Do You Have Enough Stock for Black Friday?
Despite the name, Black Friday strikes a different sort of fear in online and traditional retailers. In the United States, it’s probably the single most important day for retail shopping aside from the weeks leading up to Christmas. For most retailers, it marks the start of the shopping season where they turn a profit.
Here we’ll start by describing what exactly is meant by “Black Friday” and its effect around the world. Then we’ll cover how much is enough stock for single-day sales. How do you ensure that you have enough stock available for sale so that you don’t lose any sales? Finally, we’ll show you how to ensure sufficient stock for seasonal sales like this.
What is Black Friday?
Black Friday is the day after Thanksgiving Day in the United States. As Thanksgiving always falls on the fourth Thursday of November, Black Friday follows the next day. For many decades retail shopping and traffic are at its heaviest on the day after Thanksgiving. Some say that it’s because of a 4-day long weekend stretching from Thursday to Sunday.
Thus the name “Black Friday” stuck because it was used to describe the shoppers and cars who would jam roads leading to shopping malls and within parking lots. Another reason was that it was a day when retailers would turn from making a loss throughout the year (“in the red“) to make a profit during the holiday shopping season (“in the black”).
Black Friday Around the World
The problem with the term “Black Friday” is that black tends to suggest something negative and catastrophic. Just think of the historical Black Monday stock market crash on 29 October 1987. Thus, it’s already an uphill battle to adopt this term for retail marketing purposes around the world. And it doesn’t translate well in some languages.
In the United Kingdom, Black Friday is traditionally the last Friday before Christmas. However, it’s not a bright shopping event. It is a day where the police and emergency services respond to heavy drinking at pubs and nightspots. As a shopping day, it’s now associated with unruly customers, crowds, traffic, and assaults during shopping sales.
For Australia and New Zealand, Black Friday has had some success as an online and in-store shopping day. Australian shoppers can enjoy Black Friday deals by having purchases shipped from the United States. In New Zealand, Black Friday sees participation by major brick and mortar retailers in the country.
How Much is Enough Stock for Black Friday?
Only you can answer this question completely and truthfully. We wrote a blog post about dealing with seasonal inventory not long ago. And ensuring enough stock for Black Friday deals is part of handling seasonal stock. You want to make sure that you have enough inventory to avoid stock-outs. Otherwise, you’re going to suffer lost sales, unhappy customers, and crowd protests.
On the other hand, keeping far too much stock ties up your business cash flow. Having idle inventory lying around means a greater risk of obsolescence, theft, and damage. And there’s a good chance that you might have double-down on some goods whose trend has passed or might expire before Black Friday. You may certainly meet a surge in demand but you’ll also have excess inventory.
Since we can’t suggest an adequate stock level to suit every business, we can suggest taking a two-prong approach to creating enough stock for Black Friday. Firstly, improve your forecasts from historical sales data. The more data from past years that you have, the better your forecasts. While you’re not going to predict weather or trend changes with accuracy, you will gain insights into past purchasing behavior and sales.
Secondly, start reducing your inventory the right way. Dump slow-moving or dead stock to make way for incoming stock. Remember, the more physical stock that you’re carrying on hand means greater carrying costs ahead. And keeping unwanted stock means forgoing an opportunity to buy faster-moving inventory. Together these two things stop you from ensuring that you have enough stock on hand for major sales.
1. Improve Black Friday Sales Forecasts
We wrote an extensive blog post about inventory forecasting. This basically means holding just the right amount of inventory so that you’re not overstocked, causing holding costs and risks to rise. And, not holding too little stock so as to miss out on potential sales due to stock-outs and inventory lead time.
We suggest this is how you maintain just the right amount of inventory:
- Check how fast you sell your inventory first
- Then find your optimal reorder points
a. Calculate Your Inventory Turnover
Firstly, you’ll need to calculate your inventory turnover. This is how fast you sell your inventory and how often you need to replenish it. The faster you “turn” your inventory, the more often you need to replenish your stocks. A popular formula is:
Sales ÷ Inventory
This is measured over a period of one year. So, how do we use this inventory turnover ratio?
Unlike other indicators, a higher inventory turnover number isn’t necessarily better. In fact, a high number means that you’re not stocking enough quantity of goods. You’re facing a scenario where you’re having to replenish stock more frequently along with the requisite lead time to receive and store them.
This means lost sales as you’re experiencing a stock-out situation. For example, if you turn over an item 48 times a year, then you are selling 4 items a month. If it takes 3 weeks to replenish that stock, then you will miss about 3 sales during that period since you are selling an average of 1 item a week.
Conversely, a low inventory turnover number means that you are clearly overstocked. Let’s say that you have a turnover of 1 and that you have a quantity of 12 items in stock. Here, you’re selling an average of 1 item a month. This is clearly not desirable as your cash is tied up in slow-moving stock. And it also means that your stock may be obsolete or unpopular.
