00:00:07 The dilemma of inventory optimization in small businesses.
00:01:02 When businesses need tools to manage and optimize inventory.
00:03:27 Electronic inventory management systems and perpetual inventory.
00:05:13 Using software to reduce mistakes and verify employee work.
00:06:39 Inventory optimization options and the risks of delegation.
00:08:00 Discussing the need for hiring a supply chain manager or using external resources.
00:09:27 Weighing the pros and cons of in-house accountants vs. full-time employees.
00:10:50 Comparing enterprise software solutions and their limitations for small businesses.
00:12:48 Lokad as a specialized inventory optimization tool.
00:15:13 Evaluating the pricing and value of inventory optimization tools for SMBs.
00:17:41 Advice for SMBs on inventory management.
00:18:47 Supply chain scientists as co-pilots for SMBs.
00:20:17 The necessity of expertise in supply chain scientists for SMBs.
00:21:31 Importance of proper tooling for supply chain scientists’ productivity.
Summary
Lokad founder, Joannes Vermorel, recently discussed the challenges of inventory management and optimization for small and medium-sized businesses (SMBs) with a turnover between $2 million and $30 million. For businesses with a turnover below $1 million, inventory optimization may not be as necessary, as owners can often visually inspect their inventory. However, for companies with turnovers between $3 million and $30 million, the amount of inventory can become too large and complex for visual inspections alone. Vermorel highlights the need for specialized tools that focus on operational decisions related to inventory optimization, and suggests SMBs find software solutions that incorporate insights about their specific business.
Extended Summary
In this interview, Kieran Chandler and Joannes Vermorel, founder of Lokad, discuss inventory optimization for small and medium-sized businesses (SMBs) with a turnover between 2 million and 30 million dollars. These companies typically sell physical goods either through manufacturing or acquiring products from suppliers, and they need to maintain inventory to meet customer demand. The challenge is to manage and optimize inventory levels to prevent excessive investment in stock and minimize costly mistakes.
For businesses with a turnover below 1 million dollars, inventory optimization may not be as necessary, as owners can often visually inspect their inventory and identify non-moving items. However, for companies with turnovers between 3 million and 30 million dollars, the amount of inventory can become too large and complex for visual inspections alone. These companies may have half a million dollars or more in inventory, which can be difficult to manage without the help of tools.
To manage and optimize inventory, SMBs first need an electronic inventory management system that can provide perpetual inventory. Perpetual inventory systems allow businesses to know their stock levels at any point in time, which is essential for tracking items and preventing losses, theft, and misplacement. Traditional inventory management involved conducting full inventory counts twice a year, which can be insufficient for maintaining proper control over the process.
Using an electronic inventory management system also helps SMBs with basic tasks such as reconciling orders and deliveries from suppliers, ensuring that the quantities received match the quantities ordered. This is a crucial step in maintaining control over the inventory process before moving on to optimization strategies.
As for forecasting stock requirements, many SMBs rely on Excel, which can be limited in its ability to handle complex inventory management tasks.
They then discussed the challenges and solutions related to inventory management and optimization for small businesses. Vermorel emphasizes the importance of trust and verification when delegating tasks to employees and the use of basic inventory management systems to monitor and prevent mistakes.
Vermorel explains that as businesses grow, the complexity of inventory management increases, and business owners often find themselves unable to manage purchasing effectively. At some point, they may need to hire a supply planner or supply chain manager to take over these tasks. Alternatively, they could engage external consultants or accountants to handle inventory management, although this may not always be cost-effective.
He highlights that enterprise software solutions may not be well-suited to small businesses, as they are designed to address the complexities that arise from having large teams, rather than optimizing inventory performance. Instead, small business owners should look for software solutions like Lokad, which can help them replicate their inventory management capabilities more efficiently.
Vermorel emphasizes the need for specialized tools that focus on operational decisions related to inventory optimization, such as what to buy, how much to buy, and choosing between different supplier options. He mentions that Lokad has developed a platform specifically tailored to address these issues, as well as other complexities and options that even small businesses might face.
He expresses his belief that while it is possible to have a single inventory management software solution that works for many verticals, this is not the case for inventory optimization. Vermorel contends that for optimization, a software solution needs to have insights about the business injected into it, rather than a one-size-fits-all approach.
