suggesting in the merchandising world, or is this the lever that you'd be leveraging? And then you'd be looking at percentage of unit contribution of order volume versus percentage of unit to inventory balance.

Taylor Daniel:

Right, so, class positioning is let's call it phase two of your planning cycle. And it kind of encompasses all four of the P's of merchandising really. So you're deciding what product you want to buy. I guess the only part that's not part of class positioning is price and placement. So product and promotion both affect your inventory investments. If you know that last year, you ran a promotion on your women's knit tops, and it generated a 26% build in your unit sales compared to the prior year that's information that's relevant to your class positioning going forward, because you need to understand what strategies your brand used to stimulate sales. And if those are not repeated, you need to factor that into your demand forecast. If they will be repeated, you also need to take note of that. And if they will be repeated, are we gonna do it even better? Or is it going to be a similar, you know, are we expecting the same results or are we expecting that this promotion is gonna be even better. You know, for example, if last year you got this 26% build and it was just from an advertising campaign you did on Instagram, next year, you're gonna do an advertising campaign on Instagram with an influencer, you definitely might want to buffer your unit sales up higher and your demand forecasting while you're class positioning, otherwise you're going to run into stock outs. You're gonna sell out of your inventory because you're accelerating your unit sales velocity by further promoting that product and increasing your exposure.

Chad Rubin:

Hey, what do you do after class positioning? Like, what is the next step?

Taylor Daniel:

Yeah, Next step is open-to-buy. So you have finished your class positioning and you kind of understand at the top level, you know, bird's-eye view this is what I want each class to contribute to the total from an investment perspective, when we're talking about.

Chad Rubin:

And just real quick, are you suggesting that maybe one should develop classes? Like if I'm running a company called Think Crucial and I want, I vacuum filters, coffee filters, air filters, I should really class those things out?

Taylor Daniel:

I do think that it's helpful in the long run. Even if you're a company that only sells five products right now, if you have aspirations to grow your assortment in the future, it will help you. It will only help you if you begin to categorize and attribute things now, because then that structure will be built into your operations as you continue to grow and you continue to expand and you continue to invest in new product categories, the more meticulous and detail oriented you are, attributing these styles to certain classes or departments or whatever you want to call them then the more calculated you can be while you're going through your class positioning your hind sighting, you're open-to-buy all that good stuff. And it's just, all of that translates to more strategic buys, less wasted inventory investments, less stock outs like it only will help you.

Chad Rubin:

Okay, good. That's great for building a foundation and something that, I mean, I have like 1800 SKUs that we need to have in class. I mean, in Skubana we've labeled them and categorize them, but we haven't like broken them out on a class basis to understand contribution per class. I mean, that's a really fascinating way to look at it.

Taylor Daniel:

Yeah, I think it's one of the most important parts, especially for a brand that is selling, you know, thousands of SKUs you need to be able to look at the, you know, that bird's-eye view to understand what's happening at the macro level before any of the micro level stuff will even make sense or matter. Does that make sense?

Chad Rubin:

Yeah.

Taylor Daniel:

So we talked about the next step so open to buy planning. So basically open to buy planning, which I think Gina might have the formula for that one as well. When you are planning your forecast for a future season, you need to understand how much you have on hand now, how much you expect to sell between now and the season that we're talking about, whether that's, you know, two seasons from now or four seasons from now, it doesn't really matter. So you need to understand everything that's on order, everything you have on hand now and everything you expect to sell between now and then, and that will help you arrive at a figure that will, okay, here we have. So planned beginning inventory. So what you want to start that future selling season with. Then you would subtract your on-hand inventory, plus any upcoming receipts and then subtract your plant unit sales.

Chad Rubin:

When you say I'm coming to receipts, is that something that you've already paid down and you have on the water?

