In the Fight for Supply Chain Recovery: Best practices for inventory management during record high warehouse occupancy
Discover the best practices for inventory management in an era of record high warehouse occupancy. Explore the challenges faced by supply chains, the impact on emerging brands, and effective strategies to navigate the turbulent marketplace.
Though supply chain inflation has slowed, the going rate for warehousing has remained elevated. But, while high, at least that price point isn't rising. In fact, after a near 30% bump at the end of 2021, industrial rents have remained around $9 per square foot - this, even though the share of available warehouse and distribution space in the US is half of what it was just two and a half years ago.
That's a silver lining. Predictability can generally be good - even when an outcome is predictably negative. Like a baseball umpire with a billboard-sized strike zone, it's on the home team to take the bat off the shoulder at some point.
That’s easier than said, but nothing is easy when it comes to the supply chain. Interconnectedness is the heartbeat of logistics. But negative implications abound when the first domino begins leaning in the wrong direction.
The Warehouse Occupancy Dilemma
For 3pls, 2022 was not the year of the tiger but the year of overstock inventory. This misnomer, no doubt, was a consequence of 2021: the year of supply log jams. That fall, the queue of ships outside the LA port looked more like the cover line for the Roxbury than a significant trade hub.
To avoid another year of massive losses on 3-week late holiday orders, brands tried to get more inventory stateside ahead of peak season.
That mostly didn’t work, and there are a few prevailing theories as to why, but the result was the same regardless - huge inventory overstock.
Nikki Baird, vice president of strategy at retail software firm Aptos LLC, said she has seen clients place larger orders than necessary as a way of planning for the worst-case scenario, part of the shift from “just-in-time” inventory management to a “just-in-case” strategy. Aptos works with Adidas, Bed Bath & Beyond, and Sephora clients.
Though a favorable strategy, “just-in-time” inventory management is not necessarily a best practice. Mostly, that’s because it's rife with thick and complicated nuance. From a third-party-logistics (3pl) perspective, given the wrong procurement circumstances, it can be a dangerous game. At the same time, plenty of companies with shelf-stable inventory don’t make a regular practice of SKU retirement. A deep backlog of stock can benefit these firms if they can find the space.
And that’s just it - companies are unique in almost every way, especially in how each navigates the supply chain and utilizes services. When distribution channels are flowing steadily and the economy is neutral, there are no right or wrong ways to do it. There are only degrees of effectiveness based on what makes sense for a particular brand model.
It’s good for varied business models to exist - even within the same product niche. When it comes to inventory management, there is a place for the just-in-timers and the stockpilers. The philosophical differences between each create equilibrium in the industry, especially for the business service vendors that work with clients in both camps. But that is an ideal - a portrait of what can be when procurement and distribution channels are firing on all cylinders. In the present moment, we seem to be scooting along with a much smaller engine.
While market conditions are objectively poor, they are better than they have been within the last half-decade. More importantly, things are trending in the right direction. Import volume has leveled off relative to exports, and freight rates have returned to normal. Just this past February, So. Cal ports saw record low cargo container volume, partly due to an early Chinese New Year but also as an appropriate market correction of the warehousing issue. According to fashion industry trade journal, Women’s Wear Daily, facilities ”are so stocked with goods that there is no room to cram in any more merchandise.”
Notwithstanding any other shenanigans at the ports that have historically kept carriers waiting despite low trade volumes, the return to a more manageable inbound pace is a clear sign that the industry is on the road to recovery. Still, there is a reason it's called a supply chain. In the most basic sense, the problems that peaked last year at sea and in the ports are now making their presence known to North American warehouses.
For brands trying to weather the storm, that is a right now problem, and there are many small startup teams losing sleep as a result. Caught between a massive rock and an impenetrably hard place, these companies are forced into decisions that may run counter to founding inventory management principles.
Just-in-timers vs. Stockpilers
From the 3pl perspective, this catch-22 is most evident for food & beverage, nutraceuticals, cosmetics - pretty much any product with expiry dates and a finite shelf life. Companies in these categories want to be just in time - especially emerging brands that have not optimized shelf life beyond 6 months to a year. Without sufficient historical order data, they are just guessing on manufacturing and inbound timing. Rather than risk losing an entire batch to expiration, they’ve conceded to manufacturing and moving new inventory as needed.