The conversation then turns to the pricing of such software tools. Vermorel clarifies that most optimization tools dedicated to SMBs are relatively inexpensive, with some costing around $100 a month. He acknowledges that while the cost may not be a significant issue for multi-million-dollar businesses, the real concern is whether these software solutions deliver the value they claim to offer.
Vermorel asserts that many inventory optimization software tools do not deliver the promised performance. He believes this is because they often rely on simplistic approaches such as ABC analysis, safety stocks, service level, and time series forecasts, which he argues do not work effectively. He suggests that these tools may provide a false sense of security and that they do not perform any better than using Excel.
Kieran asks Vermorel what advice he would give to the CEO of an SMB. Vermorel suggests focusing on the key operational decisions related to inventory optimization and finding a software solution that incorporates insights about the specific business.
As the conversation progresses, Vermorel warns against falling into the trap of believing that a single piece of software can handle all aspects of supply chain optimization. He explains that certain buzzwords on a software vendor’s website, such as “safety stock,” “ABC,” “AZ service level,” or “overstock detection,” should not be seen as guarantees of a comprehensive solution. Instead, he advocates for a supply chain copilot approach, which involves hiring a supply chain scientist who can act as a trusted advisor and provide better tools than a traditional accountant.
Vermorel elaborates on the role of the supply chain scientist, saying that they can be a part-time resource who works directly with the managing director or CEO of a small-to-medium-sized business (SMB). The scientist helps to create a solution that goes beyond Excel, integrating their knowledge of the business and its specific needs. These supply chain scientists typically have a high level of expertise, often holding PhDs and backgrounds in data science.
Kieran Chandler questions whether SMBs actually need such a high level of expertise, given the expense involved. Vermorel argues that, in fact, smaller businesses face nearly all the same supply chain challenges as larger companies, and therefore require a similar level of expertise. Furthermore, he adds that limited data makes statistical analysis even more complex for smaller businesses.
Vermorel explains that Lokad has focused on creating a software platform that makes supply chain scientists more productive, allowing them to effectively serve SMBs. This approach led to the development of their own domain-specific programming language, rather than relying on Python, which Vermorel believes would have made it economically infeasible to serve SMBs. By using this specialized tooling, a supply chain scientist can efficiently dedicate a few hours a week to drive an SMB’s replenishment, rather than spending days dealing with mundane technical issues.
Full Transcript
Kieran Chandler: Today on Lokad TV, we’re going to understand this dilemma and discuss what options are available for an SMB to make the best use of their limited resources. So Joannes, perhaps we can start off by explaining a little bit more about the scope today and the size of an SMB.
Joannes Vermorel: We are talking about a company with a turnover between 2 million and probably something like 30 million dollars. This is quite a range already. We assume that these companies are selling physical goods, either manufacturing them themselves or acquiring products from suppliers. In this setup, we are really talking about the problem of deciding exactly how much inventory is needed just because things don’t teleport. You need to maintain some level of inventory, and the big challenge is making sure that the amount of money you’re investing into your stock doesn’t go completely out of the window.
Kieran Chandler: At the lower limit, when do you need to start introducing tools to manage and optimize your inventory?
Joannes Vermorel: Below 1 million dollars of turnover, there is very little you can do in terms of inventory optimization. At this level, we are basically talking about a boutique, something very small, where you can literally see all your inventory at a glance. If you’re the owner of the company and you’re very familiar with your store or small warehouse, you can do a visual inspection and have a good insight on whether there are items that are not moving. You don’t necessarily need tools; you can do it visually. Once you’re at the stage of around 3 million dollars per year, you might end up with half a million dollars and above of stuff in inventory that is just lying around. It becomes quite complex to just do a visual inspection, so you need tooling. If you don’t, you put yourself at risk of making blunt mistakes that happen to be quite expensive.
Kieran Chandler: In terms of managing the inventory, what about forecasting stock requirements? In a previous episode, we were talking about people using a lot of Excel to do that. Where does that reach its limitations?
Joannes Vermorel: First, the step is to have some kind of electronic inventory management system just to make sure that nothing gets lost, stolen, or misplaced. The traditional vision from an accounting perspective was that your accountant knew how much inventory value you had, but it was supported by doing a full inventory twice a year. We are talking about moving from inventory twice a year to perpetual inventory, where you know your stock levels at any point in time. In order to have that, you need a piece of software to do it. For SMBs, it’s important to have basic features like tracking if the quantities received from a supplier match what you’ve actually ordered. This is not yet optimization; it’s about having some degree of control over the process itself.