Taylor Daniel:

These are orders you've already submitted. These are things that you've already committed to. They may be items that you can exit depending on your relationship with your suppliers. But yes, you'd want to take note of any upcoming receipts that are already on order that you're already expecting between now and the moment that you're, the season that you're planning for in the future. So while you're going through this open-to-buy process, it's really helpful to have already gone through hindsight in class positioning, because now once you've gotten this open-to-buy number, that's just a number, so you can take your class positioning, which is percent values and apply that to your total open to buy. That will help you get to okay for women's knit tops, I'm gonna do 26% of my total open-to-buy is gonna be women's knit tops. Then from within that number, then you can start to break it down by style or color or whatever attributes are important to your business.

Chad Rubin:

So is it, Taylor correct me if I'm wrong so open-to-buy essentially is a future budget pretty much. And now we're allocating a percentage based on the classes, the class work that we did previously.

Taylor Daniel:

Exactly.

Chad Rubin:

Okay.

Taylor Daniel:

And yeah, that can be expressed as far as open-to-buy. It can be expressed in dollars or in units. I tend to prefer to stick to units in at least in my work history I have preferred that. But there are some planners out there who prefer to look at things from a retail dollar perspective than a unit perspective, simply because there are cases where, you know, a product might have a lower gross margin, but maybe it actually generates more unit revenue or more unit sales so your margin production from that product is higher, even though you're selling maybe more or less units of other things. So it can be helpful to look at it from both perspectives, but I definitely prefer to do my open-to-buy planning on a unit basis.

Chad Rubin:

Okay, so we do this budget analysis we allocate percentages based on the class work that we've done. And then you execute on that.

Taylor Daniel:

Yeah, so once you have applied your percent contributions that you want, that we came out of our class positioning with, to your open-to-buy figure, that's when the fun part starts. Then you get to understand, you know, really dissect, okay, I have, let's call it 10,000 units that I'm gonna allocate to women's knit tops. And then you're choosing, you know, so once you've gotten your top level number, you want to maybe go with some of your bottoms-up planning. So this is where, you know, looking at it from both ends of the spectrum can be helpful. So once you've done your class positioning and you're on your unit by planning and you're choosing which SKUs you wanna put in your assortment you will want to look at the SKU level at what happened in previous seasons. So say that you had this one top, that was your number one selling top and you offered it in five different colors and the white, black, and the blue were your top three selling and the red and orange, where your bottom sellers that gives you a clue. Do I wanna just buy more of those three that sold really well? Or do I wanna continue with the other colors because I feel that my assortment needs it for some aesthetic reason. You know, there are times when you might intentionally buy something and just buy it smaller because you know that it will visually improve the presentation of your assortment. Because you don't want things to be just all solid colors are all the same, or, you know, you don't want too much duplication in your assortment otherwise there, you know, there's this like decision paralysis that customers go into when there's not enough variety and it looks boring and things like that. So anyway, so this bottoms-up level planning can be really helpful when you're trying to understand, okay, now that I'm looking at the SKU level, how much do I want of each specific SKU? So, you know, like the red and orange example, maybe I'll only buy a thousand units of each of those and maybe the next season I'll exit it completely and then the other three colors, the blue, white and black, I'm gonna use almost my entire open-to-buy budget for that class on those three styles or those three colors, because I know they'll generate the most revenue.

Chad Rubin:

Okay, and so I haven't heard you talk about other metrics, I guess, in your specific jobs, there's probably three metrics that you're held to as a planner, what are those metrics like ? Have you done this analysis? Like, what are the KPIs that companies are holding you to in the business as it relates to inventory?

Taylor Daniel:

Yeah, so in regards to inventory, specifically, productivity is a huge metric that I was always evaluated on.

Chad Rubin:

Productivity of the SKU?

Taylor Daniel:

Of the style, yes. As a company, how much money did we invest to offer this product and how much money did we make? It basically was a way for us to benchmark, okay, this is the amount of effort that went into procuring this product, the cost of the materials, the freight, the marketing, everything. And then how much revenue did we generate from that? So it's kind of like an ROI, but in retail, you know, retail terms.

Chad Rubin:

Let me say, it's like ROI yes it's return on inventory And so what is a good ratio?

Taylor Daniel:

Well, that.

Taylor Daniel:

I've used this formula we've created.

