10 Considerations In Developing Your Inventory Strategy


As Amazon’s multi-DC strategy puts pressure on multichannel merchants, having an effective inventory strategy to maximize sales, profits and customer service becomes all that more crucial. Inventory is the largest balance sheet asset in most companies. Let me give you a few examples of how other companies are focusing on inventory in their businesses.

One client - a retailer with sales of $2 billion annually - has decided to close one of its three distribution centers and double square footage of another. There was significant overlap between two centers in terms of the store locations that could be serviced. Their strategy now needs to focus on identifying the potential overstock, right-size the inventory and liquidate the lowest moving without significantly damaging profits.  They have put together an inventory plan looking at the organization, systems to monitor results, etc.

In another client, they have 5 small DCs which reach more than 90% of the customer’s homes using 1 day ground. It is an efficient shipping cost model. However, our concern is that they are shipping a significant percent of orders on a split ship, multi-DC basis. Therefore, the operational costs and shipping costs are not optimized. The systems do not have strong enough inventory management capabilities to support this multi-DC environment.

 At a recent conference I heard a speaker from a retailer with sales over $25 billion annually. While they are shipping from hundreds of stores to fulfill the double digit direct-to-customer order growth, the SKU depth is only a quantity of 1.2 per SKU in the average store. We are not surprised by that.   When they sell out an SKU at a store level, depending on the type of product, the product may not be replenished. For example, fashion products may not be reorderable from the vendor. In contrast, staple or basic SKUs, may be available in a 2 to 6 week time frame. As a result the individual stores may end up with fragmented inventory assortments and require multiple locations to complete a direct order. Additionally, returns from direct may go back to stores that never had the product in the assortment initially.

For sure Amazon puts pressure on shipping costs which is extremely important. However, I would maintain that there are 10 considerations important to developing your inventory strategy:

  1. Inventory allocation to customer orders: On an order by order basis, how will you achieve the highest fill rate without shipping for a single order from multiple facilities increasing operations costs and shipping costs? This needs to be done on-line with business rules in the software and without manual intervention.
  2. Additional inventory required: If you are using a multi-DC strategy how much additional inventory is required? Our experience is that the second DC adds 30% more inventory; 3rd DC adds more than 50%.
  3. Organization: Do you have strong analysts in the inventory a=management department? Do they have good skills working with your systems? These are key skills important to managing inventory. How can your staff be organized differently to plan and manage inventory tasks more effectively? These include pre-season planning, purchase order processing and rebuy functions, liquidation of overstocks and slow moving product. Additionally, we find that the payroll costs are far less than 1% which companies pay for managing this valuable asset. Do you have experience in place?
  4. Systems support – including exception reporting, inventory on hand and on order availability by location; projection of how SKUs are selling versus when purchase orders need to be placed to prevent stocks outs. Ability to reserve an SKU quantity to a customer order, drop ship vendor management to monitor and track vendor shipped orders, etc.
  5. Use of drop ship vendor – many direct businesses are gaining sales without having to own the inventory. This is a great way to extend an assortment without a huge inventory risk.
  6. Merchandise budgeting – do you have a formalized sales and stock planning functions and reporting by location? Retailers accel at these type systems.
  7. Process improvement - with the large SKU counts in many businesses, we find that it benefits companies to look at the entire process of planning and managing inventory. It will be important to change the systems that are used to support inventory to be more efficient.
  8. Metrics monitored – what are the KPIs best in class companies use to manage the inventory investment? Do you have these in place?
  9. Supply Chain improvements - including vendor portals, EDI, ASNs, etc.
  10. Liquidation strategy – what on-line and print strategies and media, to reduce overstock and slow selling products?

 As stated earlier, inventory is the largest balance sheet asset. Having the right sized inventory is the key to profitability and customer service. To help you think through how your inventory strategy can be more effective, click to download

23 Ways to Improve Inventory Management