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The 5 R’s of Merchandising (for Ecommerce)

A 100-year-old merchandising concept applies to modern-day ecommerce retailers — the right people, right product, right quantity, right price, right time.

The post The 5 R’s of Merchandising (for Ecommerce) appeared first on Practical Ecommerce.

5 Tips for After-Christmas Promotions

The January sales lull can be frightening for merchants. An after-Christmas promotional event can provide a necessary boost.

The post 5 Tips for After-Christmas Promotions appeared first on Practical Ecommerce.

Charts: Global Supply Chain Trends 2022

Controlling costs and minimizing risks are among the top challenges of supply chain executives worldwide. Here’s our look at a recent survey by a leading research firm.

The post Charts: Global Supply Chain Trends 2022 appeared first on Practical Ecommerce.

Stagnant Sales Are Creating an Inventory Glut

Recession fears combined with supply-chain excesses have created a dramatic increase in unsold inventory. We explain.

The post Stagnant Sales Are Creating an Inventory Glut appeared first on Practical Ecommerce.

Charts: Global Manufacturing Outlook 2022

Owing to the pandemic, CEOs of large worldwide manufacturing companies are focused on supply chain resiliency. We tell the story in this week’s charts.

The post Charts: Global Manufacturing Outlook 2022 appeared first on Practical Ecommerce.

Is Your Supply Chain Vulnerable?

The combination of pandemic lockdowns and rising freight prices has forced some companies to focus on supply chain vulnerabilities.

Many commerce businesses — ecommerce, omnichannel, direct-to-consumer, B2B — have experienced some form of supply chain disruption in the past 18 months.

Each business and industry likely has unique experiences relative to products and suppliers. Those experiences inform a new sense of supply chain awareness to guide purchasing, inventory, and promotional decisions.

Pandemic

“You cannot assume that [your supply chain] is going to work the way it did in years past,” said Rick Wilson, CEO of Miva, the SaaS ecommerce platform.

Wilson’s company witnessed the pandemic’s impact across thousands of commerce businesses.

At first, there was a sense of the unknown.

“It is hard to take yourself mentally back to a place in time, but if you reflect back to March 10 through April 30 of 2020 … we were worried that our merchants might go out of business,” said Wilson, adding he was concerned the entire worldwide economy would suffer.

Soon, however, the effect on ecommerce became clear. Sales soared. Wilson’s clients experienced Black-Friday-like revenue in the middle of summer.

Concerns about the economy gave way to supply chain worries.

Lockdowns

In 2020, global shutdowns meant to “flatten the curve” slowed or stopped manufacturing the world over.

Not surprisingly, inventories began to shrink.

In February 2020, for example, U.S. retailers held approximately 43 days of inventory, according to an article from the White House citing data from the U.S. Census Bureau. By June 2021, retail inventories had fallen to about a 33-day supply, the lowest in 30 years.

U.S. retail inventory levels were at a 33-day supply in June 2021, the lowest level in decades. Source: WhiteHouse.gov.

Thus businesses should think about the manufacturing facilities they depend on, including the risks of further lockdowns and other pandemic-related disruptions.

“It’s simple project management,” Wilson said. “You have to reverse engineer [the supply chain]. You take a Gantt chart, and you work back from delivering to the customer. You check every step.”

If manufacturing is vulnerable, a merchant might purchase earlier, hold more inventory, or promote relatively less. For example, a retailer without adequate holiday inventory could avoid offering Black Friday discounts and, instead, sell available stock at full margin.

Freight Challenges

Slowed manufacturing is not the only potential supply chain problem. Worldwide container shipping costs have quadrupled in the past year, according to The Wall Street Journal. Some container prices have risen more than 50% since May 2021.

The factors driving the increase are complex but likely include pent-up demand, the March 2021 Suez Canal blockage, and overworked ports in California and China. Regardless, the effect is painful for commerce companies.

“Just this past week, I got some really bad news. One 40-pound container going through Surabaya, Indonesia, used to cost $5,000. It’s up to $19,500,” said Kyle Tortora, owner of Lotus Sculpture, an Oceanside, Calif.-based retailer of artisan-made Hindu and Buddhist statuaries.

“Indonesia is typically the most expensive place I ship from, but this is way too cost-prohibitive,” said Tortora, “so I changed my plan.”

Screenshot of Lotus Sculpture home pageScreenshot of Lotus Sculpture home page

Lotus Sculpture has had to change its purchasing and inventory practices in response to supply chain challenges.

