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:
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