I had an excellent question today from a reader and, since I’m sure many people have the same question, I’m answering it here. The question was:
“Assuming a product is broadly retail ready on a national level, how much inventory would a new vendor need. What is an overall adequate funding ratio?”
To calculate this, you need to know four things:
1. How many units of your product would need to sell per week in one store to make the retailer enough profit to justify keeping it in stock?
Different products have different sell through rates, so find out what that should be for your category.
2. How many stores do you expect to sell?
Keep in mind large retailers will typically test a product in a limited number of stores to make sure it sells before stocking it in all stores and some products have a regional appeal and would not be stocked in every store.
3. How long does it take you to make your product?
If you manufacture it yourself locally and can have more product ready to ship in 7 days, you will need a lot less inventory than if you need to bring it in from China by the container load and there is a 90 day lead time from placing the order to getting it to your warehouse.
4. Will your product be stocked in retailer warehouses and given a “warehouse slot” or will it be a one time promotional/seasonal buy?
As for financing, once you know your inventory levels, you know how much it will cost to make that much product.
To be conservative, if it takes you 90 days to get the product to your warehouse, if your inventory turns every 60 days and then it takes 90 days to get paid by the retailer, you need to have the working capital to fund that inventory for that time.
By negotiating with your suppliers and your retailer customers, you may be able to substantially reduce the amount of financing you need, but be careful. You certainly don’t want a success at retail and then orders from retailers that you cannot fill on time because you cut it too close.