10: Operations
Inventory Management
Inventory management is one of the most critical aspects of running a successful consumer packaged goods (CPG) business. It’s not just about knowing what you have on hand—good inventory management helps you avoid stockouts, optimize cash flow, and forecast demand accurately. Whether you’re self-manufacturing or using a co-packer, maintaining efficient control over your stock levels can make or break your business as it grows.
Here’s a breakdown of how you can build an effective inventory management system and avoid the common pitfalls that many CPG brands face.
Why Inventory Management Matters
Inventory is one of the largest investments for a CPG company. It ties up cash, impacts your operational efficiency, and can affect your relationships with both retailers and consumers. Run out of stock and you risk losing customers. Hold too much inventory, and you’ll tie up cash that could have been better spent on marketing, product development, or sales.
Effective inventory management gives you control over this delicate balance.
Key Components of Inventory Management
1. Inventory Forecasting
Forecasting your inventory is crucial to ensuring you have the right amount of product on hand to meet demand without over-ordering. The goal is to predict how much product you will sell over a given period so you can plan production accordingly.
Factors to consider:
Seasonality: Are there times of year when your product sells more or less? Summer vs. winter sales can vary, especially for food and beverage products.
Sales Channels: Each sales channel (e.g., e-commerce, grocery stores, foodservice) has different order frequencies and lead times. You’ll need to forecast differently depending on where your product is being sold.
Promotions: If you’re planning a sales push or promotion, you’ll want to produce and stock more inventory to meet the anticipated spike in demand.
Tip: Use tools like Forecastly or Inventory Planner to track sales data and forecast future demand based on historical data and trends.
2. Reorder Points and Safety Stock
A key aspect of inventory management is determining your reorder points and safety stock. These ensure you’re never caught off guard by a sudden spike in demand or an unexpected delay from your suppliers.
Reorder Point: The level at which you need to order more inventory to avoid stockouts.
Safety Stock: Extra inventory you keep on hand to protect against stockouts caused by unexpected demand or supply chain disruptions.
Calculating these values ensures that you have a cushion while also optimizing your cash flow by not holding too much inventory at any given time.
3. Inventory Turnover Ratio
Your inventory turnover ratio is a key metric to keep track of. It’s the number of times your entire stock is sold and replaced over a given period, typically calculated monthly or annually. A high turnover ratio indicates that you’re selling your inventory quickly, while a low ratio suggests you might be overstocking or not moving products fast enough.
A healthy inventory turnover rate will vary depending on your product category. For example, snack foods typically have a higher turnover rate than frozen meals, so it’s important to benchmark your brand against others in your category.
4. Inventory Tracking Systems
It’s nearly impossible to manage inventory effectively using manual methods, especially as your business grows. Investing in an inventory management system (IMS) allows you to automate stock tracking, set reorder alerts, and sync inventory levels across multiple sales channels.
Popular inventory management systems include:
Cin7: Ideal for CPG brands selling through multiple channels like e-commerce, wholesale, and retail.
Doss: A great option for emerging brands that need to streamline their supply chain and manage inventory across different platforms. Doss allows you to sync your inventory across your Shopify, Amazon, and other e-commerce platforms to make sure nothing falls through the cracks.
Fiddle.io: A cloud-based system that helps you manage product batches, expiry dates, and lot numbers. This is particularly helpful for brands working with multiple suppliers and production runs.
Avoiding Common Pitfalls
Inventory management is tricky, and there are a few common pitfalls that can trip up CPG brands:
1. Overstocking
Ordering too much product can lead to cash flow issues and wasted inventory, especially if your product has a limited shelf life. Avoid overstocking by maintaining accurate forecasts and regularly reviewing sales data.
2. Understocking
On the flip side, understocking can lead to stockouts, which means missed sales opportunities and frustrated customers. This is especially damaging for CPG brands, as shoppers may switch to a competitor’s product if yours isn’t available.
3. Neglecting Expiry Dates
For perishable products, expiration dates are crucial. A strong inventory management system will help you track lot numbers and expiration dates, ensuring that older stock gets shipped out first (first-in, first-out method). Failing to do so can result in waste and a hit to your bottom line.
Scaling Your Inventory as You Grow
As your brand expands into more retailers and sales channels, your inventory needs will become more complex. Here are a few things to keep in mind as you scale:
- Multiple Warehouses: Consider distributing your inventory across several regional warehouses. This reduces shipping time and costs for retailers and consumers.
- EDI Integration: As you start working with larger retailers, they may require you to integrate with their Electronic Data Interchange (EDI) systems to automate ordering and inventory updates.
- Retailer Requirements: Big-box retailers often have strict inventory requirements. Missing deadlines or failing to keep inventory levels consistent could result in chargebacks or penalties.
Final Thoughts
Effective inventory management is about finding the right balance between meeting demand and optimizing cash flow. With the right tools and processes in place, you can manage your stock more efficiently, avoid common pitfalls, and ensure that you’re always able to fulfill orders. As your business grows, fine-tuning your inventory management strategy will become increasingly important to scaling successfully.