Category Archives: Business Strategy

Slash Obsolete Inventory with this Simple Hybrid Purchasing Strategy

Obsolete inventory, the stock of products that you’re not actively selling anymore, holds back many small businesses from future investment and growth. It ties up cash and hogs valuable warehouse space. While small businesses can certainly implement various methods of liquidating old products and move on, the best solution is to stop over-purchasing in the first place. Of course, never buying obsolete inventory is an obvious solution, but it’s a very elusive goal. Obsolete inventory has a way of sneaking into warehouses. As a cowboy would say, “how did all those sick cows wander onto my ranch – and how can I avoid them in the future?”

In order to reduce future stockpiles of obsolete inventory, you can work with your supply chain team to implement a simple hybrid purchasing and manufacturing strategy that combines small-batch validation with high-volume price discounts. It combines the power of validation and speed to market with the cost benefits of large-batch, long lead-time outsourced manufacturing. We’ll look to a calendar company to explain the hybrid strategy.

Hybrid Strategy Example: ABC Calendars

ABC Calendars sells a wide variety of unique and fashionable calendars. Each year, some of its styles do very well and sell out, but some of its styles barely sell at all. In July, ABC doesn’t know which of its styles will sell well, and in February of next year, its leftover inventory will drastically drop in value. Not too many people buy new calendars two months into a new year. In the past, ABC Calendars has moderated focus groups to forecast the winners. Based on forecasts, ABC sent out large purchase orders to its Asian vendors. These vendors produce in large batches with long lead times, but their low cost helps keep ABC’s margins high. ABC needs these margins to offset the money it loses from the styles that don’t sell. Historically, ABC has done pretty well picking winners, its right about two-thirds of the time. However, as the competitive market changes, ABC needs to do much better.

The real problem ABC Calendars is facing is that the low-cost, outsourced vendors require long lead times and high order quantities. This forces ABC to guess the winning styles before it has any real sales data. To make a good margin, ABC can’t rely on local or in-house manufacturing because it costs so much more. Nevertheless, ABC is trying a new hybrid strategy that will give it quick and valuable validation while still enjoying the lower margins that outsourced vendors offer. The following graphic and explanation show how ABC utilizes a hybrid purchasing and manufacturing strategy to reduce inventory and better calibrate which products deserve a large purchase order.

ABC defines the first step in each product’s life cycle as the prototype phase. More than just a working prototype to proof and pass around the office, this is a chance for ABC to get some initial customer feedback and validation. Even at a very high cost, this phase enables ABC to print around a hundred of each calendar design. It then places them in a few test stores to see how they sell. This first wave of customer voting with their pocketbooks will guide ABC to know which styles show promise.

Based on initial sales in the prototyping phase, ABC begins low-volume, higher-cost manufacturing. Whether ABC manufactures itself or uses a local company, it can slowly increase volume with smaller batches. It can then continue to sell to its early customers and obtain more validation. Usually the higher cost of local manufacturing erodes ABC’s profits. However, before it jumps into the investment of a large outsourced order, ABC doesn’t mind paying a higher price to gain market insight. It actually prefers giving up some margin to avoid piles of obsolete inventory later.

Now that ABC knows which styles have the most positive momentum, it’s ready to place the large orders and capitalize on the lower price from higher volumes. However, before placing goliath-sized orders, ABC plans its exit strategy for the items it’s ordering. ABC orders a substantial amount to carry it through most future demand, but not enough to sustain demand through February. Instead, ABC orders enough to satisfy around 80% of projected demand, planning to run out of inventory around mid-January. Then, when inventory starts to run low, ABC switches back to the local manufacturing option. Again, this decreases margin, but it helps guarantee its warehouse will be nearly empty when March 1 comes and demand disappears for its product.

In addition to printing calendars, any business that produces a large number of SKUs and relies on slow but cheap outsourced manufacturing can significantly benefit from this hybrid strategy. It’s certainly not a lean, one-piece flow or a built-to-order supply chain strategy, but it’s a realistic step in an effort to reduce inventory through hybrid purchasing strategic shift.

What are your thoughts? Please add your experiences or thoughts in a comment below. Additionally, please subscribe here to receive our weekly insights.

Surviving the Amazon Effect

The Amazon EffectThe Amazon Effect – a term for the change to the competitive landscape caused by the growth of Amazon.com. Jim Tompkins recently posted a podcast about this topic and how its changing the business climate. Essentially, Amazon has grown to become a competitor with nearly every company – from Walmart to Apple, Home Depot to Netflix. Jim predicts that because of Amazon’s growth, and several other tipping points, a perfect storm of bankruptcies will sweep through an unprecedented number of companies by 2014. The podcast also spends considerable time speculating on what the brick-and-mortar Amazon store will look like – a move that has many large retailers anxious as Amazon continues to expand its business models.

