What Is Seasonal Inventory?
Seasonal inventory refers to products that sell at a higher velocity during particular times of year. Most merchants experience an influx in seasonal demand during the holiday season, and many may stock holiday-specific SKUs that they don’t sell year-round. Other merchants may experience seasonal spikes according to changes in weather, sports seasons, or secondary holidays such as Valentine’s Day or Father’s Day.
Whether seasonality is determined by shopping holidays or another factor such as weather, ecommerce merchants have a unique set of challenges around storing and fulfilling inventory to meet seasonal demands. Holiday seasonal demand has steadily increased year over year in ecommerce to the extent that final mile carriers are find themselves over capacity each year and are forced to place shipping limits on high-volume shippers.
All seasonal demand, whether related to peak season or a secondary holiday season, has traditionally forced merchants to choose between two less than ideal options: either lock into a storage and fulfillment contract that will cover peak capacity and pay for unused storage during their off-season or keep operations tight year-round and over-extend on internal resources during their busy season. However, a new model of fulfillment known as on-demand warehousing is giving seasonal merchants a much more attractive third option: pay only for the warehouse space and labor they need when they need it, allowing them to scale up operations quickly to meet seasonal demand without committing to using the same amount of resources in the off-season. This new option makes seasonal sales much more profitable for merchants by lowering operating costs year-round.
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Seasonal Demands Create Unique Challenges
Seasonal demand can often make or break a merchant’s top-line revenue for the year, but it also creates a unique set of logistics and fulfillment challenges that are hard to navigate without negatively impacting the bottom-line. While the rest of the year may be significantly slower, they need the resources in place to meet seasonal demand when it comes. Understanding the effect of year-round fulfillment and storage costs on the margin of seasonal sales will help merchants really leverage seasonal demand to grow their business.
The first impact of seasonal demand is a fluctuation in the amount of inventory storage space needed. The graph below shows an example of a merchant whose sales peak during November and December each, driving up their storage needs by more than 100% compared to their off-season in the early summer. If this merchant were to enter into a contract with a traditional 3PL based on their peak season storage needs, they would be paying for more than twice the storage space they needed for most of the rest of the year. If they entered into a contract based on their off-season needs and then tried to find a short-term seasonal contract, they would end up paying a steep premium for peak season storage, and as available warehouse space continues to decline each year, they would run the risk of not being able to find space for their seasonal inventory at all. In fact, 17% of respondents to Ware2Go’s 2021 merchant survey stated that in spite of raw materials shortages and increased lead times, they were still concerned that they may run out of warehouse space.
How do you manage season inventory?
Seasonal demand is met with a host of other challenges around warehouse space, labor, and evolving customer expectations for ecommerce shipping.
- Most Warehouses Require Year-Round Contracts & Inflexible Agreements. This represents a problem because seasonal suppliers may only achieve 5-7% of their annual sales per month between February and September but still pay for warehouse space based off of your peak demand levels.
- Inventory Space is Limited During Peak Seasons. With the rapid rise of ecommerce shipments, warehouse space is at a premium. Peak seasons like the holiday shopping season will only compound this problem. In fact, Amazon has continued to tighten down on FBA inventory limits and doesn’t appear to be going back anytime soon.
- Warehouse and Fulfillment Rates Spike with Demand. As demand for warehouse space and fulfillment services go up, so often do the prices. Merchants may be moving more inventory in their busy season but at a greater operational cost.
- Inadequate Warehouse Availability Results in Delayed Fulfillment Speeds. If warehouses are unable to cope with large scale shifts in seasonal storage and fulfillment needs, suppliers may be forced to reduce inventory or curb production, which can impact order fulfillment speeds and result in more frequent stockouts. This in turn leads to slower delivery times and lower customer satisfaction. Given that seasonal suppliers only have a few months to achieve the majority of their annual revenue, these types of obstructions can severely damage their bottom line.
- Purchasing a Warehouse is Too Expensive. While one might assume that the above obstacles could be avoided by simply purchasing a warehouse, this option is often more costly in the long run. Owning a warehouse comes with the added cost of hiring warehouse staff, paying for utilities and upkeep, and dealing with a broad range of other equipment and property management expenses. And, this still doesn’t solve the dilemma of only needing warehouse space for a few months out of the year. Given the limited need, purchasing a warehouse that must be maintained 24/7 is not a cost-effective strategy.
The question remains, in spite of these challenges, how can merchants manage seasonal inventory? The first step is through proactive supply chain planning. On a practical level, a proactive approach to supply chain planning looks like:
- Accurate Demand Forecasting: Going into periods of seasonal demand with a clear forecast according to previous years’ sales history, current industry trends, and geographic patters of demand enables merchants to take control of their profit margins and seasonal operating costs in a way that can significantly move the needle for their business.
