Seasonality and Inventory Metrics You Should Track
Every ecommerce business has a specific period in the calendar year when they see the highest demand for their products.
This can sometimes relate to distinct seasons within the year – such as seeing a spike in swimwear sales right before the summer or in ski equipment in the winter. Or it can be related to certain annual events throughout the year, such as sporting events, music festivals, or even elections.
This influx in sales is called seasonal demand or seasonality – fluctuations in demand for products or services that are dependent on the time of the year.
Seasonality is a critical element in inventory management, but these fluctuations can also often make managing your inventory levels challenging. The best example would be Black Friday and Cyber Monday, where most products see some degree of seasonality, which causes a significant increase in sales across industries.
It’s essential to capitalize on a product's seasonality because it not only helps a business get a boost in profits, but it can also provide a lot of information about the brand’s industry and their target customer’s shopping behaviors.
Companies that want to be prepared for these periods need to proactively develop a streamlined and efficient inventory management process that helps track and evaluate performance once the period is over.
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Elements of Seasonal Inventory Management
Many aspects of inventory management need to align to maximize efficiency.
While having the right inventory management software is essential, no tool can substitute the benefits of an optimized inventory strategy. Incorporating seasonality into inventory strategies should address both supply chain management and a consistently responsive customer service process.
Businesses that want to make the most of seasonal sales and evaluate their approach at the end of the peak sales period should do the following.
Supply Chain Visibility
Significantly more visible via inventory management software, your supply chain is a crucial component of your sales and demand evaluations.
A reliable supply chain makes it easier to make informed decisions about the best suppliers to use, their lead times, and the quality of their products.
Having a full line of sight into your product supply chain makes it easier for you to select the right suppliers for your seasonal inventory, helping companies save money without compromising on service.
For multichannel retailers, financial accuracy can become increasingly complex. It can be easy to miscalculate your profitability if you don't accurately track your costs.
The more accurate your financial reporting, the more reliable your inventory management system will be.
Multichannel brands with large supply chains and wide-ranging customer demographics need both comprehensive and accurate financial reports to develop a forecasting strategy that can incorporate seasonality.
Full Optimization of Inventory
Mistakes in your inventory management can lead to sales roadblocks and mismanaged finances.
If you overstock a product, then you will incur higher storage costs and potentially lose money if you never manage to sell them.
Optimizing your inventory management is about more than saving space in your warehouse; it’s about making sure that space is filled with products that will sell so your costs do not spiral out of control.
It’s not just overstocking that can damage your brand, either.
Stocking out of highly popular or revenue-generating products during a peak season can also have a dramatic effect on sales and consumer satisfaction. Determining the number of units to order requires careful planning and balance to prevent running into either scenario.
Inventory management is all about improving productivity.
The more efficient that you can make your real-time inventory management, the better you can mitigate employee time waste, track your stock supplies, incorporate seasonality, and make accurate decisions based on clean data.
To improve the efficiency of your seasonal inventory management, you must do the following:
- Identify periods where demand for a product was not synchronized with stock levels
- Look at sales trends of the last few years and identify a product's seasonality when demand is at it's highest
- Watch consumer trends and determine if there’s any correlation with sales trends
- Break down supplier and inventory costs, including shipping metrics, warehouse expenses, and volume discounts so you can track them against your profitability
- Automate your inventory management system using online tools and suitable inventory management software
Once the inventory management process is refined, you’ll have access to the statistics and data points needed to make informed predictions on a product's seasonality, anticipated sales, and the volume of seasonal inventory required. This will make give you a clearer picture of your cost-effectiveness.
Inventory Models For Seasonality
Outside of looking at your inventory management system, companies should also make sure their inventory model is optimized to account for seasonality.
There are many different models available, but determining which is the right one to use depends on your business operations and the seasonal fluctuations that most affect your brand.
The model that you decide on will affect your profits and how effective your inventory management processes will be. Choosing the right model can help you avoid some of the most common inventory mistakes.
