Did you know that the average time a product sits in one of Apple's warehouses is just 3.2 days? It sounds crazy, but when Tim Cook took the reins as COO of Apple in 1998 he took the view that inventory is "fundamentally evil", and worked to reduce inventory to the bare bones needed to meet customer demand.
Why was this such an enormous focal point for him? Surely developing great products is far more important than how many of them sit on shelves? The driver behind this focus was to cut costs and free capital, and saw all inventory as a rapidly depreciating asset, factoring depreciation to as much as 2% per week. This isn't just a function of the costs associated with storing inventory, but with new products being released on a yearly basis, old products immediately diminish in value. Being able to match manufacturing output with sales demand meant their production lines could switch to the newest devices without an enormous inventory of older items on their hands.
While expiry dates and lot numbers are common-place in food and grocery items, taking the approach that "every product has an expiry date" (even for things like electronics or clothing) is an effective lens to ensure that inventory levels are kept to a minimum, capital is free for other business purposes, and inventory levels are synced to demand.
How to determine the optimum amount of stock to hold at a 3PL.
When working out the optimum amount of stock to hold at a 3PL, only two things need to be considered:
- How many typically sell within a period.
- Lead-time and frequency for getting more.
Going back to our Apple example, assume we're looking at how many iPhones to hold in inventory. Let's say that average sales per week are 2000, where a big week will sell 2,500. Secondly, let's assume that it takes 2 weeks to get more iPhones into the warehouse from when the order is placed, and due to shipping fees we want to re-order no more frequently than every 2 weeks.
Given that in a 2 week cycle we may ship up to 5,000 phones (assuming 2 big weeks back-to-back), and our orders are arriving every 2 weeks, then the optimum amount of stock to bring in at any one time is 5,000 phones less the difference between 2,500 and however many we sold in the prior two weeks.
Assuming that lead-times are reliable and sales are steady, storing any more than this is wasteful. More capital is tied up in the stock, more storage fees are being paid, and the product has a higher chance of depreciation.
If you're looking to calculate your own optimum levels of stock, a great way is to use a Stock Movement Report to review in's, out's and average stock levels within the warehouse.
Here is an example of a Stock Movement Report exported into an Excel Graph:
What's interesting here is that in general the product has a buffer of around 30 on-hand at any one time. However, the frequency of re-stocking suggests the lead times of this product are very short, meaning the inventory level could be reduced quite significantly without running out.
In addition, for some reason in August 2014 a very large number were bought in, yet the sales throughout August and September were lower than those of earlier months (as indicated by the gradient of the line.
While this is a simplistic example, and there may have been known upcoming supply issues which lead to the overstocking, simply plotting the data around inventory levels over time can expose a great deal of information and potentially lead to some very heavy cost savings and capital reallocation.
When we first started to develop CartonCloud in 2012, a core concept was that of transparency with clients, and therefore we built functionality allowing customers of the 3PL to login and view their stock reports. Expiration dates are a core concept in CartonCloud, and for a long time were enforced on all products being entered (we've since relaxed this and made expiry dates optional as not everyone wanted to take Tim Cook's outlook on their products). We also added very simple but powerful features such as automated emails which can be configured when stock goes within a certain number of days of expiration, alerting the client to sell the product quickly to avoid it expiring completely.
If you're already a CartonCloud user, take 5 minutes now to run a Stock Movement report around some of your biggest selling items and take a look at whether you can reduce your inventory levels.
If you're not on CartonCloud yet, look at how you can extract this information from your sales data, or give us a call to get setup.