How to Prepare Your Inventory for Holiday Season Sales in 2020

How to Prepare Your Inventory for Holiday Season Sales in 2020

This year’s festive season, even with the fear of economic slowdown, was fruitful for the eCommerce merchants, especially for Shopify merchants because they earned revenue of $2.9+ billion through the Cyber Monday/Black Friday weekend across 175 countries.

According to last year's sales report of the US i.e. 2019, $4.2 billion were spent by shoppers online on Thanksgiving Day with a 14.5% increase from 2018 that was $3.7 billion, $7.4 billion on Black Friday(approx 19.35 % increase from 2018’s $6.2 billion) and $9.4 billion were spent on Cyber Monday(with a 19.7 % increase from 2018’s $7.9 billion.)

Amazon declared that it sold more products on Cyber Monday than any other day in the history of its business.

Furthermore, the above data shows that festive seasons are the most anticipated days for eCommerce businesses. However, while most of the online business owners plan their marketing, sales, customer relations, and product strategies, they often take inventory planning lightly. The cost of which, they have to pay by losing customers with top-selling products going out of stock and the average selling products lying in the inventory, thus decreasing the Inventory turnover ratio.

“If we consider the data of 2018, on Thanksgiving, online consumers came across out-of-stock messages, 3.3 % of the time, whereas, on Black Friday and Cyber Monday, the percentages were 2.8 % and 2.4 %, respectively. As a result, merchants lost a whopping $484 million that could have been in their accounts.”

So, what should a small or medium or big enterprise businesses do to avoid losses of business opportunities and letting their customers down?

Analyzing and Comparing Last Year's Inventory Reports to Current Reports

Picture by - Orderhive inventory management software

Get last year's before and after Holiday sales Inventory on Hand report. The report will help you to get the correct data on how much capital was invested and how much of it was earned back with a profit.

When you compare the previous year's inventory on hand to the inventory available at present and consider current trends for each product, you will be able to forecast how much more you have to invest to stock up to increase the asset value.

This will help you to plan this year's investment. You can know how much stock you should keep on hand in case of high order flow.

Generate low stock reports. This will keep you away from going out of stock. The previous year's data will help you to have a better understanding of the behavior each product has during the sale season.

Picture by - Orderhive inventory management software

You can set a reorder trigger for each product after observing the last year's data and current year's demand.

For example, if a product is constantly running low on stock even after replenishment, this means you need to order more of that product. For the products that never hit that low stock line, you can pull out some investment by ordering a little less.

Furthermore, as in 2019 according to Deloitte, retail sales were expected to rise by 4.5% to 5%, which meant that, the total spending could surpass $1.1 trillion.

It is advised to stock up by expecting at least a rise in sales by 4.5-5%.

Hence, for any festive day sales or a seasonal sale, you need to purchase products in such a way that they hit the low stock line only after the sale is over and not before that.

Produce the product performance report. Use your automated inventory management software to get the product performance report or you can track each product and create the product performance report manually in excel as well. This report will draw a clearer picture of the performance of each product during last year's flash or holiday sales.

This will tell you how quickly a product was sold last year and how much you should invest in a particular product this year.

Studying the report will educate you about the summary of items sold per week or month. With this data, you can select and bifurcate the most sold products, average-performing products, and the stocks that are only decreasing the inventory turnover ratio.

For instance, Frozen 2 toys, L.O.L. Surprise Dolls, NERF products, Madden NFL 20 video game, Nintendo Switch, Star Wars Jedi Fallen Order game, Samsung TVs, Fire TV, AirPods, and Air Fryers were the most sold products, on Thanksgiving, Cyber Monday and Black Friday in the US. with smartphones ticking to record $2.9 billion on Black Friday - the largest ever mobile sales on a day till now.

Also, according to research done by Techradar, HD 4k TVs, Airpods, iPhones, PS4, Amazon's Echo Dot, and all other electronic gadgets will again have huge discounts this festive season. As such these products will sell more than other products. So, if you are selling electronic gadgets, ensure that you have the right amount of them in stock. You may need to offer discounts big enough to beat brands like Walmart, Best Buy, and Amazon.

Forecast the needed inventory by going through last year's inventory forecasting report. Also, take the demand forecast from the sales team of the current year into consideration.

To avoid out-of-stock and overstocking scenarios, you should consider the inventory forecasting report of previous years along with the demand forecast.

Make sure you also ponder on lead time demand, safety stocks, and reorder point while forecasting inventory for this year.

Moreover, if you want accuracy in-inventory forecasting. Also consider sales velocity [(365 days/ no. of days in stock)*30 days], seasonality, and current sales trends.