An ideal turnover is 2 to 4. Again, you need to read this number against the industry and type of goods that you are stocking up on. Fast-moving consumer goods are different from slow-moving, high-value luxury items. This turnover range matches the reordering and restocking time of an item within the sales cycle. Thus, you get new stock in just before you sell it, minimizing the quantity that you need to hold.
b. Calculate Your Optimal Reorder Point
A reorder point is the level of inventory that triggers the replenishment of stock. In other words, it’s a minimum quantity of an item held, such that, when a stock falls to this level, the item must be reordered.
If you don’t have enough stock on hand to cover your reorder lead time, you’re reordering too late. If you place an order and end up with excess stock taking up valuable warehouse space, then you reordered too early.
A common reorder point formula is:
Reorder Point = Lead Time Demand + Safety Stock
Calculate Your Lead Time Demand
Lead time demand is the total demand between now and the estimated time for the delivery after the next one if a reorder is made now to restock the inventory.
As a formula it is:
Lead Time Demand = Lead Time x Average Daily Sales
Lead time is the time it takes from the issue of a purchase order to your supplier to the time it arrives in your warehouse. In other words, it is the time it takes for new stocks to arrive.
For average daily sales, look at the average number of sales per day for each of the products that you are restocking. You can generate reports manually or with the help of inventory management software such as EMERGE App.
Remember to use data from a similar time period to calculate this average. Seasons, holidays and Black Friday sales can lead to massive spikes in demand. So you want to avoid skewing your data in favor of pumping up your average daily sales.
Calculate Your Safety Stock
Safety stock describes the buffer of extra stock that you keep to reduce the risk of stock-outs due to swings in supply and demand. Just like normal inventory, the amount of safety stock that you choose to keep can affect your business.
Too much safety stock can result in high holding costs of inventory. These include the risks of spoilage, expiry, theft or damage. On the other hand, too little safety stock can result in lost sales, long lead times, and customer turnover.
One simple formula is:
Safety Stock = 1.65 x Square Root of Lead Time Demand
This is the difference between your maximum lead time demand and your average lead time demand.
2. Reduce Your Inventory for Black Friday
We also wrote a comprehensive blog post about reducing your inventory the right way. Reducing your inventory means reducing the quantity of stock held for each product variant in your inventory. This reduces your holding costs while minimizing its impact on your sales.
Remember, inventory carrying cost is a measure of how long inventory can be held before you make a loss. Typically, carrying costs make up one-quarter to one-third of your inventory’s value. This is a large sum that your cash is tied up in!
a. Embrace Inventory Management Technology
Start by using inventory management software if you haven’t done so. Solutions such as EMERGE App use the FIFO principle and adopt the perpetual inventory system. This ensures that the first goods that you purchase are the first ones to be sold. And that your inventory records are updated and recorded in real-time.
b. Add Other Sales Channels
You could also tweak your business sales model. Traditional retailers might want to explore selling on consignment. This is where a retailer agrees to sell a product and store it in their warehouse. The supplier still owns the product. Once sold, the retailer “purchases” the product. Consignment sales are ideal for most products but you need to asses whether your goods are suitable.
Another sales channel, particularly for online retailers, is drop shipping. Much has been written about it. This is where orders for a product are fulfilled by the supplier and shipped directly to the customer. The seller holds no inventory but provides sales, marketing, and customer support services for the products. However, there is a considerable lead time in shipping products from overseas to, say, the United States.
c. Change Your Purchasing Habits
You can minimize stock on hand by analyzing your purchase orders, too. Use ABC Analysis to identify inventory that has the most impact on your overall inventory cost. Increase your purchasing frequency by maintaining your safety stock level. This means buying a lower quantity each time but much more frequently. Finally, set up inventory reorder points so that you issue purchase orders in time to replenish them.
d. Reduce Physical Levels of Stock
This is the fun part. Firstly, get rid of dead stock first. These are goods that have not seen a sale for the past 12 months. We advise that you dispose of them and move on. There’s very little you can do to turn back obsolescence or poor design. Then start to rationalize your SKU numbers. Do you really need to stock products in every possible size, color, and configuration? You may be carrying more products that you actually need.
e. Negotiate With Suppliers
Here you want a lower MOQ so that you need not purchase so much stock every time. Build a sustainable relationship with a supplier before you talk nicely to them. They’re unlikely to agree to drop the minimum order quantity if it’s your first or second order. Finally, see if they can reduce their supplier lead time. Pick another port that is closest to you.
Black Friday shouldn’t strike fear and terror in the hearts of retailers everywhere. With some planning and homework, you can tackle the busiest day in your retail calendar. Take a two-prong approach by improving your sales forecast accuracy and reducing inventory for new incoming stock. Then you’re ready to face even the most hungry customers!