- Distributed Inventory: Often, seasonal demand is also regional. For example, ski jackets will likely never sell as well in warmer regions as in colder ones, regardless of the time of year. When merchants stock their inventory in the geographic areas of greatest demand they are able to meet customer expectations for 1- to 2-day shipping without relying on costly solutions like next-day air.
- Offloading Slow-Moving SKUS: Slow-moving inventory can eat up profits with long-term storage costs. Seasonal merchants should consider offering deep discounts on slow-moving SKUs, bundling older inventory with new products in buy-one-get-one promotions, and eventually liquidating obsolete inventory.
- Streamlined Fulfillment: Streamlining fulfillment through a single outsourced fulfillment provider enables both aggregated and comparative views sales performance and order profile by channel and geographic market. This allows merchants to make strategic decisions around inventory allocation and marketing spend.
What kind of inventory method should be used for seasonal items?
There are five main methods for managing inventory, and any of them could be appropriate for managing seasonal inventory, depending on SKU profile, sales velocity, current business operations.
- First in First Out (FIFO): The FIFO inventory method works by using the oldest inventory (first in) to fulfill orders first (first out). The FIFO method is appropriate for perishable and highly seasonal products and can be used to increase margins on items that experience price hikes during times of high seasonal demand.
- Last in First Out (LIFO): The LIFO inventory method uses the newest inventory (last in) to fulfill orders first (first out). The LIFO method can be used to quickly recoup expenses on products acquired at a premium seasonal price, either at the raw materials level or as finished goods.
- Just in Time (JIT): The JIT inventory method is the method most commonly used by SMB’s because it requires the least intensive demand forecasting. JIT supply chains are replenished on an as needed basis. They are a high-risk supply chain management strategy and can reward merchants with increased capital on-hand, but as we’ve seen with recent supply chain disruptions, they can also leave merchants with empty shelves when seasonal demand hits.
- Economic Order Quantity (EOQ): The EOQ method determines ideal inventory levels using three metrics: customer demand, acquisition cost, and holding cost. The EOQ method can drastically cut down on inventory carry costs but requires advanced demand forecasting models supported by a lengthy sales history.
- ABC Analysis: An ABC analysis prioritizes SKUs by lumping them into three categories: A — high value products with a low contribution margin, B — mid-value products selling at a mid-range velocity, C — high velocity products with low margin. An ABC analysis helps merchants prioritize the SKUs that are ultimately driving the profitability of their business and may prompt them to reconsider their product profile entirely.
How On-Demand Warehousing Helps Meet Seasonal Demands
Without the proper warehousing and fulfillment solution, seasonal suppliers may spend a significant portion of their annual revenue paying for storage space they don’t need. However, with the arrival of on-demand warehousing and fulfillment to the logistics space, businesses are now afforded with a much more flexible solution for managing seasonal demand. Here’s how:
- Complete Storage Scalability. On-demand warehousing provides businesses with complete flexibility over the levels of inventory they maintain year-round. Warehouse space can be scaled up or down as needed, and with flexible contracts and no start-up fees, they’re a low-risk option that minimizes investment in fixed assets. Businesses pay only for the space that they use, when they are using it and rates are consistent year-round. This enables season merchants to keep overhead low during the off-season and rapidly scale up their inventory in time for the busy season without being sidelined by excessive costs or insufficient storage space.
- Real-Time Inventory Status & Restock Alerts. By combining their network of warehouses with an online technology platform, the leading on-demand solutions provide businesses with real-time insight regarding the status of inventory across each warehouse location, as well as the status of outstanding deliveries and in-process shipments.The most advanced systems will also set automated re-order points and deliver alerts when inventory levels at any location drop below a certain threshold.
- Demand Planning & Sales Forecasting. As supplier data regarding inventory turnover, seasonal demand, and customer deliveries accumulate within the system over time, businesses can leverage the on-demand solution to develop sales and demand forecasts. This allows them to effectively plot out required inventory levels over the course of the year. Ultimately, companies can use these insights to optimize the amount of inventory they maintain year-round, thereby avoiding the costs of excess storage space while also protecting against potential stock outages..
- Guaranteed 2-Day Delivery. Looking beyond inventory management, on-demand warehouses offer a distributed network of warehouses to enable nationwide 2-day delivery. Given that 54% of shoppers wait until after Black Friday/Cyber Monday to purchase holiday gifts, a nationwide 2-day delivery network can be a major competitive advantage in attracting last-minute convenience shoppers.
Flexibility is the Key to Seasonal Inventory Management
With the winter holiday season fast approaching, many seasonal suppliers are already preparing their supply chains to handle the uptick in demand. But without the appropriate warehousing and inventory management strategy, a significant portion of their revenue will be spent on unnecessary fees and overhead. With the on-demand warehousing model revolutionizing the logistics industry it’s now easier than ever to find a flexible and scalable partner to transform seasonal inventory management from a pain point to a growth lever.
To learn how Ware2Go can help your business manage seasonality, reach out to one of our logistics experts.