Tortora generally purchases garden statues from artists in Indonesia, buying a container load every month or so. This year he took a different approach, placing a massive five-container order but not shipping it immediately. Instead, his suppliers are holding the goods in the hope that container prices will fall in the coming months.

Businesses with similar vulnerabilities may want to evaluate supplier and transport options. If no meaningful alternatives exist, raising prices now — well before the holiday shopping season — is likely prudent.

Getting Investors to Buy Your Inventory

When it comes to funding inventory, retail businesses can be creative, using loans, credit cards, supplier terms, and even advances from family. Whatever the method, raising the money can be a challenge.

“Every business needs to fund inventory before it gets the opportunity to earn revenue by selling it, and there is no single [funding] solution for all companies,” said Sean De Clercq, CEO of Kickfurther, a platform that connects investors with emerging brands.

Kickfurther describes these connections as consignment opportunities (co-ops) and separates what it does from other funding or crowdfunding options. Before describing these co-ops, it is worth mentioning some of the ways retailers, direct-to-consumer brands, and even consumer packaged goods companies acquire inventory.

Funding Inventory

Outside of savings, bank loans, credit cards, and individual investors, businesses have alternatives for funding inventory.

For example, very small companies based in the United States can apply to Kiva for interest-free loans of up to $15,000 and take as much as three years to pay.

Indosole, a brand that sells shoes made from recycled tires, is one of many companies that has used Kiva for funding. Kiva partners with institutions to provide interest-free, small business loans. Kiva and its partners also provide non-financial support and resources to help businesses succeed.

Screenshot from Kiva's home page showing IndosoleScreenshot from Kiva's home page showing Indosole

Indosole is a featured business on the Kiva website. Kiva partners with institutions to provide interest-free, small business loans.

Although not-for-profit lenders such as Kiva are rare, they do exist. The Accion Opportunity Fund is another example of affordable financing.

As a retailer grows and its inventory levels increase, other forms of financing become available from services such as Kabbage, BlueVine, Clearco, OnDeck, or similar. These companies offer various forms of term loans and lines of credit that established businesses can access. For the most part, lenders in this category will evaluate a business based on credit history and historical and projected revenue and cash flow.

Crowdfunding Inventory

Another alternative for some businesses is crowdfunding. Crowdfunding platforms are, in a way, the Airbnb or Uber of retail or direct-to-consumer inventory.

Airbnb, for example, doesn’t own rental properties; it simply connects folks who do with others who want a short-term rental. And Uber doesn’t own cars necessarily. Rather it connects folks who do with others who want a ride.

Similarly, crowdfunding platforms connect businesses with backers.

For example, electric bike maker Reevo raised millions on Indiegogo, effectively selling pre-orders to customers who, in some cases, will wait a year or more to receive the bike.

Screenshot of Indiegogo home page showing ReevoScreenshot of Indiegogo home page showing Reevo

Reevo raised funds on the crowdfunding platform Indiegogo.

Consigning Inventory

Perhaps the least discussed option for funding inventory is consignment or even crowdfunding consignment.

“We’re specific to physical-product companies, which gives us the ability to look at things like production and distribution risk. Because we are very specific to that niche, we are also able to get our businesses funded for less,” said Kickfurther’s De Clercq during a live interview with the CommerceCo by Practical Ecommerce community on July 15, 2021.

Kickfurther reviews businesses before allowing them to present their co-ops on the platform. Once approved, funding usually comes quickly. Kickfurther investors can support entrepreneurs and earn a return with consignment opportunities. Fractional investment starts at just $20.

At the time of writing, recently funded co-ops included drink maker Greater Than and apparel brand House of Fluff.

Inventory consignment is not new. Consider the Winmark Corporation. The company owns several nationwide second-hand retail brands, including Play It Again Sports, Plato’s Closet, and Once Upon a Child. Each of these obtains inventory from retail consignment: Individuals drop off second-hand goods, and the stores pay those individuals when the product sells.

Kickfurther applies this idea to ecommerce companies.

Benefit to Investors

In a technical sense, “As investors, we take ownership in [inventory] and consign it to the company to sell on our behalf, and when they sell it, then the underlying cash gets distributed,” said Michael Fox-Rabinovitz, managing partner of Chartwell Capital and the author of “Own a Fraction, Earn a Fortune.” Fox-Rabinovitz invests through Kickfurther and also joined the CommerceCo community during the live interview.

