There are two big questions everyone with an eCommerce store faces:
- How do you know when to order?
- How much should be ordered?
While there is no one-size-fits-all answer to these questions, there are metrics you can use to help you strike the right balance by using lead times and days of stock.
What is Lead Time in Inventory Management?
The lead time is how long it takes to receive your order. It begins when you place your purchase order with your supplier and ends when you receive the items into inventory at your warehouse.
Factors that Affect Inventory Lead Time
Considerations that may affect your lead time include:
Do you need samples with each production? Or is it a new product that demands a longer manufacturing time?
You may also experience difficulty here either from the sending or receiving end – or both. Allow for any delays here.
Sourcing from overseas suppliers
Does it take longer to receive items from outside your country?
This could be a problem, especially if you are using third-party logistics or FBA. The day the items arrive at the warehouse is not the same day items are received into inventory. There could also be seasonal fluctuations as shipments to warehouses increase ahead of heavy sales periods
If your supplier says your merchandise will arrive in 14 days but it actually takes 21, it could be your supplier isn’t planning for how long it takes your own warehouse to receive or shipping time.
Over time, it is recommended that you check your data to determine how long lead time is. A Good Received Note report will show the average lead time per vendor based on prior purchase orders. This data can be a good check against what the lead time ‘should’ be. If there is a significant difference between your lead time for planning and what lead time has been on prior purchase orders, then adjusting your lead time for planning can help to more accurately manage inventory.
Days of stock refers to the period of time for which you would like to have enough stock, or in other words, the stock cover. It is also your purchasing frequency. How long do you want these items to last when the order arrives?
Use safety stock to build in a buffer for supply chain problems and build it into your days of stock. If you would like stock cover to last 30 days but you want a buffer, you should set days of stock to 35-40 days to have that on hand in case there is a problem with your supplier.
How to Balance Lead Time and Days of Stock
Lead time depends entirely on your suppliers. Let’s look at three different scenarios when balancing lead time and days of stock:
Scenario 1: The lead time is more than days of stock
Scenario 1 is quite common for suppliers in North America and Europe who are sourcing from China or elsewhere in Asia. If your lead time is very long (90 days or more) and you don’t want to keep that much stock, you will always have multiple pending deliveries from each supplier. Having 90 days of lead time is common, but you need just the right amount of time to get merchandise from the supplier.
How do you set days of stock? Think about shipping costs – lots of small shipments drives up the shipping and per-unit cost, and bigger shipments drive down per-unit costs. The down side of having longer days of stock and bigger shipments is that the merchant is not as flexible or as nimble to respond to trends. You want to have items in stock, but at the same time, you want to avoid stockouts.
If your lead time is 90 days and that’s your days of stock, you only have a chance to respond to trends four times a year. If you break days of stock down to 30 days, you look at fresh data and trends every 30 days. If you have set up your store so you have a lead time of 90 days and days of stock 30 days, that means you will have 2-3 shipments in transit at all times. Each one of those is responding to trends with their store so if you are selling products that are very trendy or where tastes are fickle (such as fashion), then it might work to your advantage to consider shorter days of stock so you can be responsive. If you have evergreen items and you are confident they will continue to sell consistently, you can have longer days of stock and only order a few times per year.
Scenario 2: The lead time is equal to days of stock
This is a happy medium. Right after receiving products from a supplier, you should review your stock place another purchase order. This means fewer items in transit at any given time because as soon as you get an order in, you place another order. If you have 30 days lead time and 30 days of stock, you both order and receive items in your warehouse every 30 days. This can cut down on landed costs as shipping a larger number of units less often can be more cost effective. Be sure to calculate the total cost to source your products and take that into consideration when determining how often to order and what that will do to your cash flow.
Scenario 3: The lead time is less than days of stock
This is more common with domestic suppliers. If you purchased your stock for 90 days, you should place your next PO with that supplier in 90 days, assuming sales forecasts are correct.
You don’t have to take immediate actions once your stock is arrived and your lead time is less than the stock cover. For example, if you received products for the following 90 days and the lead time is 30 days, you have 60 days to take action – either make a PO or replace that item with something else in your eCommerce site.
Let’s say you have a 14-day lead time and you have 30 days of stock. Since days of stock is purchasing frequency, you order every 30 days. If you order on the first of the month, you will receive the merchandise mid-month. You can go another couple weeks until you get to the first of the month and order again to get at the middle of the month.
Lead time and days of stock are two metrics critical to determining how much to order and when. They are affected by many factors such as quality control, customs, and warehouses, so it is essential to keep accurate records. The more information you have, the more likely you are to have sufficient stock to avoid overstock or stockouts, which will have a positive impact on your bottom line.