Taylor Daniel:

It's very dependent on the business. So when I worked at Levi's, we often express this figure in just dollars. Like how much revenue did we generate from this specific SKU? When I was at Old Navy, it was more unit productivity. So from this particular SKU or style or class or whatever we were looking at, we would then understand, you know, in that given style where there, you know, were there five different colors that we offered, what was the SKU productivity of each of those? What was the style productivity of that parent's style? So that we could make decisions not only about is this a class or a style we want to continue carrying, but do we need to change the level of investment in the future? So that was definitely a big one, obviously percent change, which I touched on at the beginning in our retail and unit sales. That was definitely a big one, but that's obviously more sales metrics rather than inventory metrics.

Chad Rubin:

Can I throw a number out there? I would probably want a business owner I would probably want a five X ROII, so on whatever we've invested on that, SKU I want a five X return on that SKU from planning and merchandising what are your thoughts? Is that too high, too low? I mean, that's just what comes to mind for me.

Taylor Daniel:

Yeah I think it really depends on the price point of the product in this particular conversation for products that are really high ticket items, like think about the automobile industry. Your ROII might not be five, It might be like one or two, but if you're selling enough, then that will balance out and provide you with the margins and the, you know, the profits that you're looking for. Reversely for a brand like H and M where their price points are really low, they definitely want to be able to sell as many units of that style as they can because not only are they getting discounts from the manufacturers and the vendors for producing so many units, but also the faster that they can turn their inventory, the faster they can get new inventory and brands like that, obviously they want to have really high ROII. We're just going to that term. So, you know.

Chad Rubin:
Or I think different way to look at it could be the cost of the sale, right. And in advertising terms, it would be like we are spending 20 cents to make a dollar. So the, the average cost of sale is 20%. So putting a percentage out there as it relates to the overall sale price, I think could be another good way to look at it.

Taylor Daniel:
Yeah, totally. That's definitely another figure that has come up in, you know, in these conversations for sure.

Chad Rubin:

And so we haven't talked about, oh yeah, we haven't talked about aging or like inventory turns that hasn't come up yet on the journey. When do we get to those formulas and metrics?

Taylor Daniel:

Yeah so, we can talk about them now. So a couple of other metrics that were very important for me right? In my planning, we're stock to sales ratio, which we've touched on a little bit, the ratio between your unit sales and your unit inventory of any given style or class of products. As well as your rate of sale, which is how many units per week or per month, depending on the organization you're selling over a given period of time. And then a weeks of supply, which is another great one. You know, how many weeks of inventory do you have on hand to sustain the current rate of sale. And then last but not least being the inventory turnover rate. So the inventory turnover being a measure of how many times your inventory is purchased and I'm sorry, is sold and then replenished in a given year oh, perfect. So we have the formula for this is the cost of goods sold, divided by the average inventory value. This is definitely a big one in the world of merchandise planning, because we wanna make sure that this number is at a healthy rate. You don't want it to be too high because if you're replenishing really often, that means that you're also selling too much of your inventory and potentially running into miss sales because you're selling out of products where on the flip side, if your inventory turnover rate is too low, then you might be sitting on products that are stagnant or there's no demand for them. So it might be a category that you may consider walking away from or declining in the future. So when it comes to your inventory turnover rate the important things to keep in mind is that, I've mentioned that all of these things are very connected and the same goes with the metrics that I've just mentioned. There's a lot of correlation and relationship between all of these metrics. So if you, let's say that you notice that a style with a lower ticket price than some other similar styles has a much more favorable rate of sale than your other products, you could have a price lever to pull here, depending on your margins of course, maybe you consider lowering prices on some of the other items to increase the rate of sale. If that's successful, you would also be increasing the inventory turnover rate so other considerations must be made. Can your supplier keep up with those increased production needs? Are there shorter lead times available? There's, you know, other things to consider because these are also connected with each other. So as I've mentioned, all of these things are considered throughout each phase of the planning process from hind sighting and all the way until you actually place a PO and send that off to your manufacturer.

