🚨Companies lose nearly 30% of revenue because of inventory mismanagement 🚨

Not only does this pollute our planet 🌱but it has a major effect on your business’s growth.

Adii Pienaar (Author of Life Profitability: The New Measure of Entrepreneurial Success), and 3X Founder of WooCommerce, Conversio, and Cogsy has figured this whole inventory thing out.  And now he’s turning around to help you do the same. 

🗣️: What are the potential drawbacks of relying on manual demand prediction for a small D2C brand? And when should a brand start thinking of automating this?

💬 Adii: There are two reasons why we believe that an automated tool is better than a manual workflow (most often in a spreadsheet):

1. Spreadsheets are rarely updated in real-time and are prone to human error (things like typos even). When the data is incorrect or it doesn't get updated quickly enough, a brand may lose time to react to accelerating changes in their demand. More time = more flexibility.

2. I don't think there is a perfect way to forecast and nobody has a crystal ball. A machine that creates a programmatic forecast is at least objective/consistent though. A human toggling numbers in a spreadsheet until they are "believable" is more subjective. I think efficiencies are to be gained when you pick and stick to a single, objective way of forecasting.

When to start... As soon as a brand has some measure of product/market-fit and a somewhat normalised demand curve, they can get value in automating this. We often look at the ratio of orders-to-SKUs to get a sense of whether we can get better statistical significance for a brand's forecast (depending on how many SKUs a brand has, annual GMV of $500K+ is the rule of thumb we use). Before that point, a brand is probably better off focusing on customer acquisition and finding channels/tactics that have some repeatability.

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🗣️: How can e-commerce businesses use inventory optimization to improve customer satisfaction and loyalty?

💬 Adii: There are three tactics/perspectives that I'd advocate for here:

1. Make sure you have the right products in stock for when your best (repeat) customers want to make their 2nd, 3rd or 10th purchase. Not having stock available to your best customers when they're ready to purchase will dramatically affect their LTV over time.

2. When you are OOS, make sure that you can communicate an accurate stock availability date with customers. With Cogsy we empower brands to do this proactively by selling on backorder (or preorder) and showing the next available shipping date. If you don't like selling on backorder/preorder, Cogsy also gives CX/support teams those dates so that they can provide them to customers that enquire. Better customer experience = greater customer satisfaction and loyalty.

3. Lastly, I'd argue that you should prioritise your best customers in a stock-scarce environment (i.e. there's no way that you can avoid a stock outage). One practical way to do that is to reserve some of the remaining stock for your subscription customers to ensure you can fulfil their renewals. You can learn more about this over here.

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🗣️: How can e-commerce businesses optimize inventory for products with short shelf life?

💬 Adii: Very few (planning/forecasting) solutions consider bins/lots with an expiry date. I think the best thing starts in production where you produce a little more (10% - 20%) more than what you need. Sometimes you'll stock out, but you cap any wastage due to write-offs. Over time, you'll get that variance down.

And then, be super disciplined about selling the oldest stock first. This is most probably just a stringent physical process that everyone should stick to religiously. (No system/tool can circumvent human indiscipline.)

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🗣️: What is the role of warehouse management in inventory optimization for e-commerce?

💬 Adii: Make sure that the data is updated regularly. Stock doesn't get lost in systems; stock gets lost in the real world. So whatever practices you implement in the warehouse, make sure that it is standardised and disciplined.

Then make sure that your WMS actually has the necessary connections to critical third-party systems. I encounter too many instances where a Shopify-powered merchant uses a 3PL with a WMS that can't keep the Shopify inventory levels up-to-date. This is a massive no-no and just slows down decision-making.

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🗣️: What are the best practices for setting safety stock levels in e-commerce businesses?

💬 Adii: Prioritise your bestsellers. Running out of stock of the other products is not as important. So allocate more working capital to these goods.

Do some demand planning where you can at least track your forecast against actuals. If you do retrospectives on that over time, you should be able to reduce your forecasting variance.

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🗣️: In your opinion, what are the biggest changes that eCommerce companies will face in the next years?

💬 Adii: Big question 🙂 A few things come to mind:

1. I think profitability and operational efficiency will be rewarded. Growing efficiently/profitably versus growing at all costs.
2. Navigating the type of funding/financing that is available relative to the possible outcomes. I suspect it will be less venture capital and more private equity/debt.
3. Thinking about possible outcomes means asking the question about what type of business to build and how you operate it. Simplistic terms: "Lifestyle" business versus unicorn. Founders/owners and investors need to be clear and aligned about this.
4. I think every business will scrutinise every expense line item and especially those related to tech trying to figure out which of those are actually required and ROI-positive. (Look at all of the marketing apps who all claim to generate the same revenue.)
5. AI everything will be all of the rage and 90% of it will not be accretive. But it will require a lot of attention to implement and experiment. The best businesses will avoid the noise and dabble only in the AI tools that actually supports their workflows.
6. Expansion into different channels and markets. Whether that is going from DTC-only to retail or B2B. Or going from US to Europe to Australia. The best brands will sell beyond a single market/channel.
7. At some stage, we'll ask ourselves whether the platform incumbents (Shopify, WooCommerce etc) are still the best foundation to sell online. At some stage, re-platforming en masse may make sense (which will have so many second order effects to consider).

🗣️: What are the benefits of using machine learning and AI for inventory optimization in e-commerce?

💬 Adii: AI is helpful in some cases if you have a big enough data set (historic data, number of orders per SKU) and the algorithm can predict with statistical confidence. Machine learning suggests that through predicting this over & over and comparing itself against past predictions, it gets better over time. This is however not super-helpful (not considering the cost) for most brands.

A better way is to use use programmatic, statistical model with small amounts of machine learning to get some continuous improvement. I mentioned this above, but the key benefit is that the forecasting methodology is consistent when you do this. And then you just keep looking at forecasting variance to try get it down.

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🗣️: What is the role of customer segmentation in inventory optimization for e-commerce?

💬 Adii: I made the point above about reserving stock for your best customers or subscription customers. Same with focusing your planning and working capital on your bestselling SKUs.

I don't have enough or diverse enough data to make a specific case here. Apply to simple 80/20 principle and you'll likely get most of the benefit already 🙂

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🗣️: How can e-commerce businesses optimize inventory for products with high obsolescence rates?

💬 Adii: Avoid overstocking and when you realise you are overstocked, figure out how to reduce the number of units held ASAP.

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🗣️: How can e-commerce businesses optimize inventory for slow-moving products?

💬 Adii:  I think avoid overstocking is partly down to planning meaning don't buy too much stock. The second part is definitely to not buy too much stock of your slower sellers. Overbuying slightly for your bestsellers is better. Yes, you can optimise that, but the cost of overbuying is less. So I'd firstly say be very clear about what your top 20% SKUs are and then focus the majority of your working capital there. For the other SKUs, don't worry too much about running out of stock at times; rather underbuy than overbuy.

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🗣️: What are the best practices for reducing excess inventory in e-commerce?

💬 Adii: Sell it as quickly as possible. 🤪 Get your cash out and reinvest that cash where it is needed. I like the idea of using slow sellers or overstocked SKUs in bundles, where you bundle them with a bestseller at a discounted rate. That way you don't tank your AOV and you get at least the cost of the overstocked SKU back.