Episode 28: Inventory kills: A guide to optimal forecasting

Brian Weinstein: Welcome everybody to Sippin and Shippin. I’m your host, Brian Weinstein. We’ll be kicking it here every other Friday, quenching your thirst for an insider’s take to enhance your customer experience. So grab your drink of choice, kick back, it’s sipping and shipping time. All right, welcome everybody to another episode of Sippin and Shippin. I’m your host, Brian Weinstein, and I’m here every week with my co-host and crime, Caitlin Postel.

Caitlin Postel: Yes, that’s right. Co-hostess with the mostest. Brian, how’s your week going?

Brian Weinstein: The week is going well. It is Friday. I’ve survived.

Caitlin Postel: Barely.

Brian Weinstein: Barely, I have minimal plans for the weekend, so hopefully I will get some sleep.

Caitlin Postel: Nice.

Brian Weinstein: Yeah, it seems hard to come by. And we have our special guest this week, Jill Liliedahl from Inventory Planner. Welcome, Jill.

Jill Liliedahl: Thank you very much. Glad to join you this week.

Brian Weinstein: Really appreciate you agreeing to come on and talk a little bit about inventory. So why don’t you give us some background first on yourself?

Jill Liliedahl: Yes, so my first business was a company called Pop Art. We sold artisanal popsicles and that was my first foray into managing inventory and it happened to be frozen, perishable. A little tricky there.

Caitlin Postel: [inaudible 00:01:21] was the easy stuff.

Brian Weinstein: Yeah, yeah, exactly.

Jill Liliedahl: Starting my career with things that I swear off that I will never do again. Frozen perishable inventory, I will not manage that ever again.

Brian Weinstein: No, no.

Caitlin Postel: Now that you got that out of the way.

Jill Liliedahl: Yeah, check learned. Got it. So selling popsicles and then I took over an existing e-commerce brand selling dog supplies. And so got into dog treats, toys, collars, leashes, all of that kind of thing. And really just nerded out about the inventory management part of things. That’s not something I saw coming, but running that company really just saw how much cash it sucks up. Whether you’re doing it right or wrong, it just takes a lot of money, and if you screw it up, you’re really in a bad place. So just really was critical to making sure that that company was in a healthy place and keeping the doors open really there.

And so then while I was running that company, became a user of Inventory Planner. That was my first exposure and really became a power user, a big fan, an evangelist, years before ever joining the Inventory Planner team. So when the e-commerce company, we sold, it was acquired, started looking around at, okay, what do I want to do next? And reached out to one of the co-founders of Inventory Planner, who I knew fairly well by that point since we were early customers. And he was handling the support, the dev, the demos, everything for a while. So reached out to him and said, “Hey, do you need any help?” And fortunately he said yes. So I became the designated extrovert on the team so the devs could do their thing and I could go and talk to merchants and hang out and talk about inventory. So it’s a good situation.

Brian Weinstein: That’s awesome. That’s awesome. And it’s funny, right now with everything going on, and I will say this for the audience, any brands that are out there, anybody that’s working for a brand, this is coming from years, decades of my own experience, inventory kills. It is incredible the damage that you could do to your own organization. And I’ll go back and Jill, I think I may have shared this with you offline at some point, but I was at a conference, I want to say it was early fall of ’21, and there was a panel discussion, and one of the panelists was talking about how they were bringing in product for Spring of ’23 by Q2 of ’22 because of all the supply chain issues. And I kept thinking to myself, oh God, if this becomes a reoccurring theme, they’re in trouble. And so is the rest of the industry.

Caitlin Postel: I was just crossing my fingers. You better hope for not a trend change. Something happens quick, you’re buried to your point.

Jill Liliedahl: Right, absolutely. I remember working with a merchant selling eBikes. They have a lead time of a year, so they absolutely can’t get any inventory in less than a year. And then they were ordering for another year out from that. I mean, two years is so long in forecasting and trying to figure out what inventory you’re going to need, think about two years ago and how different the world was. Could we predict what’s happening right now? My crystal ball’s broken. I can’t do it. Oh, it makes me so nervous.

