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Improve your inventory forecasting with this simple mental model
Inventory forecasting is difficult. Buy too much, and you're slowly killing your business. Buy too little, and you could have sold more.
So today I want to share my SIMPLE mental model to improve your inventory forecasting without fancy Excel sheets:
When you buy inventory, group your inventory into two categories: hero products and everything else.
Hero products
Hero products are the products you use in ads to acquire new customers. These are the products you want a lot of, so you don't have to turn off your ads because of inventory problems.
Hero products are most likely your best-sellers, but not necessarily. Good hero products are:
high-margin products, so you can profitably run ads
interesting for a large total addressable market, so you don't run out of customers to sell to after a few sales
preferably products that don't grow old or get out of fashion, so they're not as risky to stock many of
Everything else
Everything else is.. everything else. It's all the products you sell consistently, but can't successfully use in ads. Maybe they're not selling enough, or maybe they don't have high enough margins to leave room or ad spend.
You want to buy "everything else" in lower quantities that you're more certain to sell. Sell these "organically" or through cheaper channels like email.
A good rule of thumb is to buy less of "everything else" than you think you can sell. It's much better to sell less but everything than to sell more and get stuck with inventory.
Too much inventory is one of the easiest ways to kill your business without you even knowing it, especially if you don't understand how inventory behaves in your P&L and balance sheet.
If you're not careful, it's easy to think you're making a profit each year, but you're really just building up inventory on your balance sheet. At some point, you have to write it off with a giant loss that effectively kills your business.
Too simple, you think?
Sure, it's simple. And I’m definitely going to learn a lot more about inventory in the future. But I still believe this is an incredibly powerful way to think about inventory buying that can save you most of the trouble.
What do you think?
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