Stock Equal Sales. Period! What is your out of stock rate? Please check, then read my real experience on a creative way I did to change the situation in a company.
Sales and Stock are the 2 Key S, the twin brother, but in such a different position.
Sales is always on the priority and celebrated when it is good. Stock is always frown upon when you had too much of it.
Then Sales had this girlfriend, M – Marketing. Marketing always claim that because they are good, sales increased. Both wanted more resources, budget and commission for them.
But frequently S&M (Sales & Marketing) forget, that they can be the best pair in the world, but they are nothing when stock is out. When they snatched away the resources from Stocks, they will go down eventually. People in stocks control are the unsung heroes in many companies.
Before you object, please hear me out. Please also let me CAUTION you, that below action is based on analysis of real on-site situation, detail planing and should not be duplicated without due consideration. Please even if you are inspired by this article (which I am happy), try not to apply it immediately in your business.
Often when I was invited to help on a company, the first request is always about Sales.
Boss:- Sales is getting low. The marketing and sales staff is doing a lousy job. Engaging third party marketing also didn’t give results. Do you have any cool ideas for marketing and sales??
Well, it is understandable that every business need sales to survive._
What I usually do?
Me: - I will like to talk to the Stock Management Person first, before I even want to listen to Marketing and Sales people.
Boss: - Huh… are you sure? We are having problem on sales leh? Yes, the stock management also not good, and we had a lot of non-moving stock. But I like to solve the sales issue first, to push all this non-moving stock with great marketing ideas like content marketing from you.
Me: - Please, let me discuss with the Stock Management Person without your presence first. I insist.
When I am allowed to meet with the Stock Management person in charge (Stock), he is usually nervous, and in full defensive mode.
Me: - Mr. Stock. Previously I managed a service network with 10,000 repairs per month. I know the habit of the sales. When sales is not going well, they all push the blame to us. When there are no stocks, they blamed us for not good in forecasting and management. When there are too many stocks, they blamed us for not good in forecasting and management also. Then the boss gives me a KPI to keep super crazy low level of stocks, and they want us to achieve JIT (Just In Time) lah, implement complex forecasting lah and etc. A real hard core WTF moment!
Normally, that will get a small smile from Mr. Stock, as he felt I understand him.
Me: - OK, then I will like to explain on a principle from my MBA (to give some strength la). The Pareto Principle.
A. List down all the Sales of Each SKU by it sales and calculate its percentage. A company usually had 80% of the sales which comes from 20% of the total number of SKUs or even less. Those aggressively getting new SKUs business will even have 80% of sales coming from less than 10% of the total number of SKUs only!
B. Then List down all the Stock value of Each SKU. A company in distress will have less than 20% of stock value for SKUs which generate 80% of the sales in the company.
Now if if 80% of the sales come from 20% of the overall SKUs, shouldn’t it be logical that these SKUs which generate 80% of the sales should consist of 80% of the stock value also? If not at least 50% also right? Isn't it the objective at the start is to have very low inventory of slow moving stocks and high inventory for fast moving stock?
Don't laugh. It happened. I had seen business with most of the top 10 selling products OUT OF STOCK, and the rest 80% slow moving SKUs consist 90% of the stock value.
Why? This is one of the real scenario.
1. Sales had high KPI to achieve. Normally boss will set a challenging KPI. Boss want them to increase more new SKU (encouraged by marketplaces such as Lazada). The logic is the more SKUs you have, the more sales you have. Also Boss worry about those slow moving SKUs and want them to put more effort in slow and non moving sales.
As the result 80% of the sales effort is on the 80% of the SKUs which generate 20% of the Sales!
2. Hold on. 80% of effort or more on actions which generate 20% of Sales. That will help you achieve great growth? Well if you achieve that, that is great for u. Please discontinue reading. This article is not for you.
But most won’t achieve.
3. Now if sales don’t achieve their KPI by a mile,
Sales:- (Panic Mode) Finish, no bonus and worst case get fired. Desperate.
Sales:- (A bright Idea!) Only those hot SKUs can save me now. At least something to show.
Sales:- Ok, let's do flash sales. Last minute decision also don't care. Can tell boss marketplace don’t give much time to think also. At least this month sales objective still ok!
4. These SKUs is a hit due to low price!
Sales:- Phew, I am so clever.