Kieran Chandler: You reach, I would say, let’s say probably $1,000,000 and above, you’re probably going to have a few employees, and obviously, when you have employees, potentially someone might not do such a good job. I mean, it’s not their money, it’s not their stuff anymore. So, bottom line, yes, you can trust them, but the idea is in businesses, trust but verify. So, basically, you trust them because you’ve hired them, but also you have the tools to verify that everything is going well. That’s what the software gives you.
Joannes Vermorel: Absolutely, and that’s what a basic inventory management system will give you. You can track, and you can just do random checks in your small warehouse or in your store where you say, “Okay, the system tells me I have five units in stock.” I can just pick a shelf and check if I can find those things, you know, randomized checks, and it works. And also, there are classes of very mundane mistakes, like you can end up with very mundane mistakes where the supplier has made an honest mistake, they forgot something, and then you didn’t check, and nobody checked, and so you end up paying for stuff that you didn’t receive. And again, it’s not that your supplier is trying to defraud you, it’s just that mistakes happen. And here, you basically have some tools to prevent classes of mistakes. Again, if you’ve ever dealt with inventory, it’s not exactly a super exciting job, so it’s very easy to get distracted and just make inattention mistakes. I mean, humans are not robots. It’s very hard to count inventory for eight hours straight without making any mistake at all.
Kieran Chandler: Okay, so that’s kind of the inventory management side of things. Now, if we look at the inventory optimization side, what are the options that are open to a CEO?
Joannes Vermorel: That’s interesting. I mean, as soon as someone has the power to buy stuff for your company, this person has basically access to your bank account. As a small business owner, it’s a bit of a terrifying experience to say, you know, I’ve had money, and then you’re just going to delegate the power to spend the money to a third person. So the reality is that actually, most business owners and managers delay these sorts of things as long as possible. And the reason is that it’s potentially the sort of thing that can actually kill you as a small business. You know, if you’re a two million dollar turnover business and you just delegate purchasing to an employee who mistakenly passes a fifty thousand dollar order of stuff that you don’t need, it really hurts a lot. I mean, if your company is not healthy and profitable, that can actually kill you. So because of that, business owners tend to postpone this sort of delegation of power as long as possible. But bottom line, at some point, with the growing complexity, the idea that as the owner or manager, you just spend your Fridays to do the purchasing, it doesn’t work anymore because there are just not enough hours in the week. So at some point, as your company grows, the number of hours that you need to spend on purchasing, for example, grows as well, not linearly, but quite near linearly. And because you typically don’t have any tooling or anything, that’s when you need to start hiring your first employee just for this purpose, which is going to be a supply planner, a supply chain manager, or something, you know, inventory management. You can give this person many titles, but in
Kieran Chandler: This person is someone who will come up with the Excel spreadsheet that decides exactly what your company needs to buy on every single day. And, as well as maybe having that supply chain planner in house, there’s also the option of externalizing that competency. I mean, there are plenty of consultants out there who can build you very nice spreadsheets and all that sort of thing. And how does that kind of work?
Joannes Vermorel: Indeed, that’s a setup. Obviously, as a small but growing business, you’re facing a situation where you might have questions like, do I take yet another full-time employee to take care of that, or maybe I’m going to leverage some freelance resources? Actually, it might not be a bad idea. I’ve seen many companies who, for example, just delegate this work at a certain point of time to their accountant. The accountant is not full-time; it’s not an in-house accountant, it’s just the person who has been following the company for a long time. By the way, that also explains why most of those inventory management capabilities for SMBs originated from accounting packages like QuickBooks, Sage, and Xero if we go to Australia, for example. So the accountant is a natural candidate to take over, but the problem is that it’s a lot of work. Typically, in terms of man-hours, it’s a lot more than your accountant usually does for one company. So there is very quickly a point where, you know, your accountant can be relatively pricey by the hour. So there’s a point in time where it makes more sense, lacking any alternative option, to just take one person full-time.