With Amazon competing with everyone, how can a small business endure this new wave of competition and survive the Amazon Effect? Three survival options are (1) differentiate your services to what Amazon does not yet offer, (2) leverage your business’s flexibility to innovate, or (3) join forces with Amazon and become a supplier. Above all, remaining focused on your customers will help weather any challenge.

Differentiate Your Services

“In real estate, it’s location, location, location. In business, it’s differentiate, differentiate, differentiate.” – Robert Goizueta

Obviously, in order to avoid direct competition with Amazon, your business needs to provide a product or service that is different. Though this may seem simple, the great challenge lies in staying ahead of how quickly Amazon’s portfolio is expanding. Having not yet opened a brick-and-mortar location, Amazon’s business model still relies fully on the Internet. Web hosting, software, and eBooks delivered electronically, as well as their enormous SKU count of products ordered electronically, all rely on their website and customers interacting with their system. Although their system is easy to use, that model leaves an opportunity for differentiation.

Highlight your Company’s Service

A key asset that a small business can offer is expertise and service to its customers. Although I sometimes spend hours comparing customer reviews and creating my own analysis of a product, I greatly value the honest expertise and guidance that small businesses provide. The more we become accustomed to working with computers, the more we feel refreshed with positive human interactions. Human relationship building is often absent from the Amazon experience. Therefore, customer service and human interaction can be a key to differentiating.

In addition, you may want to change how you approach your customers. Several years ago, IBM, seeing the trouble ahead for its business if it focused on hardware, switched its business model. Instead, it became an executive consulting company that helps implement its hardware and software. This value-added service satisfies a demand that a 1-Click purchase and a box full of hardware cannot.

Leverage Your Business’s Flexibility to Innovate

“The ability to learn faster than your competitors may be the only sustainable competitive advantage.” – Arie de Gues

Being a small business has an inherent strength of flexibility that most large companies wish they still had. Alignment is much easier when you can fit all your employees into one room and share your vision. More importantly, it is much easier to test and implement innovations because implementation on a smaller scale is more feasible. Once you grow as Amazon has, you cannot implement innovations as quickly and easily as a startup.

A friend of mine who recently completed a summer internship at Amazon highlighted one of its weaknesses. My friend had spent the summer working at a distribution center and proposing various process improvements. However, because of the company’s size and emphasis on short-term ROI, he was not able to implement his ideas. To be fair, I do not know any of the details or merits of his suggestions. Nevertheless, my friend did not want to work for them after the internship because of this experience. It highlights not only the lack of flexibility in operations, but also inefficiencies such as paying an MBA intern for a summer with little in return.

Instead, being able to integrate quickly the latest innovations in supply chain – or any other department – will help you withstand the waves of Amazon’s competitive presence.

Join Forces with Amazon and Become a Supplier

If you want to be incrementally better: Be competitive. If you want to be exponentially better: Be cooperative. – Author Unknown

For many businesses, the strength of Amazon is a boon rather than a burden. From my dad who sells books on Amazon’s marketplace to consumer goods manufacturers that work through Amazon as a retail channel, more people visiting the site means more potential customers. Recognizing that Amazon will be one of the main retail channels for the next few years can help you prepare your company to fit into its network.

How can you become a supplier to Amazon and other online retailers? Listing your products online is quite easy – most online sites pride themselves on large SKU counts, especially if you are the one holding the inventory. Success depends more on your ability to process orders seamlessly and drop-ship to customers. Quickly shipping to consumers will keep your supplier scorecards high and customer reviews favorable. Many 3PLs can handle these services for you, which is an excellent option if order volumes justify the expense.

Customer Focused Philosophy

The Amazon Effect is certainly a threat to many companies unprepared for the new competitive landscape. I agree with Jim Tompkins that many companies will eventual shut their doors because of the increased competition. However, Amazon’s devotion to its customers, more than their operations or business model, is what has made it so powerful. Jeff Bezos, CEO and founder of Amazon.com has said,

“Do not be competitor focused, be customer focused.”

That then is the key to surviving the Amazon effect. Recognize the increased competition, but then work on every part of your supply chain and business to serve the customer better.

What do you think? Please add your comments on how small businesses can survive the Amazon Effect.