Look into the ABC analysis report. Make a detailed study of the ABC analysis report of last year to know what products of what values were bought and sold.

The best part of the above analysis is that you will also be able to know what sort of products you are selling more.

Are they from A category products that constitute 80% of inventory value and 15-20% of inventory amount, or are they from Category B that is 15% of the inventory value and 30-35% of inventory amount or are they from Category C that is 5% of inventory value and 50% of inventory amount?

Accordingly, you can classify the products and identify them after taking other factors into consideration before the festival arrives.

Prepare for back-orders. Have a figure of your back-ordered inventory for last year's season on your hand if you take back-orders.

Ensure that the number of back-orders is low so you can maintain the optimum stock level for the entire festive season.

However, if you are a drop-shipper, back-order numbers should be as high as possible. By knowing the numbers of last year, you will be able to inform your supplier about the approximate quantity of orders that they might have to ship when the tsunami hits.

Know your 2019's inventory valuation before and after the Festive season sale. The inventory valuation report is the sum of costs of purchasing, keeping, moving, and maintaining the inventory in its best condition. You can prepare the inventory valuation report by using 4 methods;

Specific Identification. Taking the specific cost of individual items. #*First in First Out. Calculating by assuming first to enter inventory is sold first.

Last in First Out. Last to enter is sold first

Weighted Average Method. Average of the costs in the inventory

By doing this, you can have an idea of how much you spent last year before the sale started and how much of investment got converted into revenue.

Based on this, you can calculate and decide how much you will have to spend on inventory.

Calculate the costs of goods sold last season. This allows you to understand the amount of investment that went into producing or acquiring the goods sold, plus the labor cost.

Based on the 2018's data, you can have an idea of how much this year's cost of goods sold will be and you can try to minimize your costs. You can combine this with keeping the inventory at an optimum level to increase the inventory turnover ratio.

Costs of goods sold ={(beginning inventory+purchases during the period)− ending inventory}

Figure out the inventory Key Performance Indicator that did well on and which your inventory lagged on. It's one of the most critical things that you need to be aware of.

Make sure that you don't choose too broad KPIs because broad performance indicators don't show immediate results. During any sales season, you need to know what and where your sales are going wrong.

You can introspect and bring the much-needed changes in the way you manage your inventories/inventory.

Study the demand forecast. Find out the demand forecast accuracy of last year's sale season and accordingly plan this year's strategy for stocking up inventory. You can observe the forecast behavior against the actual sales in a well-developed Inventory Management software and understand the bias. Note down the missed opportunities, ongoing trends, and over forecast or under forecast scenarios for each product and accordingly stock up.

If the demand forecast was accurate enough, then deploy a similar technique to forecast, but don't miss the current data and behaviors into considerations.

If the forecast was not on the point, you need to diagnose and find out the root cause. So, proceed by considering all those mistakes.

Study the location or Stock Keeping Unit velocity mismatch report of last year to this date. This is matching the location velocity to item velocity to find out the locations with a mismatch. During high order flow in the sale season, it is possible that you face scenarios of location mismatch or SKU mismatch that will lead to troubles and inconvenience both for your customers and you. This can lead to the delivery of incorrect orders and subsequently increase in return order rate.

Ensure that there is minimal Location or SKU velocity mismatch before the sale starts to make the order fulfillment smooth and increase the perfect order percentage.

Employ efficient automated inventory management software. This is software made for small businesses that will help you get the reports churned out quickly, thus reducing stress and saving time for you to concentrate on other aspects of your business to make the most of this seasonal & holiday sales.

An inventory management system automatically generates all kinds of reports mentioned above and many more for you to understand your inventory in a more accurate way.

The trend is shifting towards automated inventory management software. As per getting data research, 16% of the surveyed small business owners admitted that they save more than a day/ week because of the use of efficient software, and 55% of owners save more than 4-5 hours a week. And hence, they advocate the use of Inventory management systems for small business because of an excess day/week to strategize and plan marketing for the festive season sales.

However, you can still use excel if you have budget issues or a very small number of products to manage. Excel can be helpful in many ways as far as managing very minimal inventory is considered.

Ensuring That all KPIs are at Optimum Level

List down the KPIs for Inventory management and check what needs to be looked after. The most important thing is to analyze these KPIs beforehand and make sure they are at their optimum level. There are different types of performance indicators, like:

Per-Day SLA Breach Rate
Demand Forecast Accuracy
Cycle Count Error
Unfulfillable Orders
Inventory Turnover Ratio
Timely Supply
Products Shipped on Same Day
Perfect Order Percentage
Fill Rate Percentage
Gross Contribution Margin (GCM)
Order Pick, Pack and Ship Accuracy

Minimize the Per Day Service Level Agreement breach rate before the sale starts. It would help you create a positive image that can benefit you during the shopping spree following Thanksgiving. Consumers often make a list to shop from different websites, and if your SLA breach rate is low, meaning most of the time you delivered the services in the promised time frame, it is likely that you will be at the top of that list. Ensure that the supplier's SLA breach rate is low and you are getting your stocks in time.

