How Well Are Your Inventory Management Techniques?

   

Inventory is most likely the largest balance sheet asset in your company. How well you use inventory management techniques to plan, purchase, and manage your inventory largely determines your level of customer service and profits. But selling goods in multiple channels and titles means dealing with channel- and title-specific planning and inventory management needs.

Based on our inventory management best practices assessments with clients, we've come up with some inventory management techniques to consider when managing multichannel inventories.

READ: 23 Ways to Improve Your Inventory Management Processes 

Planning and inventory management system

In most companies, an inventory management system for merchandise planning and inventory control remains highly fragmented by channel.

For promotional planning, many multichannel companies need to be more diligent and use a single promotional calendar rather than channel-specific schedules on which merchandise planning is based. These should include in-store promotions, catalogs, and email and social networking campaigns.

A detailed channel-level inventory management system caters more to individual channel planning and inventory needs. In retail, assortment planning is performed by merchandise division, department, class, and product/SKU, with another view by region, store level, and product/SKU plans. Large retailers also have store replenishment systems to recommend restocking orders for retail locations.

For most catalog and eCommerce companies, assortment planning differs from retail; it's by catalog season, drop, department, class, and product/SKU. The data elements, though similar to retail, have some major differences; using demand, cancellations, returns, space used by category (pages, square inches, depictions), and other direct metrics. Most catalog and eCommerce companies have not invested in formalized inventory management systems and are using internally developed systems or, more likely, spreadsheets.

Emerging catalog and eCommerce businesses with brick and mortar stores don't have comprehensive retail planning systems. Often they can't justify the investment and use spreadsheets or other elementary systems more effectively. But there is a huge potential for sales and profit improvement through better planning.

To get results to flow through corporate planning, inventory management and accounting systems, large retail companies identify top level plans, sales and inventory results and display as a store: "catalog store", "Internet store", or maybe the direct business as a whole combined as a "store".

Many companies have tried to use channel-oriented planning and inventory management systems (i.e., retail designed or direct designed) for other channels. But these have been less than successful due to the differences in views of the data (e.g., region and store) and the types of detailed data mentioned above.

Internet inventory management techniques are slowly evolving in most companies. Traditional catalogers now average more than 50% of sales from the Internet, although much of that business is generated by receipt of the catalog.

Products may be active and available longer if there is stock. What sells online is heavily influenced by placement on landing pages and organization and ranking within category product searches.

The online product assortment can be more extensive than that in a single catalog. Internet may have a total chain assortment different from any one store or region. The website may have a clearance or liquidation aspect. These principles of planning and inventory management are not industry established best practices, but are being hammered out in the trenches every day.

From a purchasing perspective, companies are rolling multiple channel plans and inventory forecasts together into a single purchase order management system to write POs.

The eventual multichannel inventory management system that evolves will be a new animal. It will need to be a blend of channel- and title-specific functions (such as store replenishment logic for reorderable product), and direct (such as promotional and time-based elements more like catalog).

It will also have a single inventory management system that can be displayed by product/SKU and allow you to see the plan by channel and promotion, vendor on-order and on-hand by store, and warehouse location. The planning modules will remain channel specific.

Channel Inventory – a distribution view

With all the complexities of planning and inventory control, how are supply chain logistics operations accommodating the channels? When multichannel marketing was in its infancy more than a decade ago, the prevalent thinking was to have a single warehouse that would process catalog, eCommerce and retail replenishment orders. There would be one pooled inventory, one staff and one facility — end of discussion. But supply chain logistics thinking is changing.

Looking at the chart “How Nine Merchants Manage Distribution” below, the last column on the right shows whether a company dedicates one or more DCs to catalog and eCommerce, has a separate retail DC, or uses shared facilities between all channels.

Inventory management techniques
 
For example, Companies B and C have multiple distribution centers dedicated to direct orders, and other centers for stores. These two companies' objectives are to shorten the delivery time to the customer and reduce freight costs to cover the entire country.

