Sales Growing Faster But Still, Have Too Much Inventory?

Sales Growing Faster But Still, Have Too Much Inventory?

Have you ever been in a situation where the growth of your inventory is outpacing the growth of your sales?

This particular pain point is experienced by newer small business owners. You have had a significant rate of growth. In fact, you've likely had rapid growth in the E-Commerce Sales Channel. Because of this rapid percent of sales growth founders tend to expand that growth by launching a lot of new products all at once.

The expansion requires insignificant inventory dollars.

At some point, you will begin to see the percentage of inventory on hand growing really fast but, the percentage of sales growth is not keeping up which can cause cash flow problems.

Undoubtedly, when the company gets into this particular dilemma, someone needs to break down the specific items that are driving the business. Typically, twenty to thirty percent of the items are driving eighty percent of the business.

When the new product inventory investment takes up the lion's share of the dollars those top sellers, the 20%-30% of the SKUs that are driving 80% of the sales, can go out of stock quickly. This creates a perfect storm of cash flow issues.

Because your best sellers have proven search history, they will rank very high in the algorithm. These items have consistent month over month sales velocity creating sales revenue. This is your core business.

Conversely, new products don't have the sales history. These items start at the bottom of the algorithm and work their way up. These products need to gain relevancy.

For example, Wayfair has stated that until an item has 5 reviews the algorithm doesn't consider it to be "relevant" or search worthy.

It takes time usually 6-12 months for a new item to become "relevant."

I call this the Perfect Storm.

You are out of stock on your top sellers and the new product sales drag causing excess inventory. Inventory growth (dollars invested in inventory) will continue to outpace sales growth. This is also the Chasing Your Tail Approach.

The #1 thing we recommend to suppliers. Stay in stock 100% of the time on your best sellers. These items are going to drive more significant growth than you can imagine in the long term.

Staying in stock of bestsellers will also provide you with more capital and investment dollars to strategically expand into new products. This approach to inventory management will result in a much greater return on investment.

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