Amazon allows a maximum SLA breach rate of 4%. Having the SLA breach rate of 7%-8% would lead to account suspension.

SLA breach rate can be minimized by using an order fulfillment process that is fully automated with order management and shipping tool in it.

These tools make order flow smoother by automatically confirming the order(based on the payment status), logging payments, creating pick lists, invoices, and manifests. They also allow you to raise purchase orders if you are drop-shipping or taking back-orders.

Aim for a forecast that is more accurate to save money on inventory, carrying cost, and additional investments. Demand Forecast Accuracy comes into play after the sale gets over. You can check what is your data of forecast accuracy till last month. If you are going well and almost all the forecasts are accurate, then it's a good sign for the sale season. But if you are finding a lot of Bias in Historical forecasts, then you need to identify them and correct them because you can't take the risk of losing on a huge revenue because of small errors.

Calculate Demand Forecasting accuracy in three different three ways and ensure that your inventory planning is accurate. The three different ways are -

1. (Mean Absolute Deviation) MAD = ABS (Actual –Forecast)

2. Mean Absolute Percent Error (MAPE) = 100 * (ABS (Actual – Forecast)/Actual)

3. Identify the Bias = Historical Forecast Units (Two months frozen) - Actual Demand Units

There are chances that in the case of the first two methods, the overall error might show zero because the positive errors and negative errors cancel out each other.

However, you need to report errors to your higher management because showing zero error can be a troublesome situation when they can see problems with the revenue. So, to calculate those errors, you can use the following formulas.

Equally weighted forecast error (or simple average) = AVERAGE(MAPE of product 1, MAPE of product -2)

Revenue-weighted forecast error ={(Revenue from product-1)*(MAPE for product-1)+ (Revenue from product-2)*(MAPE for product-2)}/{(Revenue Product 1+Revenue Product 2)}

Volume weighted forecast error = {(Volume of product-1)*(MAPE for product-1)+ (Volume from product-2)*(MAPE for product-2)}/{(Volume Product 1+Volume Product 2)}

The most accurate way to find the error is the Volume-Weighted forecast error because here you can see the error in terms of volume of products, which is best for inventory management.

Identifying the Bias in the forecast is a unique way to correct the forecast errors and improve forecast accuracy. Bias can be positive if the historical forecast units are greater than actual demand, and it will be negative if the forecast is less than the actual demand.

Also, to quantify Bias you can calculate Tracking signal i.e. = (Actual-forecast)/ABS(Actual-forecast)}

To get the overall tracking signal to evaluate the overall forecast accuracy, you need to add the numbers that you get for each period.

If your forecast history is free from bias, the addition will give you a '0' as the answer. If there are 12 periods for which you have calculated the tracking signal, then the overall tracking signal will fluctuate between +12 (over-forecast) and -12 (under-forecast). Ideally the number, in this case, should be between -4 and +4. Anything outside this range is considered out of control.

The Normalized Forecast Metric, or NFM, is another metric to determine forecast accuracy. NFM = (Forecast-Actual)/(Forecast+Actual)}

This number will be between -1 and 1, where 0 will be an ideal situation with the absence of bias.

For overall forecast bias calculation and 12 observations for a year, then the addition of the NFMs should be between +2 and -2. Greater than 2 is the over-forecast situation, and less than -2 is under-forecast.

You can also take this year's general forecast data into consideration before preparing a forecast for yourself.

For example, global eCommerce sales are expected to grow 16%, in 2020, which is a better growth from 2019’'s 14.1% with an increase of 19%. The revenue is projected to be around $4.2 trillion.

Minimize Cycle Count errors. False numbers can often hamper your business, and errors in cycle counts can leave you helpless on the most anticipated sale day. Cycle count is mostly done once in a week or 15 days to validate and update the inventory information on your spreadsheet or inventory management software. To plan your inventory, it will be a wise option and to carry out the count and see to it that there are very fewer errors committed.

Cycle the products for the sales first, i.e. active cycle count and check whether there is any location or SKU velocity mismatch.

With exact numbers on hand, marketing, pricing, promotion, and product listing will become a cakewalk for you.