Kieran Chandler: Okay, and somewhere in between on the scale of cost between doing it in-house and that kind of expensive enterprise software is a solution such as Lokad, an external software solution, right?
Joannes Vermorel: Absolutely, but first let me clarify what you can have with classical enterprise software. I’m not a big believer that classical enterprise software delivers much added value, especially in those areas. Now, when you go into very large companies, like a billion and above, you enter another class of problems, where you don’t have one person doing purchasing, you have dozens, if not hundreds. And then you end up with entire classes of problems. You need to manage those people, you need to have budgets, you need to have rules. Even if you’re very good at hiring people that are honest, when you hire hundreds of people, you will have some that will actually try to actively defraud you, and they will leverage the fact that the landscape is very complex. So when they do defraud you, it can be very hard to uncover those frauds. You have these classes of problems on the enterprise side.
It’s funny, most small business owners who look at those enterprise products would say, “Oh, those products would do everything that I need.” And my basic answer is, no, not at all. Those products don’t focus at all on the sort of problems that you have. They are all about dealing with the complexities that are generated by the fact that you have large teams involved, which is not your problem. Your problem is really purely about having something that can replicate, with much less time, the inventory performance that you can obtain if you were willing to spend multiple days of your week on that as the business owner. That’s your key challenge.
Kieran Chandler: So what you’re kind of saying there is you need a more specialized tool that really focuses on those operational decisions only, and that’s the approach that Lokad took?
Joannes Vermorel: Actually, we decided to build a platform that was really tailored for specific problems related to inventory optimizations. Like, how much to buy if you have multiple options, fast or slow delivery for my supplier, how do I deal with MOQs, how do I deal with price breaks, and all sorts of complexities and options that are there even if you’re a small business. The trick is that the problem is that the reality is that the software itself cannot gain all those insights on its own. There is too much complexity involved. My personal belief is that although it’s completely possible to have very rigid software that does inventory management for many verticals, overall, when it comes to inventory optimization, unfortunately, you really need to have something that works. You need something where tons of insights about the business have been injected into the piece of software.
Kieran Chandler: How about the prices of these software? Is it something that’s expensive? Some of these smaller businesses, is it something that you think is justified?
Joannes Vermorel: I mean, first let me clarify. I would say most software optimization tools that are dedicated to SMBs are actually exceedingly cheap, like $100 a month. But the question is, does it deliver the value it pretends it does? My personal belief is that absolutely not. And that’s the piece of software that is very, very costly. Not because you’re charged $1 or $2 a month, which is inconsequential if you’re a multi-million dollar business, but basically for a long code and an SMB at a few million dollars and above per year, this is pocket money. But this piece of software that is geared towards inventory optimization, my conviction, I’ve seen, there are dozens of the market, is that it never delivered the performance that is supposed to deliver. Why? Because you inevitably end up with a piece of software that is going to implement super naive basic recipes like ABC analysis, safety stocks, service level time service forecast. You know, it’s… I mean, I think we covered all those topics in many episodes, and as it is all saying, they just do not work. That just gives you a pseudo-scientific impression of working. You know, you will get numbers, it will compute the safety stock, so it looks very safe, but it actually is completely unsafe. But whatever, so it will do some kind of very dumb time series analysis and give you suggested decisions. But the reality is, this piece of software is not going to do anything better than Excel.
Kieran Chandler: If you were the CEO of an SMB, what are the key decisions that you should make and what is the path that you should follow?
Joannes Vermorel: My suggestion, and then we can come back to what we try to offer, is that my conviction is that if you’re below, let’s say, two or three million dollars, keep your Excel spreadsheet.
Kieran Chandler: Kieran Chandler here. Today we have Joannes Vermorel, founder of Lokad, a software company that specializes in supply chain optimization. Joannes, can you tell us what businesses can do to optimize their supply chain management?
Joannes Vermorel: You need electronic inventory management. For optimization, keep your Excel sheets clean and well-organized. Don’t delegate, I mean, delegation is a very risky business at this scale. The businesses that survived are the ones where people have been very paranoid about that.
Kieran Chandler: What about using software to manage supply chains?