Brian Weinstein: It’s crazy. And so for us as a 3PL trying to get new facilities right now is impossible because there’s so much inventory in the US now. I do see some reports that are maybe inventory isn’t as far oversold as we think because demand is still there. But it still seems like a crazy expansion of inventory over the last two and a half, three years.

Jill Liliedahl: Totally agree. It seems like, I mean, no exaggeration, every day a new major news outlet is saying, okay, there’s overstock, there’s not room in warehouses, cash is tied up heading into the holidays so merchants can’t prep. It just seems like every day there’s a new story coming out, new stats. So I think it’s definitely top of mind right now and a big concern for a lot of merchants.

Brian Weinstein: So when you’re talking, really when you’re working with a brand, what are the number one risk that they have by carrying all this extra inventory?

Jill Liliedahl: So it all comes back to cash flow. That’s what keeps us up at night. That’s what keeps the doors open. It all comes back to cash flow. So if you’re overstocked, you’ve spent money, but you’re not getting a return on that investment in your inventory. The money is on shelves in your warehouse and that can’t pay your rent and that can’t buy more inventory and it can’t pay salaries. So you have to liquidate it in some way, just meaning that you can pay bills with it. So I think that’s the big risk is that there’s all this money tied up in inventory that can’t be used in other more productive ways. So it’s just about figuring out how do we move basically our assets around to be more productive and hopefully lean into some opportunities that are happening right now.

Brian Weinstein: Are you saying that inventory’s not like wine? It’s not getting better with age?

Jill Liliedahl: No. No, it’s not. It’s not. Oh man. Yeah, the longer it sits around, it gets dusty, it gets old. It’s last year’s style not getting better in most cases. Yeah.

Caitlin Postel: Jill, what are you seeing brands do to strategize, to really nail their forecast during these times? What we’re coming up against, I don’t want to say it because we all hear it every day and we’re going to talk it into reality, but what are you seeing from brands to plan and forecast?

Jill Liliedahl: So I think it’s important for brands to keep in mind that we need to keep an eye on what’s happening right now. So we need to be agile and think about, okay, what’s been working over the last six months, maybe year, let’s reevaluate that. Is consumer behavior over the last year the best indicator of what’s going to happen for the next quarter, six months, even a year? Maybe not. Maybe we need to look at the last few months when you’ve seen talk of, I’m going to say the word, the recession, I’m sorry. Any West Point fans, they called it the bagel. We don’t say that word we call it a bagel. But where it’s really kind of seeping into consumer consciousness and changing some of those purchasing habits. What’s the most relevant period of time? Maybe it’s the last few months. Okay, that’s one guide. Then we know hopefully for a lot of merchants, they’re seeing a spike November, December, even if they’re not selling seasonal items that are just more shoppers that time of year.

So we can take kind of a hybrid approach and say, all right, let’s use the last few months as a guide. But then we can say, do we typically see a 50% increase in November compared to the rest of the year? That kind of thing. So we take a hybrid approach of, yes, it’s seasonal, but we’re referencing the most relevant period of time, which could be the last few months. So I think that’s a smart way to approach a time that’s uncertain, but we’re using what data we have in order to make our best move forward to spend our money wisely.

Caitlin Postel: Yeah. It makes a ton of sense with so many variables and uncertainty, use that recent historical data to drive decisions.

Jill Liliedahl: Yep, definitely. Yeah, we can’t say with a hundred percent certainty, so let’s fill in as much as we can. And I think that gets you at least some of the way there to say this is going to be where we should spend to get a good return. This is kind of our priority. We don’t have all the money in the world, so let’s start spending where we’re most sure that the customers are going to want these items.