Chad Rubin:

So specifically on inventory turns, is there any, maybe it's by category or maybe it's by what sector you're in in the digitally native E-commerce world, but is there a number that you think is healthy that should be achieved for inventory terms?

Taylor Daniel:

Yeah, totally. So it definitely is industry specific, but I would say for anyone who's in the fashion industry, beauty industry or home decor, those are industries where they can benefit from being in a range I would say between four and let's call it eight times per year. So maybe you're replenishing once a quarter or once every like month and a half or so. So that level of replenishment, or, you know, restocking or adding new product on your sales floor, not only stimulates sales because your loyal customers wanna see new goods on the floor every time that they come in or on the website, every time that they visit. But also it helps you make sure that you're buffering your demand forecasting with your replenishment cycles, so that you have enough overlap, that you can continue to meet sales demand during those last few weeks of your sales cycle before replenishment comes. Cause if your service levels drop too low, then you also have missed sales because maybe you ran out of size mediums or something like that, that can also hinder your sales performance.

Chad Rubin:
Okay and so you mentioned stock to sales ratio. You mentioned that on a SKU level, and I'm wondering if you would look at this, not on SKU level but on a company level, like if you're a $7 million company, what should your inventory inventory value be on a $7 million company?

Taylor Daniel:

Yeah, that's interesting. So I think it makes sense to segment your products into, you know, basic products that you carry year round, these ones are ones that you know, you can rebuy anytime of year, they'll continue to sell the rate of sale is pretty consistent on this no matter the promotion and stuff like that. Then there is seasonal products or trend, you know, trendy products, or maybe it's, you know, a Valentine's day graphic tee or something like that, that, you know, the unit buyer is going to be a lot shorter. So with, oh, sorry, a lot smaller. When you're dealing with seasonal products like that, I think it's really important to target a 100% sell through rate. If it is a product that, you know, you're not gonna replenish, and it's just a one, you know, buy it and let it sell through and then be done with it until next year if you wanna do a similar product. This is also great for holidays for black Friday, like doorbuster deals. These are products that you don't carry all the time. You only have them for a short window of opportunity, but you wanna make sure that bias tight, but large enough to satisfy the demand that might be generated from any promotion or marketing materials associated with that product. So on basic products though, I think it's really important to target somewhere between a 60 and 75% sell through rate. So while you're going through your class positioning and your open-to-buy planning and your demand forecasting, all of that, obviously we've touched on is, you know, very interconnected processing and when you are forecasting your unit sales for basic products, you want to make sure like I just touched on, that you have enough that your service levels are strong enough that you can continue to satisfy your consumer demand until the replenishment comes. So it's difficult to give you a figure, as far as, you know, what number companies should be targeting if they're, you know, $7 million company but I would say when you're doing demand forecasting and looking at your unit sales the previous year, or, you know whatever category you're working on, it's important to understand is this product basic? Am I rebuying this? Or is this just a one and done? Cause it, or even, you know, maybe you'll buy it for two cycles and then stop. If it's like swimwear, you know, you'll buy that through most of Q1 and maybe the beginning of Q2, but then you'll stop replenishing as you get towards June and July before back to school. So it really just depends on the category of merchandise for beauty and home decor, there's a little bit more flexibility there. Obviously fashion is much more trend oriented. There's a lot more short term trends in fashion, but in home decor and in the beauty industry, you know, these products, it's more applications of the products that are trendy rather than the products themselves. So those buying cycles might be longer. The inventory turnover rates might be a little lower cause they're more basic products that can kind of sell all year round.

Chad Rubin:

So I like Tyler who just dropped into the chat here from Austin one of my favorite cities in the United States is loving this conversation. Have you been to Austin by the way?

Taylor Daniel:

Yeah, yeah I'm from Texas. Yeah, I went to Texas State University, shout out to my Alma mater in San Marcus. Just about 15 minutes South of Austin.

Chad Rubin:

Got it, I love Austin, Texas, and I miss it. I can't wait to go back. So I've been loving this conversation and I definitely want to be respectful of your time and certainly everyone who's dialed in today. So we're gonna move into the lightning round.

