Last November I read an article in Start your own Wholesale Distribution Business: Your step-by-step guide to success. I recently came across the article and thought I would elaborate on some of the topics shared. It’s really good, timeless advice. The title of the article is “How to Find the Inventory Sweet Spot in Wholesale Distribution?” written by the Entrepreneur Press and Bridget McCrea. I’d like to highlight and expand on some of the key points found in this article.
The overarching theme of this article is people (business owners) want to have a “lean” business. They want a business that hits the gym every day and is in pristine condition. What does this mean? This means companies want to have as few employees as possible, and more importantly for wholesale distributors, they want to have as little inventory as necessary.
They produce this lean and fit inventory by 1 of 2 methods. In the first method, the business stocks as little as possible and only stocks what they believe to be needed for their orders. In theory, this is a good method, but the trouble comes when you get that unexpected order and now the company is suffering from a stock-out and is unable to satisfy the customer. The second option a lot of wholesale distributors seem to take is to overstock so they always have inventory ready for the customer whenever the orders come in. Again, not a bad idea, but what about when that inventory stops moving, or its life cycle ends and it is obsolete? What about all that inventory you have stock on your shelf that never moved? This results in excess and dead inventory which does nothing but cost you more money.
Do not fear, these are not the only two options. As with most spectrums there is a happy medium. The ideal amount of inventory for a wholesale distributor falls somewhere in between where you have enough that you never run out but never so much that the inventory goes dead. McCrea highlighted 3 key factors when trying to find this point: What are you selling, who are you selling to, how demanding are they? These questions can be answered pretty easily by simply asking your customers what their order requirements generally will be.
McCrea goes on to say one of the biggest mistakes a business can make is investing in more inventory than is really needed. This is a result of not taking into account the customers wants and needs and not factoring in product life cycle. Typically if something has a short life cycle, you don’t want to stock much of it, it will become excess and obsolete too quickly.
The article summarizes:
Following this advice will help you find that sweet spot of inventory. That optimum point where you are bringing in the most profit without spending more than needed on inventory.
I’d be interested to see if you have any other recommendations or strategies to help optimize your inventory and identify that sweet spot. Please leave a comment below.