Brian Weinstein: It’s an interesting time right now because you’re coming out of the pandemic where the growth rates were so high, you’re potentially going into an economic slowdown, maybe, maybe not. I know there’s a lot of forecast that it’s going to happen. There is going to be a recession. I’ll say the R word too, but that it could be shallow, which is nice to hear. So you don’t want to get caught without inventory. But I’ve always been of the school, I’d rather not have enough inventory than too much. Would you agree with that? I mean, I know you never want to disappoint a customer, but at the same time the damage it can do.

Jill Liliedahl: I do agree. I think it’s better to make sure you have enough cash rather than overextend on that. And in terms of potentially not having some stock when the customers could want it, there are cases where let’s say it’s our core items, if we’re taking kind of an 80/20 approach, maybe just a few of our items are driving most of our profits. Those items we genuinely don’t want to be out of. So it’s not like you have to treat all of your inventory the same. Let’s say we have items that are on the longer tail of what’s contributing to our profitability. We’re fine with being out of stock sometimes, or if it’s way out on the long tail, those could be items that we even discontinue and we kind of tighten up our product catalog to say, we’re really going to focus on what’s delivering for us and not spend time, not spend resources on these other things that are really just dragging us down and maybe taking up warehouse space that we don’t have to spare right now as well.

Brian Weinstein: That makes sense. And I just think it’s so much healthier. So what are some of the ways that you talk to brands around how they can improve in their planning and what are some of those benefits I guess?

Jill Liliedahl: So with planning, the first thing, as I said earlier, is really to think about what’s the most relevant period of time so that we’re forecasting well. I think a lot of people are starting out with spreadsheets and so need a pretty straightforward way to figure out how do we forecast. It might be easiest to say what happened over the last 30 days, 90 days, and that can work for a lot of products. But think about if you’re selling something seasonal, that’s not the most relevant period of time.

We’re heading into winter. Maybe we’re stocking parkas. Let’s think about last winter, what was that ramp up? What was the demand like last winter? And that’s more relevant, relevant than looking at the data from July through October. That isn’t going to tell us much about what people are likely to want. So that’s really the key is first think about what’s most relevant.

Two, think about, especially on key items when you’re looking back at that data. And maybe it says in January we didn’t sell any parkas. Okay, that’s really strange. Why was that? Could be because we were out of stock, not because demand was zero. So digging into your data a little bit and understanding what it’s telling us and really trying to hone in on how much did we sell when it was available. That’s going to be our best guide moving forward. Because then we can say, all right, if we’re planning sufficiently for that demand, we’re not going to be out in January so we can say that’s our best guide what was happening in December and February as a better guide for that kind of thing.

I think those are two things that can really help to level up what a lot of people are starting out with in spreadsheets. That’s a great way to get into forecasting and figuring out what you want. And then thinking about relevant time period. When was I in stock and out of stock? That’ll help to take you a little bit more into that. So you’re getting some better accuracy.

Brian Weinstein: I’ve had some outerwear companies, that’s a whole other animal. I mean it’s incredible because you can do everything right and have the best plans and like you said, you can’t look back in the last three months. You have to look back at last year and then you could pare down your inventory levels and it’s a super cold winter and your sales and you sell out of everything. Or the reverse, the flip side to that, which is devastating is it’s a really warm winter, nobody buys coats, and you’re stuck with all this inventory.

Jill Liliedahl: Definitely, definitely. I think one other thing that merchants can do, and this could be as we think about heading into the holidays, it could even be if you have something that’s seasonal, have a plan for what is our forecast? What do we expect to sell? And then you can compare against that plan and that can trigger one of two actions. One, oh my gosh, it’s really cold this winter, we need to order more. What are those points where we figure out we’re about to sell out if we don’t get on top of this? So you can anticipate it. Or two, it’s a really warm winter, let’s shift strategies. Do we discount it some and get something out of it rather than holding it for a year because it’s not worth anything over the summer.

But thinking about what’s our plan to keep this moving? How’s it comparing to our forecast? Because you want to get something out of it rather than nothing. That’s definitely a mistake that I’ve made as a merchant too, is just being too precious about trying to get every last penny out of my overstock. But if nobody’s paying for it, nobody’s buying it’s not worth anything. So it is like this has got to go out the door and we can talk about some different strategies. It doesn’t always have to be discounting. But just keeping an eye on is this moving? I thought it was going to do. We need a different strategy whether reordering or figuring out how to move more out too.