It’s a delicate cadence, easily disrupted by inefficiency at any point along the supply chain. But these past few years, inefficiency has been the rule, not the exception. The only consistent flow is the stream of customer orders. For just-in-timers, the best-case scenario is a growing pile of backorders. Suddenly there is pressure to manufacture in larger batches and store more inventory. Once caught up, it may only take a few slow sales months before expiry dates draw dangerously near. This time, the risk is a much more significant and possibly irrecoverable loss
On the other side of the spectrum are the companies that have achieved an inventory sweet spot and can incrementally grow. Their only problem is the premium on commercial warehouse space passed on from their DC. As outrageous as the price increases seem, the incumbent costs are nothing compared to new quotes.
But regardless of where a company lands along this continuum, emerging brands- and many established ones, too - ultimately find themselves standing on common ground. They are no longer each other's biggest competition, and the conglomerates that rule a space are not the existential threat they once were. Instead, priority number one - at least for now - is shouldering the financial burden of failed supply chain infrastructure.
So how is that done - other than commiserating in a long-form blog post? There’s a time to get lean; a time to seek financial shelter from the storm; and a time for both. Now is a time for both - not because things are so bad, but because they’re just bad enough, and because you can!
Leaning out is pretty straightforward, but there are nuances to cutting costs at each unique phase of operations, and in particular, supply chain functions related to finished goods (i.e. warehouse production; long-term storage; product assembly; fulfillment; last mile; etc.). We discuss which valves to pinch and levers to pull for cash flow stabilization in the next section. In the meantime, let’s talk about working capital and how even a nominal cash infusion can help startups reestablish some liquidity and hang onto margin.
Working Capital for Scaling Down
Historically, in poor market conditions, it makes sense for young companies to simply batten down the hatches and wait out the storm. Something has to give in order to keep the ship afloat, and so brands concede to some combination of cutting costs, building efficiencies, and raising prices. But the tough truth is that it takes money to save money, and any attempt at leaning out is infinitely more achievable with an influx of working capital.
But securing investment is not easy when spending is down and brands are underperforming. At the same time, traditional institutional money is just money. The big lenders are ultimately NOT going to deliver much outside of a financial buffer. Be that as it may, there are more ways than ever to secure working capital investment from reputable companies offering more than just a lump sum and an exploitative interest rate.
Take Ampla - a financial technology platform built to provide comprehensive support for emerging eCommerce companies. More than a lender, Ampla is first and foremost a brand partner. The company works in support of client success across all phases of business. Part and parcel of that mission is a robust financial suite and access to working capital.
And while cash infusion is the headliner, often one of Ampla’s other services ends up the more memorable opening act. The consolidated financial dashboard supports business banking and account connectivity, various pay-later options, access to a business line of credit, a precise borrowing cost calculator, and more. This menu of adjacent financial products is a vital part of the Ampla mission and reflects a core operational tenant for the fintech firm - the provision of complimentary financial technologies in one simple platform.
Services like Ampla’s are a great opportunity for companies needing a financial bridge for support while they find footing along the shifting retail landscape. But ultimately, the real value of any infusion is how cash is deployed. Here are the highest impact investments brands can make in operations - specifically in terms of inbounding and inventory management. Each action step is meant to simplify warehousing and consolidate inventory in order to protect brand margin and reputation. In doing so, companies ensure they are conditioned to last through trying times but fully prepared for an offensive push to scale when the tides finally turn.
Keep SKU Count LOW
Now is not the time to throw product formulations, flavors, styles, or spin-offs at the wall to see what sticks. Especially if you’ve stock-piled inventory, companies who maintain a ton of SKUs outside of the high-velocity movers are playing a dangerous game with inventory shelf life.
Beyond the ticking clock on less popular items, low SKU count companies are attractive potential partners for warehousing and 3pl service providers. Brands with fully optimized just-in-time strategies may struggle to find and keep a solid logistics partner.
In the current state of warehousing, operators are steering the ship at fulfillment shops, and warehouses are more protective of space and discerning of the companies they serve. That isn’t just about order volume and service revenue, though those are huge factors. At least for right now, if a company’s product offerings are not dialed in on a few main SKUs, account administration is easily derailed, Factor in expiries and multi-channel fulfillment, and suddenly there are diminishing returns on new client relationships.
