Stocking inventory to meet demand can feel like a moving target. This article will help you avoid overshooting the mark and locking up your cash as a result.
Supply and demand is a hard dynamic to conquer in the cannabis industry. Some products are highly volatile by nature: small batch, outdoor, craft collabs, etc. Some products sell out as quickly as they’re placed on the shelves.
Faced with this challenge, retailers have a tendency to keep more stock in inventory– particularly in popular items. They also tend to compound the problem by not keeping adequate substitutes on the shelves when those popular products go out of stock.
What are the consequences of this? What is the best way to think about stocking to meet demand? Is there a better way?
Our mad data scientist Bobby Fatemi cooked us up something deep on how to consider stocking your store and maximizing your profits.
How to stock inventory in your dispensary without overshooting the mark
In this article, we explore the impact on inventory costs in relation to supply chain volatility. Bobby analyzed daily inventory levels (from 4/12/22 to 9/24/23) of over 385,000 products across 118 retail locations.
He uncovered some interesting findings! For instance, on average, Retailers:
- Carry 730 products in inventory on any given day, and 2,300 unique products over the course of a year
- Have around 500,000 units across all products in inventory on a given day
- Hold roughly $120K in cost of inventory on any given day, equating to an average of roughly $500 in costs per product in stock
- Carry products that are available to sell for 72 days of the year, while being out of stock for roughly 20% of the time
In short, products that are resupplied more than once during this period tend to go out of stock every 5 days (e.g. 20% of the days within its sales period), causing a sales disruption. This can be seen in the figure above which shows the average number of days a product has sales in the period of study, and identifies the proportion of days in and out of stock during the period.
In cannabis, we see evidence that consumer demand is much more predictable than supply. This is especially challenging in a highly competitive industry where the consumer and they’re loyalty is the key to the kingdom. To keep customers happy and avoid running out of stock of the important products, retailers tend to overshoot the amount of inventory to keep on hand while keeping more products on the shelf than optimal. Uncertainty around product availability is driving retailers to spend more and hold more inventory costs on the shelf, and this trend is not slowing down.
What does “optimized inventory” look like?
Optimized inventory ensures that a retailer can meet changing demand without incurring additional and unnecessary inventory costs. In practical terms, over a long period of time (in the case of this analysis 75 weeks), it is reasonable to expect that inventory costs should be correlated with sales trends over the same period.
Of the 118 retailers whose inventory we studied over the course of 75 weeks, 82% of these stores experience highly volatile and/or growing inventory at a rate that far exceeds any growth in sales (as you’ll see in the figures below).
Ideally, optimized inventory really means having enough inventory to meet demand, with only a minimal amount of safety stock to address unexpected spikes in demand. That way you don’t lock up too much cash on your shelves, and stay consistent with your sales growth.
How far off is your sales growth from your growing inventory?
Well, if you’re anything like the average retailer we analyzed, it’s not looking great. If you look at the graph below, you’ll see inventory levels have skyrocketed over the course of October ‘23 to ‘24 to the tune of 250% increase.
What doesn’t increase at the same pace is sales growth. Compare the above figure with the figure below and you’ll see it clearly. In other words, retailers are stocking much more inventory than they’re selling. This is a classic case of overcorrecting in response to a challenging retail environment.
This is like taking a chunk of your revenue and locking it up in a safe you can’t touch or make dividends on.
In fact, it's actually much worse than that. Products depreciate, while lost sales opportunities don't. Products also expire, get lost, more or less become less sell-able the longer they remain in stock.
What do you do about a product that is popular but unavailable? Would you have been better off overstocking this product earlier?
In short, no, not necessarily. Cannabis products are shown to be highly interchangeable. Some products are more important than others, while the majority are replaceable. The better approach is to stock substitute products that your customers would want when their favorite product is unavailable, and more so, understand what these substitutes are.
You can always ask your customers what they want in substitute, each time a product is out of stock, but that is not a very practical approach.
Analyzing the sales data from your POS, we can see what customers buy when a highly popular product is out of stock to suggest a retailer carry those products as substitutes. Happy Buyers, our inventory purchase tool, uses machine learning to easily surface inventory recommendations directly from your POS sales data.
Happy Buyers is powered by our proprietary recommendation algorithm which provides a simple recommendation as to whether a product should or should not be restocked. To provide a product restock recommendations, the Buyer’s algorithm utilizes a vast amount of sales data and considers a range of factors, including but not limited to:
- Are there recent trends in the product’s demand?
- Has the product’s supply been historically consistent?
- Is the product priced competitively?
- Does the product influence customer purchase decisions?
Happy Buyers does automatically for retailers what would be overwhelming to do without a team of data analysts. Users of Happy Buyers don’t even need to bother thinking about analyzing POS data, our system does all of it for them. This is what we mean when we say “optimize inventory.”
To test drive Happy Buyers, click here and we’ll show you around.
Stay tuned for our follow up on this article as we analyze how much money is lost on days your product is out of stock.