Here are some of the most efficient and cost-effective models to consider:
- First-in, First-Out (FIFO): It is a simple process, where your business fulfills orders using the stock that has been part of your inventory the longest. FIFO can lead to higher profits, especially if there are fluctuations in the prices or quantities that your supplier provides. The FIFO model is straightforward and is ideally suited to those businesses that either sell perishable products or those that have high levels of seasonality (such as home goods and clothing).
- Last-in, First-out (LIFO): The LIFO model prioritizes the sale of stock that has been sitting on your warehouse shelves for the shortest time. This can seem counterproductive, but if you pay a higher price for set items from your supply chain due to seasonal demand, then the LIFO model prioritizes recouping those higher costs as quickly as possible through the efficiency of inventory turnover. This inventory management model is only going to be suitable for those retailers with non-perishable inventory, as older, less expensive stock will remain in your warehouse for an indeterminate amount of time.
- Just-in-time (JIT): The JIT model works by ordering your stock as it is needed. Once a sale is made, you place the order with your supplier for that item. While this reduces financial risk and product waste, it does have downsides. Order fulfillment times can be negatively affected, and if a supplier doesn’t have products available, then it could potentially mean that you are unable to fulfill customer orders. Of course, all businesses want to reduce their operational costs, and just-in-time inventory management does reduce your overall holding expenses, which is why it has become one of the standard recession practices. However, JIT should only be considered if you have already developed accurate sales forecasting.
- Economic Order Quantity (EOQ): EOQ makes use of three metrics to determine the ideal level of inventory. These are: customer demand, ordering cost, and holding cost. This is not an approach that is suitable for all businesses, and it is not the most popular option. That’s because it requires a formal approach to sales and demand forecasting. EOQ should only be considered if you have an experienced inventory management supervisor who has previously used just-in-time inventory management. However, when EOQ is carried out well, it can drastically reduce your holding expenses.
- ABC Analysis: This model is all about the prioritization of your products. It works by first breaking down your products into three definable categories:
- A - These are your high-value products that generate the most profitability without cutting deep into your resources.
- B - This category should include the products that are of middle-value and have an average sales frequency.
- C - These are products that don’t individually contribute much to your profitability but sell quickly.
The ABC model is suited for those businesses that want to fine-tune their inventory management and develop a deeper understanding of why some products are selling well, and others aren’t.
The ABC model can help identify issues with pricing or marketing of an individual product. By closely monitoring the statistics of each category, it becomes easier to make changes to ensure products more high-selling and profitable.
Deciding on an inventory management model should be dependent on your requirements. Develop a complete understanding of your inventory management issues and adopt the model that is most suited to tackling the level of seasonality you need. If you pick the wrong model, it might result in problems with your holding costs, waste, and order fulfillment.
Challenges with Seasonality and Inventory Management
While seasonality leads to surges in product demand that come with many benefits, they also come with a set of challenges. The increase in sales can lead to a drop in demand once the season is over.
The seasonality can also skew forecasting for the rest of the year if it isn’t accounted for. That can make inventory management much more difficult, as you may risk arriving at the end of a peak season with vast amounts of inventory that will then have to sit on shelves until it becomes relevant again (if it ever does).
Businesses need to make sure they account for any seasonal adjustment made in their forecasts to ensure they order enough stock to meet demand once the season is over without finding themselves overstocked.
Increase in Business Costs
One of the other challenges of factoring seasonality into inventory is that there will be an inevitable increase in business costs. A business might see higher fees for ordering more products to meet demand, but if this isn’t balanced with other ongoing costs, it could directly impact your cash flow.
Be mindful of your other costs of doing business, including your fulfillment and shipping costs. Make sure to closely monitor your finances to prevent tying up your capital in inventory, and set financial safety nets to keep you operating through the season.
Managing Seasonal Inventory
Seasonal inventory can be very unpredictable. There may be supply chain issues caused by unexpected high demand from your customers.
Similarly, your suppliers might see an increase in demand from other retailers, making it harder for them to meet your inventory needs. Taking more control over your inventory levels and warehouse management is always a challenge, but for high-sales periods, it can become critical.