Taylor Daniel:

Sure

Chad Rubin:

If anybody does have other questions they want to post, I didn't ask in the chat if you can drop those questions in now, make them make them great because other people are gonna wanna hear from you. But why don't we start with this, what are the biggest mistakes your seeing right now, companies making in this inventory planning season?

Taylor Daniel:

Yeah, so when it comes to mistakes that I see, you know, small and large businesses making, especially in the small businesses, I'll start with this one. So small business owners tend to be creators. There are people who, you know, they have a passion for something that they make and they've turned it into an amazing business and it's, you know, it's awesome they're expanding their assortment that's great. However, I find that there is often this roadblock with a small business owners where they grow personally attached to some of the products that were maybe their brainchild, and maybe then they ignore KPIs that, you know, should be signaling, okay, maybe I need to exit this style. Maybe I need to exit this color. Maybe I need to try something new where, you know, small business owners will feel a sentimentality towards their product, which, you know.

Chad Rubin:

I'm in that same boat, by the way I hold on to inventory, I get emotional to it. I don't wanna let it go. And then I get pushed and you have to deplete it or liquidate it.

Taylor Daniel:

Yeah and that's not what you want right? You don't want to be holding onto inventory that's forcing you to markdown. You want to be able to sell it in an ideal world, right? Every single item that you sell would be sold at reg price, there would be no markdown stake there would be no discounts that would be amazing. But unfortunately, that's just not the way the world works. And if you're holding onto inventory, that there's no demand for whether it's because of seasonality or it's a trend that has passed, or what have you, you know, that will hurt your business because not only are you going to incur holding costs from holding onto that inventory at your DC, or even in your brick and mortar stores, if you're a physical store, you know, you're, also going to be missing sales because your open-to-buy will be lower because you have all this extra on hand inventory that you don't actually need.

Chad Rubin:

So you were saying they don't have the cash, right? So your first suggestion for small medium sized businesses right now is to let go of any emotional burden you have, or attachments to your inventory and get rid of it, either get the cash back so you can use it to roll forward into new products or into good sellers.

Taylor Daniel:

Exactly, and a great way to do that without taking a permanent markdown is to try and run, you know, short-term promotions. I love doing, you know, like a buy more, save more type of promo, or like a, you know, get 20% off your whole purchase if you buy three items or more like things that generate a strong UPT or units per transaction, those are great promotions, especially if the percentage that you're offering is enticing to a customer like 5%, 10%, most customers are like, that's just a few bucks, but if it's anything greater than 15% I would say, the consumer, especially that, you know, value-driven consumer is going to be encouraged and like, feel compelled to make a purchase cause they're like, oh, well, I like this thing I have to buy it now because I can get 20% off. So that's a great way to try and move through some inventory.

Chad Rubin:

I'm gonna drop a suggestion on my side that I've seen worked for us is essentially kitting and bundling. So taking a high velocity item with a low velocity item, pair it together in like a kid and you can get a higher order value, which means more profit dollars, absolute dollars at the end of the day. And you're moving that inventory out.

Taylor Daniel:

Yup definitely that's a great strategy as well. So another mistake that I see merchants make when it comes to inventory management is trying to get into a trend that may not be right for their brand. You know, just 'cause a trend pops up and there might be a short window of opportunity if your lead times and your brand image, don't both support that, then it's not the right decision. And I do see business owners investing, you know their very precious dollars in inventory. That's maybe not brand bright, or.

Chad Rubin:

Can you drop an example without hurting people's feelings?

