A Sand Shack belt display - We have been taking preorders for these units since November 2008 for delivery in April 2009.
When you run a business that sells physical products that need to be manufactured specifically for your company, you will most likely always have a problem with inventory control. You don’t want to have too much inventory, as that ties up your cash, however, you don’t want to have too little because you won’t be able to immediately fulfill an order. So how do you plan out how much inventory you will need, and how can you lessen your risk of producing too much of a certain product and having waste because it doesn’t sell?
The answer is ‘Preorders’.
The way I operate Sand Shack is I develop samples of all my products that I plan to sell for a certain season about 8 months before any of these products will appear on store shelves. After I develop samples I make catalogs and then debut the products at tradeshows across the east coast, where I take orders for the products. I also take the samples and catalogs to all my current customers and have them place orders for the upcoming season. I also send a couple samples and a lot of catalogs out to all my sales representatives, who show the lines to their customers and take orders, which they fax back to me. I take as many orders as I possibly can before I start large-scale production of any product.
This hat is a one-of a-kind sample - but I've already taken thousands of dollars in orders for it.
So that is what I have been doing for the past four months. I have been taking orders for products that don’t exist. I currently have no inventory of Sand Shack’s spring summer 2009 lines, but I have tens of thousands of dollars of orders. This week I sent purchase orders in excess of $40k to my factories overseas to begin production on all the products (hats, belts, flip-flops, and jewelry). Although I would like to wait until I get even more orders, I need to begin production in order to begin shipping products to stores in April.
Because I will still be taking orders from stores after large-scale production begins and I will also get reorders from stores during the summer months I need to extrapolate the orders I take and produce enough product that will be on-hand for these future orders. I will produce about six times that of which I currently have orders for.
In summary, here are the five reasons preorders are important
1. They allow you to gauge the demand for your products and minimize the risk of producing something you won’t be able to sell
2. They allow you to know exactly how much money you will be collecting once you have the products made.
3. They allow you to access a loan to manufacture the product based on the dollar value of orders taken. Lenders are more comfortable lending you money if it is to manufacture product you have already sold. (however in this market any loan is difficult to get).
4. You can better plan your company’s direction 6 months in advance. Preorders show you where your company is going.
5. Retail stores need to plan what their store is carrying well before the products hit the shelves. Preorders allow you to make a bigger presence in a store.
Any questions on how to take preorders? Let’s discuss them in the comment section.
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{ 4 comments… read them below or add one }
Hey Brian,
Interesting post. I was consulting a small business last year that was suffering from inventory issues and pre-orders was one of the solutions. The tricky part will come when you will want to scale your business to the next level and hold larger levels of inventory, to meet increased demand and sales. This is when cash flow management and other complications come into play.
I wrote a post on inventory management last year that may be of some interest to you as far as how you want to deal with scaling your business and at the same time keeping tighter controls over your inventory. Hope it could be of some assistance to you.
http://www.usmansheikh.com/strategy/5-steps-to-better-inventory-management
Regards
Usman
Good article Brian. How many samples of each item do you typically order? I’m guessing you want to have a decent amount so that at trade shows you can create the illusion that you are fully stocked.
I really like how that with pre-orders, you can purchase samples, which probably do not cost very much, and then see which of those samples is most popular. That way you put very little investment into finding what your big ticket items are.
I have some questions relating to the whole process of getting your product shipped from overseas to your storage unit to the retailer. I saw that you mentioned you are writing an ebook on this process, so do not feel like you need to go into full detail right now if you do not want to. First off, what shipping service do you use to get your products from the manufacturer to you? I have been trying to research about this and it seems like the manufacturer in most cases pays to get the product to the port, and then you have to pay for the rest of the shipping. When the product arrives at your destination port, lets say Philadelphia, do you have to go pick up the product yourself or does the product get shipped to you? Or do you have the product shipped straight to the retailer? And if you get the product shipped to you, do you just UPS the product to the retailer, and who picks up that shipping cost? Sorry for asking so many questions, I am just trying to learn as much as I can. Thanks again!!!
-Adam
@Usman, thanks for the comment – I checked out your article – good pointers.
@Adam – I try to get as many samples as possible, but what I normally shoot for is 3 of each product. I use the extra samples to do exactly what you said – to show them at shows. I also send some of the samples to sales reps so that they can use them to show to customers. Check out this article I wrote for more details on sample sourcing: http://tinyurl.com/bb59lj As far as the process of shipping my products goes, yes, it will all be covered in the ebook — but just to explain it very briefly here, I have used any service from UPS and DHL to Chinese shipping companies. If I need the product quick it has to be sent by air – and if it is a large air shipment it can be sent via a discount shipping company (a lot cheaper than say DHL, UPS, or FedEx). If I don’t need the product right away and can wait a month or more, I put it on a boat and send it by sea. A forwarding company can take care of all the details in regards to shipping the product. Oh and yes, the manufacturer will pay for it to get to the port and then you will pay for it to get the rest of the way. When the product arrives at my port in the US, the forwarding company I hire clears it through customs and delivers it to wherever I need it. I don’t ship the product straight to the retailer because I need to go through the shipment and package the retailers purchase with what they ordered, and also with any other displays or signs they need. Then I just UPS the product to the retailer — and the retailer pays for the UPS shipping cost.
Don’t worry about asking so many questions..I think it is great that you are trying to learn as much as you can, and you found the right website to come to, and the right person to ask – I don’t have all the answers, but I will always try to help. I hope you get a chance to read the ebook when it comes out (maybe in March).
Cheers,
Brian
Thanks again Brian, and I’ll be looking forward to that ebook when it comes out.
-Adam