- Managing inventory is about keeping the right products and the right amount of the right products on your shelf, at the right time.
- Vertically integrated companies must connect storefront inventory to their internal supply chain quantities and timelines
- Understanding seasonality and forecasting short- and long-term demand can dramatically improve planning and profits
This article was written in conjunction with Alyson MacMullan of Cannabis Retail Advisors. All of Alyson’s quotes are published with her express permission.
Inventory Management is part Art, part Science. The Art is knowing WHICH products to purchase, and the Science is the practice of balancing supply and demand in one, or multiple, locations. Most dispensaries have anywhere from 1,000 to 10,000 SKUs in their product catalog, so it’s no surprise that getting the right amount of the right products on the shelf is often one of the most challenging aspects of running a retail cannabis business! Thankfully, we can lean on the lessons learned and best practices from other retail industries.
The first consideration is getting the “right cannabis products” on your shelves
Retail cannabis businesses, whether it’s medical or recreational / adult-use, need to ensure that they have products that their customers want to buy. Your entire catalog of products can be analyzed using a “product matrix” to ensure you meet all the criteria within your product portfolio.
First and foremost, do you have a good balance of product categories. Industry data from BDS Analytics & Headset suggests that flower products are still popular, but consumers are increasingly looking for edibles, concentrates, vapes, topicals, tinctures, and other specialty product types. Does your store have enough product diversity to keep your customers engaged and coming back? Or, could you be over-assorted and wasting money on items that don’t move and need to ultimately be marked down?
Then, within each category, do you have a good distribution of product prices? If your customers want $20 edible options, but all your edibles are $30 – $60 dollars, you may be losing out on revenue because you don’t have the price points that your customers are looking for.
Here is an example of a retail price product matrix in action:
In this example, we took the retail sticker price – what your customer would see – and mapped the number of distinct SKUs currently available for purchase within each product category. If you notice any big outliers (such as mid-tier concentrates and lower-tiered edibles, marked in bold) that’s worth looking into. You may consider doing this same analysis with historical sales of the last 90 days to see where your customers are currently buying. Be aware: there may be a selection bias because customers can only buy what you put on the shelf, so if you only give them lower- or higher-priced products, they will skew in that direction.
You may consider a similar exercise with checking brand name vs. non-brand name products because we also see in industry data that customers are increasingly looking for the brands they’ve come to know and love. This is another key component of stocking products that customers expect to see (or they’ll go to the shop down the street).
Although the first consideration is always stocking products that customers want, you can’t run a successful business if you aren’t making money on those products. So another absolutely key consideration is understanding your gross margins.
Here is an example of a gross margin product matrix in action:
After incorporating overhead costs like rent and payroll, it’s hard to make a true profit on any product with a gross margin less than 45%. It’s OK to have a few loss leaders to get customers in the door, just as long as there are many more products that have higher margin that they can add to their cart. If you’re worried about doing this analysis by hand, we have a Store Dashboard data tool that will help track and manage all your product margins in one place.
In short, stocking “the right products” is a combination of having products that consumers want and that earn a profit for the business.
Given the “right products” the next consideration is how many units to order of any given cannabis SKU
Now that you have a product portfolio that you know your customers want and that makes you money, how much should you stock of any one product?
If you stock too little of a product, you’ll experience out of stock events which cause a loss of revenue for the company and can frustrate your first time and loyal customers. Have enough out of stock events and your customers will go somewhere else where they can get the products they’re looking for.
If you stock too much of a product, that locks up capital in inventory and can cause cash flow issues. Furthermore, having too much inventory in stock can increase the time it takes for inventory audits (more time counting the same boxes over and over again) as well as more opportunity for products to go missing without being noticed until it’s too late. In the worst case scenario, if cannabis products sit around too long and get close to expiring, you may have to discount dramatically to move stale inventory or maybe even throw it away without realizing any revenue, which negatively impacts your gross profit.
Many dispensaries are over-assorted, particularly in the edibles category. Here’s a simple exercise to do that could have a big impact on your business: Run your sales report by item for at least the prior 90 days and sort your pre-tax sales high to low. You will notice that roughly 80% of your sales are coming from around 20% of your items. As a result, it’s common to underbuy your top sellers, missing a sales opportunity, and overbuy the bottom tier items, which ties up money that could otherwise be used to buy more of what you know sells.