Joannes Vermorel: If you see on the website of the vendor words like safety stock, ABC, AZ service level, or overstock detection and whatnot, just don’t go for it. What Lokad offers is that I believe that there is no magic. We need to introduce a supply chain co-pilot, which is what we call the supply chain scientist who is going to act as a co-pilot for your company. It’s kind of similar to the setup where you were delegating that to a really trusted party like your accountants, but with someone who has better tools. You know you’re concerned, he can be trusted, his competence but the permit that he has, his tools especially all the software tools that he has are basically geared toward his prime job which is accounting. So it’s not in terms of tooling, your accountant comes with a handicap that it doesn’t naturally have from day one the proper tooling to just execute that. So the idea is that at Lokad, we offer this division and we have executed that successfully many times. It’s actually how Lokad got to the point it is right now by working in tandem with SMBs where Lokad provides part-time obviously a supply chain scientist who becomes typically the co-pilot answering directly to the managing director or the owner small CEO of this SMB and basically crafting something that goes beyond Excel but we stones of insight with the business.
Kieran Chandler: Is it necessary for the supply chain scientist to have a high level of expertise?
Joannes Vermorel: Final question here, and the supply chain scientist is someone with a real high level of expertise. We’re talking about people with PhDs. We’re talking about people with backgrounds and kind of data science. They’re incredibly gifted and incredibly expensive as a result for SMB who’s not the biggest sort of company. So we really need this level of expertise, or is it kind of like using a sledgehammer to crack a nut? So, I mean, obviously, Lokad, we have gone the path of having expensive people. Some people might disagree that we’re not paying them enough, but basically, I think we are on the more expensive range of the salaries. But the reality is that even if your small business supply chain-wise, you have almost all the problems of large companies. You have a mock use, you have price breaks, and statistically speaking, you have even less data which makes all the statistical analysis even more complicated. So unfortunately, the idea of having unqualified manpower to solve this sort of problem just doesn’t work in practice. That’s one thing. Now, that was the approach of Lokad. I realized super early on that, yes, those resources would be very expensive. So what is the solution? You need a software platform that makes those people very, very productive. And by the way, that’s why in 2012, we decided to not have Lokad being a platform that would have programmatic capabilities in Python, but we went for our own domain-specific programming language. And that was the prime motivation because if we had been doing that
Kieran Chandler: So, Joannes, could you tell us a bit about Lokad and what your company does?
Joannes Vermorel: Yes, of course. So, Lokad is a software company that specializes in supply chain optimization.
Kieran Chandler: And how did you get started with that?
Joannes Vermorel: Well, I’ve always been interested in optimization, and I saw a big opportunity to apply that to supply chain management. It’s an area that’s often overlooked, but it’s really critical to the success of many businesses.
Kieran Chandler: I see. And can you talk a bit about how your software works?
Joannes Vermorel: Sure. So, we use advanced algorithms to help companies optimize their inventory management, forecasting, and other aspects of their supply chain. This can help them save money, reduce waste, and improve customer satisfaction.
Kieran Chandler: That sounds great. And I know you’ve mentioned before that your software is particularly well-suited for small and medium-sized businesses. Could you explain why that is?
Joannes Vermorel: Yes, absolutely. So, when we were first starting out, we realized that if we were going to make our software accessible to SMBs, we needed to make it affordable and easy to use. And that meant doing things a bit differently than other companies in our space. For example, doing that in Python it would have been completely impossible infeasible in terms of just economical cost to serve SMBs. We needed something where a supply chain scientist with a relatively expensive skill set can, with half a day a week, deliver a good service to a small company. And the short answer is yes, with proper tooling. But tooling is completely critical to preserve the productivity so that this expert can really spend, I would say, free super-productive hours a week to drive your replenishment instead of just being, spending days to deal with mundane problems of compatibilities of between libraries or packets, or whatever is the Python setup that you’ve tried to set up in your company.
Kieran Chandler: I see. So, the tooling is really key to making this work for SMBs.
Joannes Vermorel: Yes, exactly. Without the right tooling, it’s just not feasible to provide this kind of service to smaller companies. But with the right tools in place, it’s really amazing what you can achieve.
Kieran Chandler: Well, it sounds like you’re doing some really interesting work. Thank you so much for taking the time to speak with us today.
Joannes Vermorel: It was my pleasure. Thank you for having me.
Kieran Chandler: That’s everything for this week. Thanks very much for tuning in, and we’ll see you again in the next episode. Bye for now.
