As a seller of custom-made products, you often have to focus on two aspects of the business at once- manufacturing and sales. Both are equally important.
If you manufacture great products but don’t have a sales funnel, your products won’t move.
If you sell very well and lose sight of manufacturing, you may end up with no products to sell.
As someone donning multiple roles, it is good to understand the basics of inventory management and their relevance to this industry.
We start with the basic inventory calculations that apply to all products.
Then, we discuss handling inventory when customization is available, as well as the inventory of raw material and finished goods.
We also cover returns and replacements, and how they may affect your business.
Lastly, we discuss proper storage and handling until your product reaches the customer.
The Basic Calculations
If you are daunted by the math in this section, don’t be. Once you understand the reason behind these calculations, you can do them in your head!
Every product has three attributes that determine how long it takes for it to be ready for a sale.
The first is the lead time, which in this case is the time taken to manufacture a certain number of products.
The second attribute is the ‘certain number’ of products itself- in other words, the number of products you can sell in a given time period. Both these attributes work closely.
For example, if you sell 30 handmade products of type A in one week, you need to have 30 products at the beginning of each sales week. In this case, the reorder level (the minimum number of products you need to have to avoid running out of stock) is 30.
So, whenever you reach the threshold of 30 products in your inventory, you must start making more.
Likewise, since it takes a week to make 30 products, one week is your lead time.
Since there are often some fluctuations and demand and supply, you may sell forty in a week, or due to unforeseen circumstances, you may need ten days instead of a week to be ready with goods.
The stock that you store to account for these emergencies is known as safety stock.
Let us now look at how these values are calculated.
Reorder level= average daily sales*lead time
For example, if you know that your lead time is one week and that you sell 5 products each on Monday, Tuesday and Wednesday, and 10 products on each of the remaining four days, your average daily sales can be calculated as (5*3)+(10*4) divided by 7 (the total number of days in question).
This equals 55/7 or roughly 8 products in a day.
When multiplied by the lead time of 7, we get a reorder level of 56 products. So whenever you have 56 products in your inventory, you must start making more.
Now for the safety stock.
Safety stock= (max. Daily sales * max. Lead time) – (avg. daily sales * avg. lead time)
From the earlier example, if we sell 40 products in a week (instead of 30) and it takes 10 days for us to make them (as opposed to one week), the safety stock can be calculated as (40/7*10)- (30/7*7)
Note that we have divided weekly sales by seven to obtain the daily sale value.
In this case, it comes to 27 units. So we need to stack 27 units of this product in our inventory at all times to account for vagaries in sales and supply.
Remember, these numbers are not set in stone. Whenever you notice a rise in sales for a product that becomes a sustained trend, you need to recalculate these numbers.
Think Through Customization And Product Variants
As a seller of handmade products, it is probably the norm to make and sell customized accents.
For example, a customer may want a piece of blue pottery but with mirrors, which are not a part of the original model.
The greater the degree of customization, the more inventory of accessories you may need. One way to control this process and ensure that you don’t go overboard is to limit the number of customization options available.
You can make a list of three or four options for each product that is doable with little extra investment in inventory.
Ensure that these options only need material that can be put to multiple uses and does not perish.
While customization is the backbone of a good handmade product industry, limiting the options to few at a time can help you explore what your consumers want, as well as plan for inventory accordingly.
Composite Stock Inventory
As both the manufacturer and seller of finished goods, you have to keep track of not just a single product’s inventory, but the inventory of all the parts that make it up.
For example, if you sell a gold chain with beads on it, you need to maintain the inventory of the plain chains, the beads of different colors and also the finished product with beads on it.
At the outset, it may seem like handling raw material and finished goods separately are the best ways to proceed.
However, if you do this, you have no way of linking the inventory.
One day, you may run out of the finished product, only to discover that you have also run out of the raw material!
To avoid this situation, composite stock inventory can help. You handle this by linking a finished product to each raw component used to make it. The same raw material can be spread across products.
When you sell one finished item, the inventory levels are adjusted for that item.
When you reach the reorder level of the product and decide to make more, your raw material inventory is adjusted accordingly.
As a result, you can keep track of both the raw material and the finished products.
You can order them based on their individual reorder levels, but at the same time, know how the product sales affect your need for raw material.
Instead of using spreadsheets to do this, your best bet is to use an inventory management that allows you to automate purchase orders.
This way, every time you run low on raw material, a purchase order can be automatically sent out to your vendors, leaving you to focus on manufacture and sales.
Designing A Returns Policy
The best thing you can do for your handmade product business is preventing returns in the first place. Since returns happen when the product does not meet expectations, you can clearly specify all product attributes and provide high-resolution images to help customers.
If you do have to accept a return, offer them store credit instead of a full cash refund. This way, they have more reason to buy from you again.
As you will see in the next section, shipping handmade products can be quite expensive for you as a seller, because they need to be handled carefully.
If you choose to accept a return, consider who might be charged for the return shipping.
As always, have a clear, easy-to-read policy up on the site so that there is no confusion as to what the norm is. It is better to have a sound policy in place than argue about the details later.
In general, people who request customizations know that a product has been created for them specifically, and will only return if something goes very wrong, which brings us to the next section.
Storage And Handling 101
Surely, you would have given due thought to how you wish to ship a product once it is sold.
One step before that is packaging, and one step before THAT is handling.
If you do not have storage space that is clean and organized, now is the time to invest in one. It can be a shed in your backyard but organize it well.
Seal all leaky nooks and prevent damage from the elements. Have numbered shelves that correspond to the products in your inventory. Store each product separately and carefully to prevent breakage when handling.
Then, when it is time to ship the product, think through your packaging.
Will you be using bubble-wrap? Do you need paper strips inside a hollow object to prevent breakage due to pressure?
Do you need another layer of shock-absorption before you put it in a carton? Minimizing damage in transit can help you prevent returns and grumbling.
Evaluate your shipper’s capabilities.
Is your shipper known to handle fragile goods with care? How much do they charge for larger packages that weigh relatively lesser? Choose a shipper by balancing out the product safety and cost of shipping. Lastly, never underestimate the power of insurance.
Insuring your goods against transit damages can prevent you from having to spend on returns and replacements from your own pocket.
This way, you will be able to handle your inventory with the least amount of money, and without paying for every unforeseen circumstance.
Focusing on manufacturing, sales and scaling up at the same time can be daunting.
However, managing inventory through sound calculations, inventory management systems and automation can give you the confidence you need to grow your business successfully.
While you face certain challenges that are quite unique to your industry, many of them have very simple answers when it comes to inventory.
For example, you have to keep track of inventory for raw material and the finished product, and also manage the link between inventory levels of the two.
Gone are the days of using spreadsheets for inventory- as handling gets more complex, dynamic systems that update inventory automatically and without human intervention are the new norm.
Have you tried any of these tips for your business? If so, tell us how it went in the comments.
Mohammed Ali is the Founder and CEO of Primaseller—a MultiChannel Inventory Management software that also helps sellers build brand credibility by ensuring that accurate stock information is reflected across sales channels and orders are fulfilled on time. When not running a startup, Ali is often caught lapping up the latest book in fantasy fiction.