Platt Perspective on Business and Technology

Online store, online market space – part 19: balancing an inventory

Posted in startups, strategy and planning by Timothy Platt on January 26, 2011

Yesterday I wrote a posting to this blog in follow-up to a conversation I had with an entrepreneur with an online jewelry store. One of the issues we discussed was inventory, and I quickly realized this was an area that I had not adequately covered in my series Online Store, Online Market Space (see Startups and Early Stage Businesses, postings 20 to 33, 35, 37, 40 and 41).

Even a cursory review of inventory turnover rates in most businesses reveals item to item disparities.

• Some stock-keeping units (SKU) can best be considered stock items and sell consistently, and long term.
• Some items sell seasonally and then essentially not at all when out of season.
• Some sell more as fads and as trends of the moment than anything else. They may show very high turnover potential for a period of time, but then primarily just be good for secondary markets if even that.
• Perishability issues can be very important here, and storage capacity.
• And as a final point I would list here, I add short term liquidity potential. Stock that can be sold but only at a slow and steady rate may have liquidity value and show on the books as assets, but inventory that cannot be readily moved is also inventory that captures and sequesters away potential liquidity, making it inaccessible, at least short-term.

On the one hand, a business needs at least some inventory on hand and even if they follow a lean, just-in-time inventory model to limit the levels of potential liquidity held out of immediate availability. There, supply chain and providers serve in effect as an alternative to in-house inventory and its warehousing. Some businesses may need even significant levels of in-house inventory but any business can literally drown in inventory if it cannot move it rapidly enough to maintain adequate here and now liquidity.

It is useful to look at a business in terms of inventory and turnover, and liquidity flow as it increases and decreases as a result of them. And here, a key to this is in knowing how detailed a model of your business you have to use for your evaluations of business and market performance.

Many if not most businesses still seem to rely on single aggregate turnover rate models for measuring their business performance. Modern database systems allow you to directly connect inventory to sales on the one hand, and to reordering on the other in streamlining and optimizing supply chain. I add that I have seen businesses get into trouble when they have the numbers and lots of them, but they do not effectively connect them into ongoing strategy and planning.

The more distinct types of SKU items you hold in inventory on average and as extremes at any one time, the more complex this can become. The entrepreneur I spoke with told me that his store generally manages approximately 2800 in-stock SKU items at any one time with seasonal fluctuations in both what is in inventory and in how many types of item are in-store. Note that for online stores:

• in-house but perhaps more distantly warehoused inventory,
• in-store and immediately available for shipping in order fulfillment, and
• in-supply chain and in a supplier’s warehouse

can be effectively equivalent from the end-user customer’s perspective and from the perspective of speed and efficiency of transaction completion.

Speed, consistency and reliability become quality assurance measures here in evaluating your business and its business model and practices, from the inventory and turnover rate perspective.

I will probably come back to this in a future posting, for further discussion.

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