The Point is Profit: How Much Inventory Do You Need?

Author
toddhestand

Enough, But Not Too Much: There is no right answer to this question. You should have enough inventory to cover your customer demand, but not too much that the cost of that inventory financially cripples your small business. You always want enough stock on hand so that customers can buy whatever they want, whenever they want it. If you're sold out, then you're turning away people who are primed to buy--and that's worse than having no customers at all. Presented by Kristen Ainscoe, Partner, ONO Made in the 191.

Be Ready So You Don't Have To Get Ready

You must know how much it costs to purchase materials to make ONE of each of your product. Keep track of these materials, what you are buying them for and how much they each cost. Make sure you are tracking ALL materials you need and ALL materials you may already have. For example, you may be sewing with white thread that you personally had. To really understand your cost of materials, you must find out how much that thread cost and how much of it you are using. Keep enough raw materials on hand to make items that sell out so you don't have to pay a premium for them or shipping.

Don't Forget Your Time

You must know how much time it takes you to make ONE of each of your product. First, you must account for your time in terms of a dollar amount. Second, you must understand lead time, how long it will take to make a product and fulfill an order. For example, it takes me about 8 hours to make a shoe, but the lead time is quite different. It is actually 5-7 days. This is because I use cement construction and I must allow several overnights for drying time for the cement. So I consider 8 hours at my pay rate in the cost of the shoe, but I also understand I must leave a minimum of 10 days lead time to fulfill an order. I build in 5 days to allow for problems and shipping. If I ship earlier I have a super satisfied customer. If I ship in 10 days, I've met customer expectations.

You must also understand how many items you CAN physically make at once. IFor example, I can make a full run of shoes sizes 5-11 at a time, but if I have two size 11 ordered, I need 5-7 days for each one. My production is limited by the number of shoe lasts I own in each size.

Insider Tip

I manage my inventory by opening a delivery (a specific number of pairs of shoes, within a certain delivery time frame). I open ordering from the 1st-10th of each month with the number of pairs of shoes I estimate I can make that month. I promise delivery by the 20th of the following month.

The Take Away

Managing inventory is an extremely complex topic. The best way to get started is to determine how much you want to make for the year. Divide that number by 12 months. Add monthly cost of goods and operating expenses. How much do you need to sell in order to remain profitable?

For more information, check out The Point is Profit Webinar Series for makers. Visit ONO made in the 191. Contact Anne Cecil, Founder: onomadeinthe191@gmail.com