The sweet spot for having just enough, but not too much, inventory for any one product SKU is having enough days in stock that you could reorder on your usual timeline (and have a little buffer). As a specific example, let’s say one of your gummy products sells an average of 10 units a day. If you know that it takes 14 days for the product to restock from that gummy vendor, you may want to order 22 days worth of product, or 220 units of that gummy SKU. That way, when you go to re-order in the next week, you can be confident that you have just enough inventory to last you the 2 weeks that it’ll take to get product back on your shelf.
“It does not benefit you to carry inventory in excess of desired days of supply on hand, the time it takes to get there (lead time) and safety stock on top items,” says Alyson. “Otherwise, you are tying up money that could be used to buy top selling items, pay your operating expenses, reinvest, and save.”
If this sounds complicated, that’s because it can be tough to keep all the numbers straight! To help cannabis inventory managers with their purchase orders, we have an Inventory Management module coupled with our Inventory Buy Planner to help teams understand what products to reorder, when, and how much by using your historical data to help predict future demand.
“The Buy Planner tool has been a game changer for my client,” shares Alyson about her experience with a cannabis store in Colorado. “Not only does this tool take the guesswork out of trying to figure out what and how much to buy, it also significantly reduces time spent trying to figure all that out in the first place!”
In addition to managing the “right products,” you also need to keep track of managing the “right amount” of any one product.
Vertically integrated cannabis companies have even more data to track, analyze, and activate
Companies that are purely retail have a relatively easy time tracking vendor turnaround timelines. Essentially, they look at the difference between when they received product and when they put in the purchase order and viola! That’s your turnaround time.
Things can get exponentially more complicated for any products that your team grows or manufactures internally. Using the same example as above, if we are ordering gummies, how long does it take to manufacture, package, and ship off those gummies? If it’s the same 14 days then you’re in good shape, but if the timeline is longer or shorter then you’ll need to adjust your inventory planning accordingly.
And that assumes that you’re manufacturing the gummies because you already have the raw biomass of cannabis plant (bud, shake, or any other raw materials) already in stock. If you got one step back further in the supply chain, it can take 3-4 months from clone to ready-to-use biomass for the manufacturing process.
So if we expect to sell 100 units of gummies in the next 10 days, we may need to plan for those 100 units as early as 6 months ago! This diligent planning will ensure that you’re planting enough of the appropriate strains, that yield enough biomass at the right time to enable the right manufacturing processes to yield enough of the right products at the right time so it’s on the shelf when your customers reach for that bag of treats. Whew, that’s a mouthful! And it can be incredibly complex to connect all the pieces and make sure the operation is flowing smoothly and efficiently.
Of course we’re biased, and we believe vertically integrated companies stand to win the most by actively tracking and managing their data to help drive business decisions. In this example, our Cultivation Yield module and Grow Profit Planner would be very helpful to predictively model every step of the supply chain to ensure you have enough gummies on the shelf when you need them.
Cannabis demand sees strong seasonality by region
To make inventory management even more complex, demand for any given product will vary widely depending on the region, and customer base, of your store. In places with recreational and out-of-state sales, we know there is typically a spike in demand that’s highly correlated with tourist traffic. Even medical stores have fluctuations for different product categories between the winter and summer months.
Cannabis store and dispensary managers may consider using time series analysis for highlighting seasonality trends for each specific location. Time series analyses are useful for identifying consumer trends as they change over time, and how products vary by month and season. For example, you may see that vape and edible products are more popular in the summer months as consumers are generally more out and about and are looking for a more discreet consumption option.
Put your data to work for you in managing your cannabis inventory
We’ve seen all the different ways that understanding cannabis demand is important. It’s important to understand what your customers want, how much is optimal to order, and what kind of margins will empower your ongoing growth and success. You’ll also want to keep track of seasonal trends over time and how that impacts your decision making on the product portfolio and order quantities.
Of course, this is much easier to do when you have all your historical data and predictive forecasts as your fingertips. Regardless of how you run your reports and who builds your predictive models, using your data to master both the art and science of inventory management will empower your team to earn more profit, and stress less while you’re at it!
Do you have a clear idea of your current challenges and opportunities? Do you need help calculating your product margins or sell rates? We always love to hear from you on our contact page and are happy to give you an unbiased perspective on who will best serve your needs. If you’d like to chat about your specific business and needs, feel free to schedule a free data consultation.
We firmly believe that a rising tide lifts all boats, and if we can help you (and our data peers) succeed in this rapidly growing market, it is our honor and pleasure to do so.
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