Holiday Inventory: A Small Retailer's Balancing Act

One of the biggest challenges for small retailers preparing for the holiday sales rush is anticipating demand and ordering inventory accordingly. Stores that don’t order enough of hot items risk losing business if they sell out. Retailers that order too much could be forced to discount heavily to move the product late in the season or after the holidays. This balancing act is particularly tricky for products that can’t be restocked on short notice.

As part of our ongoing look at how a handful of retailers are faring this holiday season, I asked the business owners we’re following how they prepared their inventory for this holiday season.

Einmaleins, the European lifestyle and home products shop in Olympia, Wash., ran out of certain products late in the season last year. “We probably would have done at least 20% more if we had product in,” the store’s owner, Mathias Eichler, told me. He wants to avoid that this season — but that means stretching finances to stock up before sales pick up. The business, just over two years old, is still trying to establish credit lines with suppliers and lenders that would allow it to comfortably expand inventory. Eichler writes:

As a still reasonably new store, I am trying to work with my suppliers to extend terms — not always successfully. We’ve placed some of our orders very bullishly in early April/May (imports from Europe) and [were] expecting a 40% increase over last year. Since then I don’t know if I still can manage that, but the product is in, mostly paid for and we’re hoping for the best. I am in talks with a bank (it’s late already) to get a line of credit to place my last holiday orders.

In the course of the last year, we’ve established our lines we carry better and are expecting an increase almost across the board. … So, since we were cautious last year and sold out of many of our items we’re trying not to make the same mistake. Since November started we’ve seen a bit of an uptick in sales compared to last year, which is great to see. People are already spending money. Small stuff, stocking stuffers etc. [Under] $10 items.

I’m hopeful, but money is very tight right now with many outstanding bills that will have to wait until December to be paid.

David Sasson of Overstock Art has a particular challenge. He carries 1,500 different paintings, and for best sellers he might stock 100 copies. His hand-painted replica artwork needs to be ordered from China six to 10 weeks in advance. That means that if he runs out of a painting between now and the end of December, he probably won’t be able to get more until after the holidays. Here’s Sasson’s take on managing inventory:

We started increasing our order amounts in August. We are expecting this holiday season to be much stronger then last year and therefore, are ordering quite a bit more inventory. Our focus this year has been to fine tune our inventory process which means we are ordering in smaller batches. However, during this time a year there are paintings we do not want to be out of.

When it comes to ordering frames our lead time is similar to a standard retailer. Our lead times are between two days to two weeks depending on the vendor and shipping time. We are using a simple formula to predict demand in which we stock a two months’ supply from the slower vendors and two weeks’ supply from the closer vendors. During this time, and since we’ve seen a spike in demand in the last three months, we’ve been ordering three to four months’ supply on some frames. Also, we are having problems with some frame suppliers who do not have enough inventory, so we might run out of our best selling frames.

Inventory is going to be particularly challenging this holiday season, because it’s hard for the entire supply chain to predict what the ultimate consumer demand will be. Last year, since the truly scary period of the financial crisis didn’t begin until September, a lot of suppliers and retailers had excess inventory by the time people started cutting back their spending. That resulted in deep discounts.

Now we’re more than a year into a period of slackened consumer demand. Businesses cut production to adjust. If consumers decide to spend more than businesses anticipated, stores could find themselves selling out earlier than expected. As Sasson points out, this is already beginning to happen with some of his frame suppliers.

So an open question to retailers: How is your store managing inventory differently this year compared to last year? Let us know in comments below or on Twitter.

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