Check the inventory. Identify the unfulfillable inventory to ensure that you don't count that stock is available to sell and end up putting an out of stock message before you can cash in on the hype completely. Unfulfillable inventory is the damaged products or customer returned damaged products that can't be sold.

Replenishing the unfulfillable products with fulfillable stocks is important to save on inventory holding costs and generate more revenue during the festive season.

Also, if you have received faulty products from suppliers, you can replace those products according to the type of agreement you have with them.
Aim for a high inventory turnover ratio. This would mean that you are selling your inventory efficiently and restocking it efficiently as well.

Inventory Turnover ratio = { CostofGoodsSold/AverageInventory}

For this, you need to stock sensibly and be on the thin line between overstocking and under-stocking

Ideal inventory turnover ratio is considered to be in between 4-6

Increased inventory turnover ratio is directly proportional to the bottom line(the actual profit you earn), i.e. { Total Revenue-Total Expenses}.

Be clear about the suppliers and your supply chain functioning. Only select those who supply quality products in the shortest time duration.

Timely supply will allow you to take back-orders because you will be confident about the delivery time.

Maintain a smooth supply chain and distribute it among your inventory flawlessly.

A good supply chain management software with a centralized inventory management system would help you to build a strong, proactive and efficient supply chain system so that you never go out of stock.

Try to increase the number of products shipped on the same day percentage to meet customer desires. According to Fraud prevention company Trustev, 56% of people aged between 18-34 years want their retailer to ship the product on the same day, while 64% of Millennials are more prone to buy from the online portals that promise same-day delivery.

So, if you want to capitalize and earn big-time on the upcoming holiday season, it's better you increase the same-day product shipping percentage.

To be able to ship the products on the same day, you should manage your inventory quickly and use automated techniques to manage your inventory, orders, and shipments.

Work on your perfect order percentage. Perfect order percentage is = percent of orders delivered on time) *(percent of orders complete) *(percent of orders damage free) *(percent of orders with accurate documentation) *100.

Perfect order percentage gauges the effectiveness of inventory operations in delivering damage free, complete, and accurate products on time with correct documentation.

Keeping this KPI at the highest level is the best thing you can do this sale season to ensure that your consumers are satisfied and would recommend you for the entire end of year sale season.

A 3% increase in perfect order percentage equals a 1% increase in profit margin. If you have maintained or achieved this before the sale, then you are more likely to be one of the most recommended brands among your consumers.

Track the exactness of order fulfillment according to your customer's requirements. This is called the fill rate percentage. Operational accuracy and automation have to play a big role in this because a 100% fill rate is what everybody aims at. 98% and above fill rate percentage is considered to be above par, and you should aim to achieve that.

Control and improve the order pick-pack-ship accuracy. This is where the performance of actual inventory management and operational performances are scanned on the ground.

Order pick involves going to the particular place where the order is kept and then packing and shipping it. Do this by displaying the employee throughout levels and displaying the accuracy and picking rate on the screen to motivate the employees.

Encourage the staff to achieve 100% accuracy by rewarding and appreciation.

Weighing every order with a software verification system will decrease the errors while calculating the percentage of orders quickly. This will give your checkers & QC staff.

To minimize the mismatch of documentation, you can use an automated document printer and inserter system. These types of systems provide a double bar code verification and ensure that the right document is going into the designated order.

Obviously, you want this process's accuracy to be the maximum because if this goes wrong, fill rate, perfect order percentage, and most of the other KPIs will also be affected.

There are a lot more things than this that you need to work and keep track of to ace the sales race in any holiday bonanza sale to make sure your holidays are also joyful and productive.

Always stay ahead in the game by being in tandem with the changing trends of the eCommerce industry. AI automation is used by almost each and every business in today’s so it's high time you also use it in your backend process like inventory, purchase, return, order and shipping management.

You should opt for an “omnisoftware” software that bridges all the gaps between the departments like inventory, purchase, supply chain, order, shipping, return, analysis and reporting by integrating everything into one centralized portal.

Picture by - Orderhive inventory management software

This type of portal will help you to prepare for any holiday sales like Cyber Monday which has the most number of orders in a single day. Just integrate it with your Shopify portal, all the changes will automatically reflect in orderhive and Shopify whenever an order is placed, gets shipped, delivered, or returned.

You will know in and out of your inventory and what you need to do regarding each product. How much you have to order or what you don't need to order. In short, all of the above-listed inventory preparations can be done by logging in to one portal.

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Devendra Gupta

Content Marketing expert at Ordehive.  Loves to laugh. While his talks don't usually make sense, his write-ups - stories, blogs, and poems do educate, inspire and engage the audience.

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