Caitlin Postel: Yeah, I think it’s interesting how valuable that what behind the why could be. Why were we selling out or why didn’t we sell out? Instead of just looking at your spreadsheet and not understanding what triggered that overstock or stock out. On the opposite side, we’re talking about overstock, but what about stock outs? We touch on it a bit. As a consumer, I don’t really mind too much as long as you tell me, give me that option to let me know when it comes back into stock. Because now I’m even more excited and now I can go and get in there and if I don’t get in there in time and I didn’t check out and now it’s gone. I think that’s another side of it. What does make sense as far as those hot items that you’re okay, are you okay with selling those out? What does that look like on the other side of the coin?

Jill Liliedahl: This is a really interesting thing because I think sometimes we can be so focused on our top items that really deliver. We never want to run out of those. I’m sure you all have seen the same Facebook ads, Instagram ads, whatever it might be like this item always sells out or just back in stock, which most of the time I think is probably made up. But as a marketing tactic, okay.

Caitlin Postel: I play into it.

Jill Liliedahl: I mean I’m obviously reading the ads, so I guess that’s working. But having that scarcity mindset where we do genuinely know popular items that are hard to get and it adds to the prestige or the cache of that item of that brand that it’s so desirable. So in some cases that could be part of the brand where it’s just so exclusive or so in demand that you want to run lean on it. I think that’s a tight line to walk, but it works for some people. So just keeping in mind, especially as we think about cash flow, not over-investing in new items, there can be some instances where you want to play up. This is a hard thing to get, too.

Caitlin Postel: Yeah, just make a TikTok about it. Say that it sells out every time and then maybe that’ll drive some of your overstock. Get rid of it. You don’t have to discount it. Just create the hype.

Jill Liliedahl: Yeah, I didn’t say when it sells out maybe in two years, but it sells out.

Brian Weinstein: Right. It sells out. Exactly. Exactly. So Caitlin can go, “Oh man, I better get on getting this right now. I have to go get it before it sells out.”

Caitlin Postel: Guilty as charged.

Brian Weinstein: That’s crazy. Yeah. And Jill, it’s funny because it resonated with me when you talk about the inventory’s not getting any better, you should cut your losses and this is going way back, I’m dating myself, but I had cousins, I had family that were jobbers, especially around apparel and they were buying closeout items and reselling them and they would go to people, they would go into showrooms and they could immediately tell how the owners felt about the product and they’d walk out and I remember my cousin going, “Yeah, he thinks it’s gold so we’re not going to buy that. He’s going to never come down at his price.” But he said, “I’ll be back in six months and he’ll sell to me at a discounted price.” Because if it wasn’t selling, it’s not going to sell. And then do you really want to put time, energy, dollars into keeping it around?

Jill Liliedahl: Absolutely. Especially if you’re paying for warehouse space. Think about what it’s costing you in action is actively costing you something. In that case, whether it’s maintaining your warehouse, paying for the space, whatever it might be, it’s got to go not so much in the opportunity cost of just not having that cash to use in more productive ways.

Brian Weinstein: Right. Well I think that’s the key to this whole thing is that the blunt impact it gives to your cash flow and your ability to do more things with your business. Are there any particular tricks, anything that you suggest people consider to help improve that cash flow when it comes to inventory planning?

Jill Liliedahl: Yeah, I would say that when you’re looking at your forecasting, it’s not just, okay, what’s going to happen in my store, but we’re looking down hopefully to a SKU level, what’s going to happen with the green medium dress. We’re really dialing it in because the demand for the green ones different than the blue is different than the extra large and the large and et cetera. So really getting down into it and then it’s about prioritization. We don’t have all the cash in the world, so we need to decide where are we going to spend our limited funds, what’s the best investment? And in terms of that investment, you can think about it with two considerations.