Taylor Daniel:

So when I worked at Old Navy, you know, Old Navy is part of Gap inc, which is Gap Banana Republic and Old Navy. And, you know I was part of the international buying team. So all of my stores were in the middle East, Southeast Asia, Saudi Arabia, really cool stuff. And when we collaborated a lot with the other brands, so Banana Republic and Gap you know, all three brands had stores in the same places. So we were doing, you know, trend research and things like that with the same geographic region and so it helped to be able to collaborate across brands. However, there was a trend that, you know, Banana Republic noted the Banana Republic team noticed, and it's like a linen of like smock type men's wear shirt. And that made total sense for Banana Republic 'cause it's a business casual type of product, but that doesn't really make sense for old Navy right. Or gap even. So this like long sleeve linen, you know, high quality material makes total sense for Banana Republic, but it's not quite brand right for Old Navy, which is a value-driven brand. So that's you know, small example, but another example might be, you know, if you are a brand that sells, you know, skincare, you know, moisturizers and things like that, maybe you see a trend with, you know, all of these beauty influencers out there doing like a full face while they're on camera and, you know, promoting these different products and if you start trying to add on things like apparel into your assortment that maybe women can wear while they're doing their their regimens or whatever, you know, that it could work, but it might require a lot more effort to promote that whole new class of products that's when your customers, your target customers, your loyal customers are coming to you for something else. Does that make sense?

Chad Rubin:

Yeah, completely. Yeah I was, I guess the recent example for me was Allbirds. So Allbirds launched, so they have, I think they have, sustainable footwear and is logical to maybe add socks to the mix But I would have continued to build out the footwear brand. They started moving into sustainable apparel, especially given COVID right now. It's not that in my opinion, it wasn't the right wedge or it wasn't the right entry point into apparel. I think they should have probably expanded their assortment. There's so much more footwear to be making and they decided to move to products. I think that's just one example that comes to mind for myself.

Taylor Daniel:

Yeah, totally.

Chad Rubin:

Alright next lightning question. And this'll be the last one, unless there's others that come up. What should I have asked you that I haven't asked you?

Taylor Daniel:

Well, let's see.

Chad Rubin:

I know we've covered a lot.

Taylor Daniel:

Yeah, we have covered a lot. So something that I think someone asked through HubSpot that actually got me thinking, someone asked what apps, programs, or habits are best to stay on top of inventory. So a couple of things to keep in mind, as you are trying to implement best practices, especially for those small or pre-launch types of businesses, you know, it's important as we touched on to implement structure now, so that as you continue to grow, your operations can support your new practices. So a few things to keep in mind for businesses that sell from the same inventory across multiple channels, it is critical to ensure that your POS and your inventory systems are integrated so that they can communicate with each other. Otherwise, you're gonna have to record all this stuff manually, which obviously is time-consuming and very error prone because of, you know, the human element. So for example, if you sell an item on Amazon, you need to make sure that your inventory levels are updated across any other sales channels, like your website or their marketplaces or whatever, so that you can avoid overselling because the worst thing you want is you have gained a new customer, and then you have to send an email saying, hey, sorry, actually, I don't have that item you're gonna have to wait until I have more.

Chad Rubin:

Taylor you are selling Skubana for us right now you don't have to do that.

Taylor Daniel:

Well, it's important. I mean, I know that Skubana is an amazing solution. I don't know if you know, our listeners have been able to see a walkthrough or a demo of the solution, but as a merchandiser, having worked for giant corporations, like Levi's is a global name, like household name, this company Old Navy, Gap like they didn't have any solutions for me to do any of my reporting, any of my purchasing, any of my buy planning, none of that. And I'm sitting, you know, granted, I'm trained in how to do these things so, you know, there's, many hundreds of thousands of merchandisers at lots of big retail companies around the world. But I sit here and think if I had a solution that could automate the reporting and the accuracy and all that part, and then I could use my analytical brain to dig deeper instead of literally 90, it is crazy 90% of half the year, I'm sorry, half a year, we are working in Excel. Like we are just building reports, we are sorting data, We are, you know, trying to build graphs and things that we can present to leadership and stuff like that and it is very, very time consuming. And it's kind of mind blowing to me that more giant retail companies don't have those types of solutions in place for their merchandising and design teams and production teams to utilize in, you know, in conjunction with each other. So that's definitely very important. Did you have anything to add on that before I go to next tip?

Chad Rubin:

No I mean, that was great. It doesn't require anything.

