Download the success story below to read how SoundImports created a scalable and transferable purchasing process.
Selling ‘No’ is disastrous for your webshop. There is a good chance that customers will run away from you, and a competitor will soon be at their beck and call. Unfortunately, you cannot accurately predict consumer behaviour, so you need a safe level of stock.
With a warehouse filled to the brim, you will never have to sell ‘no’ again, but where do you get the money to buy the products? Where do you get so much warehouse space? Moreover, if you do not sell the products in the end, it is an unnecessary risk to have so much stock. As a webshop owner, it is up to you to come to the perfect decision, the perfect purchasing strategy. In other words: enough stock to be able to deliver, without buying too much.
You should be realistic and understand that the scales will never be perfectly balanced, but of course, you can strive for this. If you succeed in balancing purchase and sales as well as possible, then you have laid the foundation for a (financially) healthy company.
Step 1: Divide your products into categories
The first step towards a successful purchasing strategy is to divide your assortment into two or three categories, depending on the size of the assortment. Do you sell 50 different products? Then you can do it with two categories: category A and category B. More than 200 different products? Then use three categories: A, B and C.
Divide the products in your assortment between the different categories. The best-selling products, the runners, go into category A. The only-selling products, the soft runners, go into category C (or B for a smaller assortment). It is up to you to decide what the runners and soft runners are. As a guideline, place the 5% best-selling products in category A, the next 25% in category B and the 70% only-selling products in category C. You can look at both numbers and the contribution to total turnover. Typically the 5% best selling products often account for 70% of turnover. If you are just getting started, then first look at your sales figures and assign the top 5% of your assortment under category A.
Step 2: Determine the minimum stock per product
After dividing the hard- and soft runners over the categories, step 2 involves determining the minimum stock per product. The minimum stock per product helps you to place a new order with your suppliers on time, so you can always deliver to customers. After all, an order placed with a supplier will not be in your warehouse within five minutes. The minimum stock per product is the answer to the question: how many products do I sell in the time that my new delivery takes to arrive?
For example, the supplier of the coffee mugs you sell in your webshop has a delivery time of 7 days. You sell 3 to 10 coffee mugs per day. The minimum stock of coffee mugs in this example is 70 pieces. After all: from the moment you order new coffee mugs, it takes another seven days before the mugs are delivered. In those seven days, you will sell 70 mugs in the best-case scenario. In other words: the moment the stock of coffee mugs has reduced to 70 pieces, is the ultimate moment to order new stock. If you do not, you run the risk that you have to sell ‘no’.
When determining the minimum stock, it is smart to keep a safe margin at least for category A, the runners. After all, the risk that you will no longer sell this stock is small. In the case of the coffee mugs, a runner in your assortment, you take into account the most favourable scenario, namely: you sell 10 coffee mugs per day for seven days. For category B, for example, you could choose 9 and for category C even 8 or 7.
Step 3: Determine the order size per product
Once you know the minimum stock you need to order new products in, you can decide how much you want to buy. Given the risks and space, you want to order as often as possible and have as little stock in your warehouse as possible. That kite will certainly fly if the supplier of your products is just around the corner and delivers the order free of charge. A supplier based in China, or attractive quantity discounts, could urge you to order less often but in larger volumes. You must continuously weigh up the stock costs and order costs against each other. You are already doing pretty well if you can make a rough estimation of this, but in the next blog, we will show you how to determine it more accurately.
Step 4: Analyse and adjust
This last step is a continuous process. As soon as you have placed the order based on the first three steps, it is crucial to analyse the results continually. Are the products still in the right category? Is the minimum stock still correct? Or can I change it based on the latest sales figures? Have I estimated the order size correctly? Are you still at risk of running out of stock with a product from category C? Then it may be advisable to buy even more defensively in this category, or vice versa. In short, turn those knobs and make adjustments!
The goal of the last step is to get the scales more and more balanced. If you cannot see the woods for the trees anymore, and are not ready to use the software, then consider keeping an Excel sheet to maintain an accurate overview.