5. Next month sales drop even further, because these hot SKUs had a spike and all sold out! Boss:- (Angry) What are you doing this month!
Sales:- Boss, I can do sales one, but that stock management fella, useless one. Good SKUs also cannot make sure always got stock.
7. Stock fella kena scolded like hell,
Stock:- Wah like that, I need to buy more stock. What to do.
8. But when the extra stock came in after missing a month from the marketplace. Cannot Sell!!
9. Boss: - (Angry and Eyes Buldging) Why buy so many stocks ?! Who agreed to buy?
Sales, give me a strategy and focus your strength on moving this slow moving stock!
10. Stock:- (in his mind) But, But, you and sales ask me to buy one woh last time. (Stock don’t dare to say this out when Boss is furious).
11. Sales go back use 80% of its effort to work on the SKUs which generate 20% of sales, and later go cannibalize other hot SKUs that month.
So back to square one, and the vicious cycle continues. Nobody is happy, sales drop and everybody suffer.
11+. Boss:- (Desperate already) , I need to engage super Marketing agency but need money leh. Stock come here, I want you to manage your stock better. Next month budget cut more, I need this for marketing agency.
Stock open his month, no words come out. Guess what will he do?
Although this sounds like it happened in multi people business, It happens in single entrepreneur as well. In here, the entrepreneur will be overwhelmed by the different feelings. If you felt it is too dramatic, I had even face more dramatic situation before.
Ok, let’s not elaborate more on this scenario. How do I solve this if this is already a chronic situation?
I select few top SKUs which had sufficient stock to last until the next batch of stock will arrive. This is to ensure no OUT OF STOCK in between when I am executing the strategy. Then I ask Stock and Boss buy 4X of the amount and request discount from supplier. This SKUS selected.
Boss:- What if cannot sell later?
Me:- Cannot sell, fire me immediately without any compensation.
Wah where got such crazy people one? Sorry, by now, you should have known that I had some missing screw in my brain. Haha just joking. In actual, we had many ways to get capital such as meeting with supplier to extend some credit from our past cooperation.
When the stock going to arrive, I ask the sales, stop all your effort on this measly 20% sales. Execute on this 4X quantity top SKUS stock we have. Do whatever you can as we can even lower price because we had some discount from supplier, or I kept the discount secret, and throw in some sales commission for these specific SKUs.
In comparison for a total 100 SKU:
100% effort on the 20 top SKUs which generate 80% of the sales which had been selling well with good reviews, plus better price position or sales commission.
80% effort on the 80 bottom SKUs which generate 20% of the sales with previous top SKU out of stock.
What is the chances that sales will not do better? Near to zero. If I am that unlucky, so be it. haha. But I had not failed before. This breaks the vicious cycle, and sales climb tremendously without any magic Marketing trick.
Lets side track a bit,
If I ask Stock or Sales to take this action:
Mr. Stock:- (Face turn pale) Cannot! Cannot! Cannot Sell how? We had strict KPI to buy only enough base on past sales. I won't be responsible for this.
Mr. Sales:- (Face also turn pale) Siao ah. I only responsible about sales. Why do I had to take responsibility on this big risk you take?
This is HUMAN. It takes a person to understand ACCOUNTABILITY to be able to overcome this fear! Read this if you want to know more.
Back to the core. Guys. The moral of this article, in eCommerce, it is very harmful to your business when your hot selling stock is OUT OF STOCK! Lost of marks in marketplace algorithm, customer complaints, customer buy from your competitor products, like it and review 5 star and etc. If I want to write about this, it will be another article. This is a good article here
Many theories for stock management, such as Just in Time, automated stock forecast by software, and etc to minimize your stock sounds great, but in actual it is a two edges sword. You need to have sufficient knowledge, scope, neutrality and even leadership in an organization to make success a possibility. In many case, it become a roadblock which is so hard to be remove because it sounds great.
At the end, what makes a great theory fail and succeed is HUMAN, just like the Pareto Principle above.
I simplified the scenario to make it more readable. Please do not copy the above steps without due consideration which I could not explained all here in detail. Don’t flame me if you buy 4X stock, and cannot sell later. It it is human and market forces we are dealing with, not the stocks really.
If this article connect and sound familiar to you, and you are stuck in this, you know who you should call. Cheers.