Manufacturing Inventory Management: How Much Inventory Do You Need?

by Cindy Glass
Manufacturing - Jul 23 2014 - 5 min read
manufacturing_inventory_management

Every product startup’s experience with what scale means will be somewhat unique. Scaling up for some might be transitioning from making a few to making many with a more automated process; for others, it might be the leap from prototype to manufactured production.

In our case, we were making a low-cost, high-volume product that lent itself to offshoring (or so we thought). Those supply-chain dynamics are very different from a high-cost, locally made item. However, similar themes run through both models.

1. How Much Do You Have to Order? This question gets answered pretty quickly when your factory partner sends the quote. But quick is relative. We’d been working on designs for months and spent more months finding a factory partner and hashing through samples ahead of getting a firm quote. The better places often won’t return your calls or emails without a formal introduction or your demonstrated excellence in that field. If you don’t have manufacturing experience, this process can be shocking.

You will get a minimum order quantity and a price quote that translates to your initial investment in inventory. If you haven’t presold your inventory (that is, taken deposits) into well-understood distribution channels, this number leads to the next question.

2. How Many Can You Sell, to Whom, and How Fast? You need to bridge your initial investment to your sales outlets. You need to have a very good sense of who your outlets are, how you will sell to them, how much they will buy, and how often.

In my case, my company ended up in the worst of both worlds. We quickly discovered that our products were best suited to a brick-and-mortar, boutique-y retail environment. Customers responded best when our products caught their eye with colorful packaging enclosing a funny item they’d never seen before. We were a $10 vacation, an impulse buy.

The immediate financial impact was that we were cordoned into wholesale channels, cutting our profits in half relative to sales directly to consumers. We also needed to sell to many small stores placing small orders. We found ourselves in the unfortunate bucket of being a low-cost, high-volume manufactured product that was best suited for a low-volume, low average order retail boutique.

This mismatch is expensive. It usually means high inventory carrying costs while you chase down a lot of little customers and invest resources into getting—and keeping—their relatively small orders. The inverse relationship impacts cash flow and energy level significantly, as well as your ability to feed yourself. Long term, this kind of business will most likely be a hobby, not something that sustains you, absent significant investment or luck.

product manufacturing

However, change is afoot for product startups, especially those that think long and hard about their value proposition and inventory planning as they scale. Small manufacturers have more and more opportunities to get started and thrive. (And, I argue that the more value-added, the more niche, the tighter you control your production, and the more specialized your sales outlet, the better your chances are not only for survival, but also to build a sustainable, quality company.)

Inc. Magazine recently featured Mark Dwight, founder of Rickshaw Bags in San Francisco. Rickshaw is the ultimate lesson in bridging your inventory risk to your distribution risk: Every bag is made to order. No inventory risk and no channel risk. And Rickshaw is able to support more than 20 employees in a city that, fully burdened, makes his labor rate 20 times that of workers in China and 100 times that in Bangladesh. His manufacturing facility, which doubles as an open retail space, is open to visitors and has become an important marketing tool.

Dwight says, “By making products to order, we can offer a portfolio of bags designed specifically for our own lean manufacturing process. We don’t maintain a finished-goods inventory, and our materials are delivered just in time. We keep our supply chain as short as possible, purchasing most materials from American manufacturers and working with local subcontractors who specialize in the few things we don’t do ourselves. We also focus on direct sales, as opposed to wholesale, to improve profit margins and support higher costs.”

And, organizations like TechShop—a micro-scale manufacturing mecca for product startups—are also enabling entrepreneurs to take incremental steps that preserve capital, allow for design iterations by using digital manufacturing methods, and scale their businesses in a way that enables sustainable growth and investment.

Popular Mechanics highlights lessons learned by entrepreneurs in a brave new world for manufacturing. Chris Anderson, founder of 3D Robotics, distinguishes old notions of scale compared to today’s. He says, “With older, analog methods such as injection molding, you get great economies of scale…But the downside is that once you’ve made a part, you don’t dare change the design because it’s expensive. With digital manufacturing tools, you can change the design every day.”

product manufacturing

These examples obviously highlight local production of high-value items, but if your supply chain takes place offshore, scaling up can managed well. Consider Sparse, a startup committed to beautiful design and safer urban mobility. Colin Owen, founder and CEO, shared his advice.

He said, “We used every fancy prototyping technology, investigated multiple production scenarios, and ultimately landed our production with great manufacturing partners near Hong Kong… utilizing ‘traditional manufacturing’ for production [was] an ordeal to set up, but yields quality, repeatable parts thereafter. The decision to move at this scale of production required that we grow a global sales and fulfillment network. That wasn’t exactly an ambition for a first our product…but it’s certainly an interesting, if occasionally harrowing, game.”

The takeaway from all of this? Do your best to match the inventory risk to your channel risk. It’s a lot easier, faster, and cheaper to go back to the design drawing board than it is to return a container ship to China. Take it from me.

For more manufacturing stories, check out Made in America: Why New-Shoring Is the New School of Manufacturing Trends for Small Business and Power to the People: 5 Manufacturing Trends Shaping the Future of Small Businesses.

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