One, how quickly are we going to get our investment back? Because maybe I have net 14, hopefully net 30 terms with my vendor. So what kind of revenue am I going to make in 14 or 30 days paying that bill? I mean we’re obviously juggling a lot more than that, but just in very simple terms, what’s the timing of getting that inventory, being able to sell it? When’s the bill due for what I paid for that? So that’s one, speed of getting my investment back.

But then what’s the amplification? Because we’re not trying to do a one for one. We’re trying to say if I spend a dollar, I want 2, 3, 5, $10 out of that. We’re trying to amplify our investment there. And so thinking about it on those two aspects of what’s going to be the most important, what’s going to drive my profit and is in demand so that people want it not two years from now. Two weeks a month. And looking at keeping our inventory fresh and keeping it moving. So I think really kind of triaging the forecast, what’s my best investment and honing in there and not worrying about the things that aren’t really driving our profitability. And I think getting pretty brutal with that, especially as we’re heading into a time of uncertainty. Just eye on the ball. What’s driving our profitability now, let’s hone in on that.

Brian Weinstein: That’s great. Yeah, I think that focus on moving things through. So one of the things that comes up and I’ll ask you because when we’re talking to brands like what’s a healthy turn, inventory turn? What do you look at as a healthy inventory turn?

Jill Liliedahl: Well I’m going to give you the most annoying answer of it depends.

Caitlin Postel: Well said.

Jill Liliedahl: You want to have me back already on this podcast. That’s so helpful. Thanks. So things that it depends on. Let’s dig into it a little bit more. One, the cash situation of the brand. So how many nights a week is it keeping you up? Or once in a while I’ve talked to brands who just have a lot of money to spend on inventory and I try to keep my game face on because I’m like, wow, you’re living in a different world than I am, but I’m happy for you. This is great. Okay, so there’s a couple people like that.

For the rest of us, thinking about how tight am I on cash, how much money do I have in the bank right now? Is it a few weeks? Is it a few months? If it’s a few weeks I’m making tinier investments in inventory because I don’t want to tie that up as much. If I have a little bit more and I can buy in bulk to get better economies of scale, then we can get into that. So you’re really weighing that kind of thing.

As we’re thinking about vendor costs, we’re also thinking about shipping. So if I fill a full container from China, great, I don’t want to ship over air or let’s max it out, let’s make sure we’re making the most of that coming over because it’s expensive to send part of a container and it’s not doubly as expensive to send a full container. There’s this kind of like a base cost and we’re adding to it the more that we’re getting into it. So thinking about those kind of things, what’s the shipping cost? What are the economies of scale there?

We’re definitely talking to more brands as they’re thinking about their cash flow and saying, I’m only holding what I absolutely have to, how quickly can I get this from my vendor? How quickly can we turn it around? Can I knock down any sort of buffer or safety stock? We are really getting tight on pulling down the value of inventory that’s sitting in our warehouse.

I’ve talked to a brand that dropped their inventory value by a million and a half dollars in six weeks by placing smaller, more frequent purchase orders so that they weren’t tying up that money for longer and they just dropped it down by about a week. So it didn’t drastically change things, but they had their operations dialed in.

We just talked to another brand that’s dropping theirs by a little over a million because they just said, we are not messing with this other stuff. It is not hanging out in our warehouse. We’re only holding what we have to. And so just really getting very focused on the inventory that’s driving profitability.

Brian Weinstein: No, that’s great too.

Caitlin Postel: How interesting. Music to our ears, right Brian?Turning the inventory quicker.

Brian Weinstein: So I think there’s a little bit of a misconception that warehouses 3PLs, like when a brand has a lot of inventory because they’re paying for all that space. But the reality is, one, it’s we can do better if we’re flowing merchandise through as a 3PL and two, we also know that the client can’t be healthy because to your point, that’s tying up cash flow that they could be using to grow their business.