Beyond the operational layers topping high SKU client ops, there’s the pesky issue of space. When SKUs increase, stockpilers and just-in-timers become equally unattractive. In either case, the size and scope of production to support daily orders is substantial. At the very least, warehouses can stack or rack bulk storage, minimizing pallet positions and footprint considerably. But, there is simply nowhere to hide hundreds of active SKUs, each of which requires a distinct bin location in the forward pick area.
ALWAYS Track Lots
Those not tied to a genuine F&B brand may be ignorant about lot tracking having managed expires with First in, First out (FIFO) for so long. But when warehouses are crowded, it’s nearly impossible to sync up drayage, freight, and inbound dock appointments without planetary alignment. Just-in-timers are more familiar with these struggles. Especially for products with shorter shelf lives, the first inventory to expire and first in/out are not always the same. Lot programming provides a clean solution to this problem batching iterations of like SKUs to mitigate human error in order processing.
But the benefits of lot tracking are not lost on stockpilers either. Especially for early-stage companies, order velocity may not consistently warrant overstock levels. When that is the case, items within a particular manufacturing run creep dangerously close to the end of shelf life. But when lots are tied to items, brands can be vigilant about monitoring and prioritizing aging inventory so that there is always a safe buffer ahead of expiration dates.
Duplicate SKUs for Omnichannel
The most consequential characteristic shared among companies struggling to manage inventory and navigate high warehouse occupancy is brand size. In the context of fulfillment and logistics, we’re not talking about size in terms of revenue, channel sales, user growth, subscribers, customer acquisition costs, etc. Instead, the most important metrics are those related to the order and unit volume and velocity - package level and billing details like…
- DTC orders per month and parcels shipped
- Average DTC picks per order
- B2B orders per month
- Average units per order/common order configuration
- Case picks per order/pallets shipped over time
At a certain point on the path toward scale, brands begin to exist in an awkward purgatory. Monthly spending far exceeds service minimums, but order volume does not yet warrant SKU duplication for new/additional channels (i.e. DTC - pick/pack; B2B - wholesale; B2B - EDI; FBA; etc).
The inability to segment inventory adds a layer of nuance. Now, not only are just-in-timers struggling to sync inbound and expiry rotation, but sharing inventory across multiple budding channels means items are often back-ordered.
This happens when on-hand inventory is decremented, and items become components of automated prebuilds (i.e. specialized kits; variety pack bundles; retail configurations; etc.)
New orders are coming in for real inventory items, which are physically present at the warehouse, but as components of kitted items and a different SKU. And so, as far as the warehouse management system is concerned, those raw inventory items are classified as “out of stock.”
Chaos ensues as clients, feeling the pressure of retail ship windows and angry customer service inquiries, set into motion an endless stream of special projects.
Configurations are assembled and stored as inventory; broken apart and packed for retail; reworked into new configurations; relabeled; stock transferred to feed DTC; and so on.
Soon, ops is a free-for-all, devoid of any system to govern logical inventory usage. Any and every available item is fair game, and the singular focus is on scanning out orders and issuing tracking Stock adjustments. We’ll cross that bridge when we get there.
It makes sense why brands fall into this trap. It’s reasonable to assume that drawing on one inventory pool would help companies stay lean and maintain a high level of efficiency. But depending on what's available to end customers online, the cost associated with duplicating SKUS and segmenting inventory by channel is easily offset by the steady flow of active special request work orders.
There is no best way to manage inventory. Stockpilers and just-in-timers are each leveraging opportunities available to them based on their particular brand’s model for inventory management. Of course, in certain scenarios that is too broad and generous a statement. At the end of a turbulent era, with warehousing the last battleground in the war against supply chain irregularity, some startups are simply making the best of a bad situation - gritting and bearing through growth phases in their own companies and the greater marketplace.
But no matter the circumstances that shape the way companies operate in less-than-ideal conditions, there are universal truths and a few core best practices that can help founders sustain the difficult work of startup eCommerce retail while setting brands up for relative prosperity no matter the climate.