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Most companies have a lot on their plate these days. The rapid changes in the social and economic components have brought challenges in fundraising, maintaining cash flow, finding partners, and dealing with basically every other aspect of running a startup.
Supply chains don’t usually make headlines for startups. But in today’s climate, the chaos of global supply and demand means supply chain management is one of the most important skills early stage teams need to master.
Even major retailers like Target have recently exposed supply chain issues and the impact of overstocking. They are announcing drastic strategies to cut prices and cancel orders to rebalance inventory and free up inventory revenue.
And if giants like Target have trouble forecasting demand, smaller companies and start-ups find themselves in an even more precarious position, often without cash buffers to support wasted materials and orders.
Related: How advanced analytics could put an end to the $50 billion retail overstock problem
How is overstock created?
When your inventory strategy is based on meeting demand instead of considering replenishment lead time, you end up with overorders. Buying in bulk seems cheaper in the short term and less risky than leaving orders unfulfilled. Still, in the end, you’ll probably end up with a case of music chairs: you can’t move 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.
This is also due to the lack of accurate demand forecasts, but forecasting tools only work if they can find patterns. When you have an inventory management solution that makes deliveries and usage more predictable, you can order smaller batches more often. This way, you’ll have less inventory tied up and lying around, and you’ll have more opportunities to be agile – intervene and correct course – without overflowing your warehouses. The biggest vulnerability in demand forecasting and planning systems is their inability to handle real-time interventions.
Why does excess inventory significantly affect early-stage companies?
An astonishing number of startups are finding that money immobilized in excess stock can equal a funding round. This is funding that can support research, survival, growth or the next phase of startup development. What may seem like a temporary glitch becomes a significant obstacle to a startup’s long-term success and life expectancy.
Managing material assets should be extremely important for startup founders; without it, they simply will not be able to maintain sufficient liquidity to take risks and grow.
Take, for example, Peloton. This VC-backed company found products with huge physical components (bikes and treadmills) that were no longer mass-marketed. Peloton faced dire financial consequences due to wasted stock and had to take emergency measures, including laying off thousands of workers and canceling plans for a new production facility.
Electric vehicle maker Rivian is the latest victim of overstocking. Not being able to sell a physical product meant he had to raise prices before he developed enough to sell on a large scale. The final nail in the coffin? The company made the critical mistake of asking customers who had already ordered a cheaper vehicle to make up the difference.
The sad thing is that it could have been a completely different story; the company admits that if it had not struggled so much with supply chain problems, it could have produced twice as many units.
Related: 3 Ways Small Businesses Can Survive a Supply Chain Crisis
How should startups deal with the temporary problem of excess inventory?
Before startup leaders can start practicing better demand forecasting, they will have to deal with the immediate problem of excess inventory and not enough cash.
How startups resolve this initial state of affairs will depend on their unique financial situation. If they need cash to stay alive, faster cash speed is better than stock as an asset on their balance sheet. For most start-ups with a lot of inventory, there are more excess and wasteful inventory dollars than the savings they get from laying off workers right now.
An immediate step that can reduce your burden is to cancel all upcoming orders that exceed your needs. If you have access to actual lead time data, you can re-route or cancel your inventory. You should not consider laying off employees when there is excess inventory to make money from.
How do you know when it’s time for this kind of intervention? You may see changes in demand, abnormally long lead times, changes in shelf availability, etc. Keep an eye out for materials passing (and blocking) in your supply chain.
Related: How Better Inventory Management Can Improve Your Finances
How can startups use artificial intelligence to forecast demand?
New retailers and early-stage start-ups can use AI-powered tools to better plan future demand, and it doesn’t have to mean retraining or learning everything you know about supply chains. Consider these strategies:
1. Keep an eye on lead time estimates
Looking ahead to the actual lead time estimates for your items can help you plan for potential overstock. Find out how often the supplier can deliver. Look at global shipments to determine if you’ll receive your materials on time for distribution or production. This information can set more accurate expectations for the rest of your production and more. It also helps you advise clients ahead of time instead of apologizing after you let them down.
2. Don’t undervalue clearance stock
Value your clearances accordingly; there is no need to price something at 50% off if 40% off would result in the same purchase volume. The great thing about being aware of lead times is that you don’t have to take desperate measures. You can look ahead to the whole picture and introduce more incremental, smaller measures to deal with excess inventory.
3. Actively manage inventory buffers
Inventory buffers should not simply stagnate, as excess inventory (even in the form of a planned buffer) can saturate the supply chain, causing the flow of goods to stop. If you can proactively manage inventory buffers for critical goods, taking into account factoring carriers and demand disruption patterns, you can create a healthier flow even in a turbulent market environment.
Overstocking happens to the best (and greatest) of us. But when you’re an early-stage company struggling to grow with VC funding and struggling to find enough spare cash to make changes, then excess inventory can drag your company down and threaten its future. By focusing on your supply chain and reading estimated lead times to manage the flow of material goods, you can take back control and free your finances.
