6 Considerations In Developing a Better Inventory Management Strategy


The omnichannel industry has spent massive efforts to manage and fill customer orders from multiple shipping points - order on Internet and pick up at store; or ship from store or distribution center; etc. Whether you have multiple shipping points or not, many companies can benefit from making inventory management a strategic objective with the intended outcome to optimize inventory levels to maximize sales, profits and customer service.

If you’re not in stock when the customer orders, or can’t get it to them on their time table, you’ve lost the sale. And here’s the real rub, maybe you lose the customer forever along with their lifetime value.

This blog identifies six considerations that are essential to strategically managing inventory to produce higher sales, profits and customer service.

Download: 23 Ways to Improve Inventory Management Processes

Six Considerations When Optimizing Inventory Management Strategy

When we use the term optimizing inventory, we mean maximizing sales and inventory investment without being seriously over stocked or under stocked. In our inventory management consulting with omnichannel companies, how this achieved is through a complete evaluation of your buying and allocation of merchandise practices; understanding merchandise assortment and the product characteristics (e.g. percent new or exclusives, reorderability, lead time, minimum quantity and freight, etc.) and the infrastructure (e.g. processes, systems and organization) you have in place for managing inventory.

It’s important to involve all departments in the inventory process. In addition to inventory management and the merchants, include customer service, fulfillment and finance. From our consulting with omnichannel companies on inventory management, there are six major considerations:

1. Lost sales from a marketing and e-commerce perspective

Evaluate from a marketing and e-commerce perspective what the customers’ buying behavior is when you are back ordered and out of stock. Have you done a database analysis to answer how backorders or out of stocks affect your sales and profits? What happens to customer shopping behavior when they are on the website and they abandon the cart? How much is this costing in terms of sales and profits?

Read: 10 Considerations In Developing Your Inventory Strategy

2. Lost sales – from an inventory and financial perspective

Evaluate from a financial perspective how the inventory managers and finance department think inventory can be managed differently to increase sales, and what optimizing inventories means financially.

The size of many companies’ product offerings is extensive. What products do you never want to be out of stock? What items are new, or exclusive, and how much risk is there to being under stock and overstocked? What products are new (i.e. no selling history) or fashion oriented and you may not be able to reorder in the current season? What products simply don’t sell enough units and dollars to keep in the assortment and should be eliminated? What items can be drop shipped and you do not need to invest in inventory? This is an ongoing process for inventory managers to be able to optimize sales without under stock or overstock inventory levels.

Read: 10 Steps to Taking a Financial View of Inventory

3. Factor in multiple shipping points.

The more distribution centers and stores you have, the more inventory will be required to effectively fill orders. A second DC may add 30%+ more inventory. A third DC over 60% more inventory dollars over a single DC. This doesn’t mean you have to mirror inventory in each selling or shipping location. We have had clients which place slower moving hard goods in a single central facility; and the faster selling apparel is shipped from multiple facilities. It’s important to determine what your tolerance is for more inventory investment.

Download: 23 inventory best practices that will affect your business the most

4. Assess the processes.

Chart out the current inventory processes including seasonal planning; purchasing; forecasting (i.e. projection); when to liquidate overstocks and inventory management. How should these processes be streamlined? Can they be made more responsive to take advantage of customer buying? What needs to change to manage and achieve a more optimal inventory position?

5. Deploy effective systems.

In line with assessing the processes, does your company have the right systems to plan and manage inventory profitably? Do the systems assist in multi-location allocation of stock? Do they allow access across the enterprise to others outside merchandising and inventory control?

6. Assess organization.

Inventory is often the largest balance sheet asset and it’s managed by a small number of people, with less than effective systems. Do you have the best organization structure considering their responsibilities (i.e. managing freight, vendor compliance, purchasing, forecasting, liquidation, etc.)? Do you have the right professionals to develop this strategic initiative?

These are some of the key considerations and decisions that go into developing a strategic plan to increase sales and optimize inventory. It’s important to involve all the stakeholders in this evaluation as you determine how to improve sales, profitability and customer service.

23 Ways to Improve Inventory Management