3 Online Brands Saving Millions by Cutting Back on Inventory

The last two years have been a roller coaster for online stores. The supply chain disruptions of 2021 led to many merchants struggling to get their hands on enough inventory, and then overbuying to compensate in 2022.

But now, with an economic downturn looming and the threat of reduced consumer spending increasing, stores that overstocked during the pandemic are stuck hoarding mountains of goods that they can’t shift.

A survey of 500 fashion stores including multiples and independents by forecasting software provider Inventory Planner found that 25 percent of excess stock was written off altogether last year by online merchants, with the average online store sitting on tens of thousands worth of excess inventory due to the downturn in consumer spending.

Excess Stock Can Be a Long-Term Mistake

Mountains of excess stock is a particular challenge because products can start to decrease in value after a while. Excess stock also means businesses have less room to fill their warehouses with new stock, as well as less cash to buy new items and capitalize on new trends.

As the economic crisis worsens, cutting inventory is becoming a crucial strategic move for all brands to ensure they can optimize cash flow. Here, we speak to three brands that saved hundreds of thousands or even millions — and in many cases boosted sales — simply decreasing their stock holding costs.

“It pays to be prudent when forecasting sales over periods of fast growth — otherwise you could end up with a ton of inventory that's no longer moving,” explains Mike Hodgen, co-founder of Freedom Rave Wear, a San Diego-based apparel retailer.

The team at Freedom Rave Wear use a data-led forecasting tool to model trends and predict "winners." Hodgen explains: “There’s huge value in making winning picks. If you buy the wrong items and they don’t sell, that could end up being a six-month long mistake.”

Freedom Rave Wear receives insight from its forecasting tool on which items are likely to be in demand, and then the production team uses it as a blueprint for what items should be manufactured with priority.

“We use it as a daily recipe for our production team,” notes Hodgen. “With it, we know we’ll need 24 small, high-waisted Brazilian bottoms in 30 days [for example] or we’ll lose thousands of dollars — so we make them."

Freedom Rave Wear has slimmed down its inventory considerably. Its profitability has doubled as a result.

“Our business was holding around $300,000 in inventory and then we switched to relying on forecasting recommendations to only make items in high demand," says Hodgen. “We cut our inventory levels by 66 percent. At its lowest, our inventory held around $100,000 — and at this stage our business doubled. This was because items were being made, then immediately sold rather than sitting on the shelf. We also freed up capital to invest in production, hires and additional marketing.”

Food for Thought: Why Reducing Inventory = More Cash

“In today’s environment, who wouldn’t want a million dollar cash buffer?” Those are the words of Kevin Dalaeli, president and COO at Kos, a plant-based protein and superfood company based in Santa Barbara, California.

The brand's products are sold via retailers across the U.S., including Whole Foods, Target, and Walmart, as well as on the Amazon Marketplace. However, the team at Kos predicted storms on the horizon in the e-commerce space, and acted accordingly to give the company a bigger cash flow buffer. It proactively targeted its biggest investment: inventory.

“There’s a storm raging in retail right now — nobody knows what’s going to happen; it could get better, it could get worse, so it’s vital to have some cash in reserve so you can weather whatever comes next,” Dalaeli advises.

“If your inventory has expiration dates, which ours does, the risk of excess stock is especially high," Dalaeli adds. "Many suppliers will only buy from us with an 18-month expiration date, so if we aren’t turning over our stock every six months, we’re in trouble."

Kos implemented a popular forecasting and planning tool to better identify slow-movers and more accurately forecast demand, which led to a healthier cash flow balance.

“We were able to cut out ‘days of outstanding inventory’ in half, which freed up around $1.5 million," notes Dalaeli. “Every dollar we spend in inventory counts. If you spend it on the wrong things, you tie up cash you can’t spend anywhere else. Having too much stock is as bad as having not enough.

“Say you spend $100,000 on ‘safety stock’ that then becomes obsolete and has to be binned or liquidated, then that’s $100,000 you could have spent on an employee that would have brought in $500,000. That’s a huge opportunity cost.”

Big Smiles After Removing Guesswork

Relying on any form of guesswork is risky, especially in the current market when cash is king, costs are high, supply is unpredictable, and demand is constantly fluctuating.

That’s why global oral cosmetics brand Snow, based in Phoenix, decided to overhaul its approach to demand forecasting.

“When it comes to running a $100 million e-commerce business, you really have to get planning and forecasting right to be able to balance cash flow and keep customers happy,” says Trevor Martin, vice president, operations at Snow.

“At Snow we had the classic problems of underpurchasing and then running out of stock and upsetting potential customers," Martin recalls. "At one point, we were getting a bunch of one-star reviews and customer service took a hit because the team had a huge backlog of tickets. We’ve also been at the other extreme where we’ve massively overordered and tied up too much cash in stock."

Snow is known for its transformative teeth-whitening kits endorsed by a string of A-list celebs, including Floyd Mayweather, Kris Jenner, Kim Kardashian, Ellen DeGeneres and Chris Pratt. It uses technology to reliably predict sales during unpredictable times, while avoiding stockouts and excess stock.

“These last two years have been an absolute wild ride because of the COVID swing, and then the residual financials that people had, and now a downturn,” Martin says.

“Our inventory planning technology has been phenomenal for us. It’s given us real-time certainty in a volatile marketplace. It factors in seasonality, trends, promotions and market shifts. It means we can glance at the data and instantly say, ‘OK, we need to order 100,000 of that item, not 10,000 — otherwise we’re going to run out in two months.'

“Inventory planning isn’t as simple as it used to be. I worry that a lot of e-commerce companies are going to tank this year because they don’t have the right tools, so they’ll mismanage their inventory and mess up their cash flow.”

Cash [Flow] is King

Cash flow is king — and right now it's more critical to a retailer’s survival than ever before. In order to free up precious cash, inventory overhang should be the focal point for attack.

Mark Hook is vice president, global brand, PR and communications, Inventory Planner by Sage, an inventory forecasting and planning software.