“Realistically, we look at the deal. If we like it, we’ll allocate cash to it…it is really fractional ownership in a sense,” Fox-Rabinovitz said.

But at least some investors don’t necessarily think about the Kickfurther co-ops in this way.

The investors inject money into a company that is both interesting to them and a sound investment. They profit from supporting a growing business that develops exciting new products.

Save Money on Inventory with EOQ

A production scheduling model first proposed in 1913 and popularized in the late 1980s may help modern companies understand how much inventory to buy and how often, saving money in the process.

Ford Whitman Harris, an American production engineer, developed the economic order quantity (EOQ) model to help buyers at manufacturing companies understand how much of a given raw material or part they should buy.

In the past few decades, different sorts of companies, including pure ecommerce operations, omnichannel retailers, and direct-to-consumer brands, have used the EOQ to calculate the ideal amount of inventory to purchase from a particular supplier to minimize the cost of buying and holding.

The model starts with an understanding that the total cost of buying inventory is the sum of the purchase cost (the price of the product), the ordering cost, and the carrying cost.

Total Cost = Purchase Cost + Ordering Cost + Carrying Cost

A Balancing Act

Purchasing inventory is something of a balancing act.

Buying too little inventory results in out of stocks, disappointing shoppers and foregoing profits.

But too much inventory is a problem too. Where will the retailer put the inventory? And what happens to that inventory as it ages? Will it spoil or become obsolete?

This balancing act is what the EOQ tries to solve, using an equation that identifies ordering cost, demand, and carrying cost.

Image showing the EOQ formula.Image showing the EOQ formula.Image showing the EOQ formula.

The economic order quantity or optimal order size is the square root of two times the ordering cost times the demand for a given timeframe divided by the carrying cost per unit.

Ordering Cost

Ordering cost, also called the setup cost, is the expense of placing an order (not the price of the goods, which is the purchase cost).

Thus, ordering cost might include freight and the time your company’s purchasing team spends researching and placing the order.

For example, imagine a DTC brand that manufactures its product in Taiwan. With each production run, the brand sends a quality engineer from its office in Los Angeles to the facility in Taiwan. The trip is part of the ordering cost.

On a smaller scale, a purchasing agent might submit an order, arrange the freight, and allocate that inventory to a few warehouses. The agent’s time should be used to estimate a fixed cost per order.

Imagine that the ordering cost of a product is $100. We can place this number in a Google Sheet.

Screenshot of a Google Sheet showing the $100 ordering cost.Screenshot of a Google Sheet showing the $100 ordering cost.

Ordering cost is the cost of placing or processing an order.

Demand

For the EOQ equation, demand is the number of units your business will purchase in a given timeframe, typically one year, reflecting the number of units you expect to sell.

A weakness of the EOQ model is that it does not account for seasonal spikes in demand. For this reason, it may be necessary to adjust the timeframe.

In our example, let’s imagine that demand is 10,000 units per year.

Screenshot of a Google Sheet showing the $100 ordering cost and 10,000 demand units.Screenshot of a Google Sheet showing the $100 ordering cost and 10,000 demand units.

The EOQ demand is the number of units your business will purchase for some timeframe, such as one year.

Carrying Cost

Carrying cost, which is sometimes called holding cost, is the expense of storing or holding unsold inventory for a particular timeframe (the same timeframe as for demand).

Carrying cost is often shown as a percentage of total inventory value. But for our EOQ equation, we want a monetary amount per unit. So we will start by calculating the carrying cost percentage and then multiply it by the unit cost.

Inventory carrying costs typically include the costs of capital, storage, servicing, and risk.

  • Capital costs are the opportunity or interest costs associated with buying inventory. Imagine you bought $100,000 in inventory. If your business could have earned 5 percent by investing that money, the capital is costing 5 percent. Similarly, if you have to borrow to buy inventory, the interest is a capital cost.
  • Storage costs are a product’s share of warehousing costs, including the rent or mortgage, overhead, and similar.
  • Servicing costs are expenses related to holding a product, such as insurance, software, and labor.
  • Risk includes shrinking, spoilage, and obsolescence.

Added together, these costs result in “inventory carrying (or holding) sum.” That figure is divided by the total value of the inventory and multiplied by 100 to get a percentage.

Carrying Cost (%) = Inventory Carrying Sum / Total Inventory Value * 100

We then multiply the carrying cost percentage by the cost per unit.

For our example, we can say that it costs 20 percent to carry inventory and our unit cost is $10. Thus our carrying cost per unit is $2.

