The Inventory Management System in Lemonade Stand TermsNovember 7, 2018
Whether you are an ecommerce entrepreneur, a 3PL, or a brick and mortar store, you know inventory management is key. An Inventory Management System (also called Inventory Management Software) is inherently quite complex. In fact the more robust your inventory management system, the more difficult it is to fully understand. In Ernest Rutherford’s book Einstein: The Man and His Achievement, the author attributes the following quote to Einstein: “An alleged scientific discovery has no merit unless it can explained to a barmaid.” As an ex-bartender I’ll pass over the insinuation in favor of the concept.
Using the tried-and-true Lemonade Stand as an example, I will explain what an inventory management system does and how it can help your ecommerce venture.
The Lemonade Stand
As either an entrepreneurial 9-year old or a peculiar adult and you’ve decided to start a lemonade stand. You are going to buy all of your ingredients and sell each glass for $2. There is no inventory management system, so you are going to have to wing it. You decide you’ll need enough for two batches. So, you buy 4lbs of sugar, a gallon of water, and 24 lemons.
Next you decide to just make one batch of 10 glasses and save the remaining ingredients until you need them. In your inventory you have 10 glasses of lemonade, 2 pounds of sugar, half a gallon of water, and 12 lemons.
Unfortunately, the day quickly turned overcast and around 1pm it begins to rain. At the end of the day you’ve only sold 4 measly glasses of lemonade. You do not use preservatives at your roadside stand, so you throw the remaining 6 glasses out. Moreover, you remember that you are going out of town tomorrow. The lemons you purchased will spoil before your return.
Here is the situation: you spent $11 dollars on ingredients, but you only made $8. Now, you are going to have to spend more money to recover your costs.
The Inventory Management System Saves the Day
Before explaining how an Inventory Management System can help, I first want to breakdown the three words. “Inventory”, “Management”, and “System”.
Inventory is what you have in stock. Or rather, what you have available to sell. In the lemonade stand example, you are unlikely to sell a single lemon to a passerby. Even though these are ingredients, they are still count as inventory because they make up what you sell: lemonade. Inventory is what you have to sell.
The idea that an inventory management system only monitors inventory levels is a common misconception. For an inventory management system to be even remotely helpful, it needs to do a lot more. If you are in ecommerce, an inventory management system tracks everything from the supplier to the consumer. That includes inventory, costs, expiration, serial numbers, units of measure, and product variations . Plus your inventory management system tracks ecommerce returns as well. Management applies to all parts of your supply chain.
The value of an inventory management system lies in the last word. A system is a replicable process. It means that you can repeat actions and expect the same result. A system is a replicable process.
Let’s put it all together. An inventory management system is a process for managing everything you sell.
How an Inventory Management System Helps
Let’s take a step away from the ecommerce model and look back at our lemonade stand.
An inventory management system helps with forecasting. In lemonade terms, that means you look at the weather forecast and consider how it might affect your sales. Forecasting gets better with time. The more lemonade you sell, the better your forecasting gets.
Forecasting also says, “Hey, I usually only sell 8 glasses a day on weekdays, so don’t make more than that.” An inventory management system gives you information to help you spend less and make more.
Avoid Expiration Dates
Your inventory management system takes expiration dates into consideration. In fact, your inventory management system really hates expired products. It knows you will have to pour out wasted lemonade and throw away spoiled lemons. If our lemonade stand had an inventory management system, we’d know not to buy two batches of inventory. In fact, we shouldn’t even buy one batch.
Instead of spending $6 on lemons, we really only need $2 worth. Being that water and sugar don’t spoil, you don’t need to worry about expiration dates for those two items. And your inventory management system knows that too.
Avoid Stock Outs
Let’s take this the other direction. Instead of an overcast day, the day was sunny. We quickly sold out of our first batch. By 2pm we’ve sold out of our second batch. It turns out our customers are sending their friends over and there should be a big rush at 4pm. Unfortunately, we are out of inventory! We missed the opportunity to capitalize on the street credit and are losing out on a lot of money.
An inventory management system uses forecasting to let us know when we need to buy replenishments. If we have forecasting, our system prepares us for the rush and we won’t miss out on money. And we love money.
No Stagnate Inventory
Stagnate inventory occurs when an unsellable product is sitting on the shelf. Some examples of stagnate inventory are Santa Hats in February, out of style clothing, 2nd Generation iPod cases, etc. You don’t want stagnate inventory because it often costs you money for inventory to sit in a warehouse. An inventory management system once again uses forecasting to avoid this situation.
Improves Cash Flow
We borrowed $20 from our parents to start this lemonade stand and we only made $8. We have to use that $8 to buy more inventory to sell, which means we are still pinching pennies. An inventory management system keeps you operating at a profit, so you have the cash flow to continue to grow.
While an inventory management system saves us money, it also saves us time. How do you get lemons? You spend half an hour going to the store, buying product, and driving home. What about your ecommerce company? Do you spend a lot of time on the phone? Do you send a lot of emails? How reliable is your supply chain? With an inventory management system you virtually eliminate the time you spend sourcing. Just click a couple of buttons and you are ready to go.
While we are on the subject, what if the grocery store by your house runs out of healthy lemons? Do you skip the day’s work or do you go to a different grocery store? Not only can an inventory management system monitor your inventory levels, it also allows you to source from multiple suppliers. And quickly.
Reduce Storage Costs
While it is unlikely your parents charge you for storing your inventory, most 3PLs do. Sugar and water do not have an expiration date, but if you don’t have lemons then you can’t make lemonade. This means you are paying to store inventory that you can’t even sell. This is a lose, lose, lose situation. You lose on the profits. You lose the money you spend on storage. Your fulfillment company loses on the profits from shipping your goods.
Once again, an inventory management system predicts these situations in order to avoid them.
We can keep going about the value of an inventory management system, but I hope you are getting point. I’ve laid out some fairly common inventory issues and explained how an inventory management system can ease those pains. It is worth noting, however, that an inventory management system can do much more.
We did not touch on coordinating inventory across all of your ecommerce platforms. We also didn’t talk about returns and exchanges. And we didn’t discuss how to monitor hurt items. A robust inventory management system can do all of this and more. Hopefully, with this information you can continue exploring the value of an inventory management system. If you have questions or want to learn more about Shipedge’s inventory solutions you can contact us here.
Too Long, Didn’t Read
Here are your takeaways:
- An inventory management system is a process for managing everything you sell.
- An inventory management system can save you money and time while increasing your bottom line.
- It is not appropriate for a grown adult to own and operate a lemonade stand. It’s actually pretty weird.