A few months ago, a close friend of mine (just like several thousand other Georgians) started a CBD business. With the legalization of CBD across the nation in 2018, the industry has ballooned as new entrepreneurs try to capitalize on an enticing market opportunity. After months of planning and thousands of dollars in investment, he successfully ordered his first round of product. Exciting stuff! The only problem? He had literally no idea what his demand would look like.
In fact, not only did he lack the historical sales data necessary for determining the amount of inventory he should order and maintain, but since the entire industry is brand new, there is literally no sales data available beyond the past 12 or so months. So, to save costs and to be conservative, he only ordered a dozen of each type of product. However, thanks to interest from local veterinarians, sales of his CBD dog treats jumped quickly, and he sold out in less than a week. But because it takes 3 weeks for him to receive new inventory from his suppliers, he lost out on several known sales (and probably a few he doesn’t know about) due to supply delays.
But at this stage, how could he have known how much inventory he needed to meet this demand? The simple answer is, he couldn’t.
While this challenge is proving particularly strenuous within budding industries like CBD, virtually all startups (except for those that sell a service instead of a physical product) undergo a similar challenge.
As a startup that works almost exclusively with other startups, we know the costs of developing and storing inventory can be quite high. However, we also know that the costs of being unable to fulfill new orders and meet customer demand can be even higher.
The problem is that few startups recognize this reality up front, and instead dream of a scenario where they can’t keep up with all of the demand for their products. And while too much growth is a better issue to have than no growth at all, the challenges associated with quickly scaling inventory and fulfillment workflows can quickly become an operational nightmare.
To better understand this concept, consider the following examples:
Examples of startup growth (almost) gone bad
Sara Blakely and Spanx
Given I’m an Atlanta native, I’ll use Sara Blakely as my first example.
Today, Sara is a multibillionaire, the owner of Spanx, and one of the most successful businesswomen in the world. But 10 to 15 years ago, Sara’s life looked quite different.
Like most startups, Sara was operating Spanx out of her home in the early years. This meant that she stored inventory in her garage and shipped orders from her driveway. But as demand increased, Sara struggled heavily with fulfilling her orders. Sara’s fulfillment challenges grew so complex that she would come home to hundreds of boxes stacked on her doorstep.
While Sara couldn’t have known beforehand what her demand would look like, she quickly arrived at a juncture where continuing to function ad-hoc, without building out a more elaborate demand planning and fulfillment structure, would completely overwhelm her.
This realization is what ultimately drove Sara to shift her fulfillment model and to begin plotting her sales demand so that she could more accurately plan her inventory shipping and storage. This allowed Spanx to forecast its growth and scale operations accordingly.
John Mittel and Phocus
When John Mittel, the co-founder and president of Phocus, was in medical school, he tried to find an alternative to unhealthy energy drinks that could help him through long nights of studying and working in the hospital. Not finding an existing beverage that met his criteria, John and his co-founder, Tom O’Grady, created their own. With the introduction of his caffeinated water beverages in late 2017, John tapped into a market itching for a healthier alternative to coffee and traditional energy drinks.
As it turns out, Phocus’s early growth was hard to support. The demand Phocus experienced in its first year resulted in triple-digit month-over-month growth. And although John was overjoyed with Phocus’s success, he also recognized the risks his budding business faced. With the internal bandwidth of their six-person team stretched so thin, Phocus was ill-prepared to handle additional customers. Staff were already struggling to meet demand, and any further spike in order requests would almost surely lead to fulfillment delays and stock outages.
As fulfilling orders in-house became impossible, John ultimately recognized that if Phocus was to make it through its rapid growth phase, he needed to adjust his supply chain workflows. He also needed to begin analyzing his sales forecasts in more detail.
For these reasons, John decided to outsource his fulfillment, which freed up time to build out Phocus’s future demand projections. And just in time: with CVS recently announcing availability of Phocus products at over 800 locations, John now has an operational structure that can support Phocus’s long-term, year-over-year growth strategy.
Sales spikes can be exciting for startups (but also dangerous)
Now, for many startups, these scenarios sound like a dream come true. Why complain about fulfillment when sales are through the roof? The above stories seem more like the ideal situation, wherein an entrepreneur realizes he has a product that sells. But while this is true, there are clearly some underlying risks to consider.
The primary challenges in these circumstances is that if sales increase faster than operations can support, there will inevitably be a fallout, either in the form of missed orders and stock outages, or a breakdown of staff bandwidth. And that point is not the time to realize your business is unprepared for growth.
While the examples of Spanx and Phocus highlight companies that were able to solve their logistics dilemmas, there are countless other examples of companies that failed because of it.
Numerous cases exist where a company’s inability to fulfill orders and meet demand led to their banishment from Amazon and other e-commerce platforms, or where consistent fulfillment delays reduced customer satisfaction so drastically that sales dropped almost as fast as they had risen just a few months prior.
The bottom line here (and the ultimate point I’m trying to make) is that over time, putting all of your energy and focus into sustaining daily operations, without setting aside time to strategically analyze your business and adjust your roadmap, can ultimately be the reason your business fails in the long-run.
It’s learning how to plan ahead and then quickly scale your operations to account for growth that allows businesses to cope with heightened success, rather than being damaged by it.
Tips for staying ahead of your own growth
OK, so at this point, you (hopefully) agree that this is something your business should at least be thinking about. Of course, the issues highlighted above should not be your only focus. Closely monitoring your sales and marketing efforts (and the resulting traction) so that you’re always in tune with the shifting demand for your products is the best way to stay on top of your operational needs, and to ensure that you aren’t blindsided by sudden spikes in order requests.
With this in mind, the following tips highlight a few ways that startups can stay ahead of their growth:
- Use your marketing efforts as a determinant of future sales: For a business without any sales data but one that is putting significant investments into marketing, scaling your inventory in-line with marketing efforts is a basic but effective method of adjusting your stock to meet future sales expectations. Over time, as more historical sales data becomes available, you can transition to a more standard demand forecast.
- Understand your market’s seasonality: If you expect to experience an uptick in sales during Christmas, Valentine’s Day, the back to school period, or during some other event, plan your inventory and fulfillment needs accordingly. For some retailers, as much as 30 percent to 40 percent of sales can be derived from these seasonal periods.
- Document your sales data from day one: From the very first sale your business makes, you should keep a detailed log of sales activity, including the date of purchase, type and volume of product, e-commerce or in-person, location, etc. The more you know about your sales volumes and the preferences of your customers, the better you will become at marketing, selling and fulfilling.
- Understand what fulfillment options are available to you: It is worth mentioning that even for small businesses, there are cost-effective outsourced fulfillment options available. Of course, very few startups will be able to purchase their own warehouse or contract some massive provider to handle their fulfillment. But, there are on-demand options available that allow small businesses to store limited amounts of inventory in warehouses for marginal cost, and get orders fulfilled in 1 to 2 days. For more information about these services, check out Gartner’s latest report on this budding industry.
Although each business will use a different strategy for handling its growth, the important thing is that you do have a strategy. As an entrepreneur, you must constantly be looking one step down the road.
Being proactive instead of reactive is how you stay ahead of the game. And as demand for your products begins to increase, knowing ahead of time how to manage your storage, fulfillment and logistics needs will allow you not to be overburdened by daily operations. It will enable you to support the growth your business experiences, rather than being overwhelmed by it.