Free up your finances by avoiding the pitfalls of excess inventory

by Ana Lopez

Opinions of contributing entrepreneurs are their own.

Most companies currently have a lot on their plate. The rapid shift of social and economic elements has led to challenges in raising funds, sustaining cash flow, finding partners and dealing with virtually every other aspect of running a startup.

Supply chains usually don’t make the headlines for startups. But in the current climate, the chaos of global supply and demand means supply chain management is one of the most critical skills early stage teams need to get it right.

Even the largest retail companies, such as Target, have recently come out about their supply chain and consumer issues impact of excess inventory. They are announcing drastic strategies to cut prices and cancel orders to restore stock balance and free up warehouse revenue.

And when giants like Target struggle to forecast demand, smaller companies and startups find themselves in even more precarious situations, often without cash buffers to support wasted materials and orders.

Related: How advanced analytics could end the $50 billion retail overstock problem

How does excess stock arise?

When your inventory strategy depends on meeting demand, rather than factoring in replenishment lead times, you end up with too many orders. Bulk buying seems cheaper and less risky in the short term than leaving orders unfulfilled. Still, you’ll probably end up with a suitcase of musical 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 create. impress the market.

This also happens due to a lack of accurate demand forecasting, but forecasting tools only work if they can find patterns. When you have an inventory management solution to make deliveries and consumption more predictable, you can order in smaller batches more often. This way you have less inventory stuck and hanging around, and more opportunities to be agile – to intervene and correct course – without saturating your warehouses. The biggest gap in demand forecasting and planning systems is their inability to support real-time intervention.

Why does excess inventory have a big impact on start-ups?

A staggering number of startups are finding that cash tied up in excess inventory can equate to a round of funding. That is funding that can support the startup’s research, survival, growth or next stage of development. What seems like a temporary glitch becomes a major hindrance to a startup’s long-term success and life expectancy.

Managing tangible assets should be vital for startup founders; without it, they simply cannot remain financially agile enough to take risks and grow.

Take Peloton for example. This VC-backed company found itself with products with huge physical components (bicycles and treadmills) that were no longer mass-marketed. Peloton faced serious financial consequences from this wasted inventory and had to take emergency measures, among other things laying off thousands of employees And cancel plans for a new production facility.

Rivian, an electric vehicle manufacturer, is the latest casualty of excess inventory. Unable to sell its physical product, it had to raise prices before it was even developed enough to sell on a large scale. The last nail in the coffin? The company made the critical mistake of asking customers who had already ordered the cheaper vehicle to make up the difference.

The sad thing is that this could have been a completely different story; the company admits that if it hadn’t struggled so much with its supply chain issues, it could have produced twice as many units.

Related: 3 Ways Small Businesses Can Survive the Supply Chain Crisis

How should startups deal with the immediate problem of excess inventory?

Before startup leaders can begin practicing better demand forecasting, they must address the immediate problem of excess inventory and insufficient cash.

How startups solve this initial state of affairs depends on their unique financial situation. If they need the money to stay alive, faster cash flow is better than inventory as an asset on their balance sheet. For most inventory-heavy startups, there are more excess and wasteful dollars tied up in inventory than the savings they’re getting from laying off employees right now.

An immediate step that can ease the burden is to cancel any upcoming orders that exceed your needs. If you have access to real lead time data, you can redirect or cancel inventory. You should not consider laying off employees if there is excess inventory that can be used to make money.

How do you know when it’s time to make these kinds of interventions? You may see changes in demand, abnormally long lead times, changes in shelf availability, etc. Keep an eye on the materials moving (and getting stuck) through your supply chain.

Related: How Better Inventory Management Can Improve Your Finances

How can startups use AI to forecast demand?

Newer retailers and early-stage startups can use AI-driven tools to better plan for demand in the future, and it doesn’t have to mean retraining or relearning everything you know about supply chains. Consider these strategies:

1. Keep an eye on lead time estimates

Looking ahead to estimates of the actual lead time of your goods can help you plan for possible excess inventory. Understand how often a supplier can deliver. Look at worldwide shipments to determine if you will get your materials on time to distribute or manufacture. This information can create more accurate expectations for the remainder of production and beyond. It also helps you advise customers in advance rather than apologizing after you let them down.

2. Don’t underestimate your clearance inventory

Price your clearances correctly; there’s no need to price something 50% off if a 40% discount would result in the same purchase volume. The beauty of becoming aware of lead times is that you don’t have to take desperate measures. You can see the whole picture ahead and take more gradual, smaller measures to deal with excess inventory.

3. Actively manage stock buffers

Inventory buffers shouldn’t just stagnate, because excess inventory (even in the form of a planned buffer) can oversaturate your supply chain, bringing the flow of goods to a standstill. If you can actively manage inventory buffers for critical goods while accounting for carriers and demand disruption patterns, you can create a healthier flow even when the market environment is turbulent.

Excess inventory happens to the best (and biggest) of us. But if you’re a startup company fighting to propel your way forward with VC funding and struggling to find enough extra cash to make changes, excess inventory can drag your business down and threaten the future. By focusing on your supply chain and reading lead time estimates to manage the flow of your tangible goods, you can take back control and free up your finances.

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