Taylor Daniel:

I'm gonna stick to my material over here. So tip number two, I would say during the holiday season, during your peak season, it's important to review business every day. Even if it's just 10 minutes at the start of your day, take a look at your top KPIs, inventory contributions, you know, your stock to sales ratios, your weeks of supply and your rate of sale. Those are two of the earliest indicators that you might actually need to chase into more inventory of a hot selling style. So say that you have some style that you launched in August for back to school, and it didn't really do as much as you thought, but then you're checking your reports every day you know, the first few minutes of your workday and it's Q4 and you notice, oh my gosh, this shirt now has, you know, 10 times the rate of sale than it did a few months ago. We might need to get more inventory. And that's one of your merchandising levers that you can pull. Hopefully you have the infrastructure in place to be able to negotiate with your suppliers, to get product with shorter lead times. That's another thing. Negotiate with your suppliers especially if you're a small business, you know, it can be intimidating. I've been there myself you know it can be very intimidating, especially if there's a language barrier I know it's tough. But especially as your relationship with these manufacturers or suppliers continues to grow, ask for things, the worst thing they'll say is no, but if you say, hey, I would really like to be able to offer, you know, more products that you guys make for me and I need shorter lead times like, can we get to six weeks?

Chad Rubin:

I didn't know, I always thought just price was negotiable.

Taylor Daniel:

It definitely can be, depending on the supplier or manufacturers could be current capacity, right? If they have several different clients and they're producing lots of inventory for all of them, they may not have additional capacity, but especially if you know that already that they can take on more definitely ask I mean, the worst that they could say is no, right? And maybe they even have some ideas of how to shorten your lead times. Maybe we buy bulk fabric upfront like we were talking about with the Old Navy blank T-shirts earlier. Maybe we go ahead and cut them, so blank, whatever, and then we can dip, dye them and shift them out, or we can screen print them and ship them out. Or we can, you know, whatever, if you have some of the materials or even partially finished goods on hand that can help shorten your lead times and improve your relationships with your manufacturers. So then another tip, unless you have anything else on that one.

Chad Rubin:

No, please keep dropping value.

Taylor Daniel:

So as we've touched on, it is important to note that Q4 2020 is gonna be pretty different than Q4 in years past. So I think that it's important to make sure that the bulk of your inventory is accessible at your DC's and warehouses, rather than in your brick and mortar stores or any, you know, in-person expression that you might have so that you can satisfy the increased demand from online shoppers. We mentioned earlier that the growth of online sales has increased more in the last five months than it has in the last seven, eight years. That's that is significant growth. And so for you as a merchant, to be able to strategically place your inventory in the position that's gonna allow you to satisfy that huge shift, into online shopping that's definitely gonna be critical. And then for doorbusters, for holiday doorbusters, we've touched on this a little bit earlier, but I think it's very important to make sure that those buys are conservative. The last thing that you want is to be left sitting on inventory that can't sell without being marked down or can't sell at all, depending on the seasonality of it. And then the last tip that I wanted to share is I think that it's very important to perform a physical inventory count in the early days of November, or even, you know, the end of October so that you know, that all your systems, your inventory is correct and accurate across all your channels, all your warehouses, and then you'll wanna perform another inventory count either in January or February, so that you can account for any shrink you may have encountered during the holiday season. But those tips right there, those will all help you stay on top of things throughout the season. It will help you catch changes that are happening in your business, and it will help you react in a smart way that can help you take advantage of every opportunity that bubbles up.

Chad Rubin:

Well, there you have it, everybody. Taylor Daniel, thank you so much for coming on. What is the best way that people can find you and learn more about what you do, and where you hang out?

Taylor Daniel:

Yeah, I'm everywhere, but you can always visit us @fomoagency.com. But of course, you're welcome to follow me on Instagram at Taylor, Jesse, or on Twitter @taylor_jdaniel. I know that one is a mouthful, but we can change them after the fact, but, but yeah, I'm bouncing around all the time, but fomoagency.com is always a great way to reach me.

Chad Rubin:

Awesome, thank you so much for coming on and super grateful to dropping the value and we'll be in touch.

Taylor Daniel:

Yeah, it sounds great. Have a good week guys.

Chad Rubin:

Alright, bye. Thank you.

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