Inventory management software can help to alleviate many of the potential challenges through forecasting tools and automation that make it easier to incorporate seasonal adjustments and anticipate how many units you’ll need to order.
Businesses should also keep their inventory management approach flexible between peak and off-peak seasons. Forecasting becomes much more critical, as does keeping a closer eye on cash flow and consumer demand.
While brands could previously expect to see seasonal fluctuations only a few times a year, modern businesses have to tackle a seemingly endless calendar of on-peak events. This means developing a clear understanding of the peak-seasons that match your products and your brand. Seasonal fluctuations will exacerbate issues in your inventory management model – if you are spotting issues through the off-peak season, make sure to address them before the peak season begins.
While inventory management is commonly assumed to be the sole responsibility of a supply chain manager or an inventory manager, the fact is that every person in an organization needs to develop an understanding of how seasonality impacts your inventory management. By isolating the decision-making and process itself, you limit the effectiveness of your business and expose yourself to supply chain disruptions. Ideally, your inventory control manager should focus on managing the often conflicting needs of the sales team, the finance department, and the suppliers that the business relies on.
How to Know if You are Successfully Managing Seasonality
Managing your inventory requires knowing the metrics that are going to be invaluable in your post-season analysis. While all business models vary, the key performance indicators (KPIs) of successful inventory management are mostly standard.
The most common KPIs to consider in terms of your inventory management include:
- Inventory Turnover: This is a ratio that captures how well a company restocks products compared to how quickly they sell. A low inventory turnover might indicate a company is holding too much stock, which would mean sales are dropping.
- Days to Sell Inventory (DSI): DSI measures how many days a company holds inventory for before actually selling it. The lower the DSI, the better a business is performing.
- Average Inventory Levels: This measures the average number of units held at a warehouse during a set period. When measuring for seasonality, you will want this value to be close to your average sales velocity.
- The Total Number of Stockouts: If a business runs into several stockouts during a peak season, it can indicate poor inventory planning and that more product was needed to fulfill the demand for the season.
- Rate of Return: While this may not be directly attributed to seasonal inventory management, tracking how many return requests you receive and the reasons why could indicate potential issues with a product. If the rate of return is high, you may want to reconsider if it is a seasonal product you should continue selling.
These KPIs are the most effective methods for keeping track of your total inventory efficiency. The next challenge is to decide how much inventory you need to have on hand based on seasonality while having an awareness of the most common costs and myths that can lead you to make bad decisions. This becomes much more challenging during those seasonal periods and on-peak calendar dates.
More consistent and regular inventory checks are beneficial to managing proper inventory levels because it gives more control over your stock. It also allows you to optimize your entire inventory management process.
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- Operational KPIs that’ll actually move the sales needle
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- Enticing customers to fill their shopping carts to the brim!
Here are some additional inventory management tips to consider when prepping for seasonality:
- Be aware of your industry: Evolving trends and seasonal price changes can transform your profitability. Examine each type of product you sell and identify their sales volumes.
- Evaluate new stock risks: If you are considering adopting a new product to sell during a peak season, make sure to weigh the risks and the potential rewards. Investing in new stock is always a risk.
- Order safety stock: This is well worth considering if you are in a sector that sells event-based goods. Even if you compare sales year-over-year, you can never anticipate exactly how well seasonal sales might go. Evaluate your order quantity from previous years and make sure to factor in safety stock for your products in case actual sales exceed your forecasts.
- Have a reorder point: Implement reorder points in your replenishment process. If inventory levels begin to dip quickly, you can use this measure to replenish inventory before you run out of stock. Remember to take into account the delivery times of your suppliers. Reorder points can help you avoid long periods of low or missing stock, which can be devastating for your top-selling products.
Good inventory management can certainly be a challenge during on-peak seasons. However, with the right awareness and a combination of software and inventory management techniques, it can transform your business.
Proper planning and an awareness of the KPIs of your inventory management systems can give a business the potential to cash in more effectively on those peak sales periods.