Screenshot of a Google Sheet showing the $100 ordering cost, 10,000 demand units, and carrying cost per unit..Screenshot of a Google Sheet showing the $100 ordering cost, 10,000 demand units, and carrying cost per unit..

Calculating carrying cost takes a little work. It requires understanding the capital costs, storage costs, service costs, and risks associated with holding inventory.

Calculate the EOQ

Having identified the ordering cost, the demand, and the carrying cost per unit, we are ready to calculate the EOQ or optimal order size, which is Q* in our equation.

Image showing the EOQ formula.Image showing the EOQ formula.Image showing the EOQ formula.

The economic order quantity or optimal order size is the square root of two times the ordering cost times the demand for a given timeframe divided by the carrying cost per unit.

This is a straightforward calculation in Google Sheets and Microsoft Excel. The formula is the same in both. Here is what it looked like in a Google Sheet.

=SQRT((2*B3*B4)/B8) 
Screenshot of a Google Sheet showing the formula for calculating the EOQ.Screenshot of a Google Sheet showing the formula for calculating the EOQ.

Calculate the square root in a spreadsheet.

In this case, it would make the most sense to order 1,000 units ten times throughout the year.

Remember, the EOQ aims to reduce your company’s total cost of purchasing inventory by calculating the optimal order size. EOQ then is a way to improve your business’s bottom line.

EOQ may be best for products with relatively stable demand. If your goods have strong seasonal demand, consider experimenting with the timeframe.

Consumers Want Visibility into What They Buy

Is that new summer dress 100-percent organic cotton? How can you prove it? What happened after the cotton was picked until the dress was delivered to the customer?

Merchants don’t typically know with certainty if the product they are selling was ethically sourced and produced. The info from suppliers is frequently limited and often misleading.

Consumers have questions, and they are not getting answers.

What Consumers Want

Consumers want to know that the goods they buy are safe, sourced legally and ethically, and manufactured without damaging the planet. Worldwide, cotton farming uses more toxic pesticides per acre than any other crop. These chemicals strip the land of nutrients, contaminate the water, and endanger the people who grow and harvest it.

Many merchants are responding. For example, apparel retailer Everlane has committed to all of the cotton in its clothing being 100-percent organic by 2023.

Sceenshot from Everlane's website, stating "More Sustainable Every Day"Sceenshot from Everlane's website, stating "More Sustainable Every Day"

Everlane has stated that all of its cotton will be 100-percent organic by 2023.

It is not only about clothing. It is about the food we eat, the shoes we wear, and the furnishings in our house. Retailers have realized that they need to provide greater transparency into their end-to-end supply chain.

Food. Consumers have growing concerns about the health, safety, and freshness of the foods they eat, including the use of harmful ingredients and pesticides. Consumers want to understand and substantiate terms such as organic, free trade, cruelty-free, and free-range. They want more openness.

A 2018 study by France’s consumer affairs ministry found that 49-percent of olive oils sold in that country are wrongly labeled as to quality and product origins. Some bottles were even found to contain rapeseed and sunflower oil instead. It is likely the same elsewhere, beyond France.

An American importer, Caroli USA, Inc., is using blockchain technology to monitor olive oil from the bottling source in Italy, through customs clearance, and into and out of U.S. warehouses. This ensures that the customer, buying a premium product, is getting the real thing and that the olive oil was transported at the correct temperature and the right humidity throughout its entire journey.

Furnishings. Wooden furniture and home accessories are not exempt from consumer scrutiny. Buyers want to know where an item was made, what type of wood was used, and whether it contributed to deforestation.

Fortunately, timber sourcing is authenticated through third-party certification bodies such as the Forest Stewardship Council, which promotes the responsible management of the world’s forests. Companies that achieve certification commit to transparency about their sourcing and manufacturing processes.

Tracking

Manually tracking items through the supply chain is not the answer. Blockchain technology is now used extensively, especially with food, to identify and track individual items. A head of lettuce or a joint of beef can be followed from farm to fork using smart labels and QR codes, tracking each activity, including third-party certifications and compliance with regulations.

Consumers are starting to demand proof regarding ethical sourcing and sustainability claims. This is especially important for premium branded products where counterfeiting is rife.

For merchants, verifiable tracing:

  • Builds trust in a brand,
  • Reduces fraud, counterfeiting, and fakery,
  • Addresses quality problems,
  • Facilitates prompt recalls.