Jill Liliedahl: 100% yes. This truly is a partnership because if we are helping our clients, our users to be healthier businesses, then they stick around, they grow, we grow. I mean it’s just mutually beneficial. So it’s in everybody’s interest to say these are healthy habits, here’s a best practice, cut down and try to get your stock turned up rather than tying up that inventory. Definitely.

Caitlin Postel: It’s interesting how those small tweaks can be so impactful. You throw out a number 1.5 million dropping. We’re talking some coins here.

Jill Liliedahl: That’s a bunch of money, right?

Caitlin Postel: Yeah, it sure is.

Jill Liliedahl: Yeah, definitely. I mean think about that in six weeks you have a million and a half dollars that you basically didn’t have before. I mean you had it but it couldn’t do anything. And now you can, that’s a game changer. So I get fired up about that stuff. It’s exciting when they think about, oh now we can do these things with it.

Brian Weinstein: Yeah, and that’s reduced in what? You said a week, right?

Jill Liliedahl: Yeah, exactly. They dropped from ordering monthly to every three weeks basically. And so yeah, it’s a little bit more work to place purchase orders more often, but the amount of money they’re saving, they can pay for it. It’s fine.

Brian Weinstein: Yeah, that’s crazy.

Jill Liliedahl: It’s an okay trade off. So it’s a no brainer.

Brian Weinstein: I mean these little just tweaks and discipline, right? Because definitely I’m sure takes a lot of discipline and it’s changing a mindset, atomic behaviors and getting into it, but the amount of reward that you can get out of it is incredible, especially when you’re in a position where you need to reinvest.

Jill Liliedahl: Definitely. Yeah. And like you said, it requires discipline. I mean this company could only do that because they really had their operations dialed in. They had reliable, repeatable processes. If your business is in chaos, I wouldn’t recommend diving right into that as a strategy. It has a lot of dependencies, but it worked for them and they were able to succeed that way.

Brian Weinstein: No, this is great. I really, really appreciate you coming on Jill. This has been really informative.

Jill Liliedahl: My pleasure. Thanks so much for having me.

Brian Weinstein: So Caitlin, was there anything we didn’t cover?

Caitlin Postel: No, I think we covered a lot here. A lot of gems it sounds like when it comes to inventory. If you don’t know what to do, don’t do nothing. Use your spreadsheet or your technology, whatever you’re using, whatever system for inventory. And I think that’s super helpful for brands, big and small. So thank you Jill.

Brian Weinstein: So I do have one lingering question that’s been kind of eating me up the entire podcast. What is an artisanal popsicle?

Jill Liliedahl: Thank you so much for asking. Here we are talking about inventory optimization and you want to know about popsicles?

Brian Weinstein: Yeah, exactly. It was distracting. I should have asked at the beginning.

Jill Liliedahl: So it means that it’s handmade, typically using local, seasonal ingredients and trying to get into more interesting flavors than you might encounter otherwise. So for example, strawberries with balsamic vinegar and then dip it in dark chocolate. I’m actually salivating just saying, it’s so good. That kind of thing. Just trying to make it a little more interesting for folks.

Brian Weinstein: Huh. I never even knew those existed.

Jill Liliedahl: Indeed. Yes.

Brian Weinstein: Wow.

Caitlin Postel: Just let me know when they’re available. Tell me that you’re out of stock and I’ll order a few.

Jill Liliedahl: Exactly.

Brian Weinstein: Going fast.

Jill Liliedahl: They always sell out.

Caitlin Postel: Going fast, yes. They’re melting as we speak. Yes.

Brian Weinstein: Exactly.

Caitlin Postel: Super interesting though. Sounds delicious.

Jill Liliedahl: Yeah, definitely. Definitely. Well, thank you both, I really appreciate it.

Brian Weinstein: No, it was great. Thanks, Jill. This is Jill Liliedahl from Inventory Planner joining us this week. Thanks again. Caitlin, you want to walk us out?

Caitlin Postel: Sure. Thank you, Jill, and thank you everyone for tuning in. Check us out every other week on your favorite podcast platform. We’ll see you soon. Thanks guys.

Brian Weinstein: Thank you.