But to accomplish this, they have the additional overhead of multiple facilities and staffing, and their warehouse management system and order management system must be capable of managing multiple inventories and allocating and filling orders.

Adding a second direct DC adds at least 40% more inventory, and sometimes goes even higher. Plus, opening multiple DCs presents a management challenge of transplanting your culture and company philosophy to a totally new group of warehouse employees.

As the eCommerce channel in retail companies has grown substantially, supply chain logistics management has come to realize that picking, packing, and shipping of small orders is very different from full-carton replenishment to stores. With large volumes, it may prove to be more efficient to have dedicated centers for direct supply chain logistics.

Company I is a manufacturer with 50 stores and eCommerce and catalog selling channels. It also picks from stores where fast-selling products can be allocated, and the stores ship. The downside to this is that stores are begrudgingly giving up best-selling product. The company's philosophy is to achieve high fulfillment of customer orders, to leverage inventory and to maximize sales.

Another of the real drivers behind this shift is the realization that without having separate sales and stock plans, there is no accountability by business units to make their sales plans. So if the first unit to allocate inventory gets the stock, then there may not be inventory for later drops of a catalog, e-mail campaigns, social networking promotions, initial stocks to open stores, etc.

Other companies use a “virtual inventory” concept, not in the sense of drop-shipping, but of the inventory management system being able to keep planned sales by product and SKU by channel, and being able to reserve inventory for the channel business unit.

So if quantity of a product is 5,000 and 3,000 is for retail, 1,000 for eCommerce and 1,000 for catalog, while the inventory is housed together in the same bulk and forward allocations, the inventory management system keeps each selling channel's inventory protected. In this way business units are in control of their sales and stock performance.

Importing’s effect on inventory management

Where we source inventory is also changing how we can plan and manage it. Much of the multichannel industry relies on a high percentage of imported product. Even if you buy from a domestic distributor, chances are that merchandise was manufactured overseas.

The initial markup, and hopefully the maintained gross margin, is significantly higher to offset the negatives that are cropping up in many businesses. The vendor minimums (often in thousands of pieces) are forcing companies to plan to use product in multiple seasons, leading to higher inventory investment and carrying costs. Long lead times (some below 13 weeks, but most 18-23 weeks) mean that purchase orders are placed long before the promotional planning is finalized, resulting in too much or insufficient stock. Using new products that are imports may lead to large overstocks if a product fails to sell as projected.

Additionally, companies may not be looking at a fully loaded product cost including agent's/broker's fees, demurrage, duty rate, product development costs, and buyer's travel. Couple that with supply chain logistics and warehouse storage space requirements for container size receipts and the inventory carrying costs. All of this leads to higher inventory and carrying costs and slower turnover.

What to do about it?

  • Use mixed container loading, where appropriate.
  • Weigh the increase in per unit cost to take smaller quantities.
  • Move the entire merchandise and creative planning calendar for promotions back and do each season earlier (no easy task).
  • Challenge merchants to look domestically to try to get the product with smaller quantities, or to develop product domestically and later roll it out overseas if it sells.
  • Tackle the issue of accounting for all the product costs to be sure you have an accurate, fully loaded cost and sufficient initial markup without being overstocked.


Liquidating overstocks

Inventory that doesn't sell and liquidation are two dreaded aspects to merchandising. Because you have to take in larger imported orders and distribute to more selling channels, you need a cost-effective inventory management strategy for in-season liquidation and clearance.

In a cost-based model it's hard to determine how much gross margin is lost in marking down retail prices. Our experience is that it may represent 2% to 4% of net sales at least.

What to do about it?

Develop liquidation inventory management techniques. Options include clearance catalogs, eCommerce specials, social networking promotions, bind-in or package inserts, sales pages, and telephone offers.

 

 

  • Develop a report showing candidates for liquidation based on rate of sale.
  • Develop an age of inventory report that will age products in time brackets (30 days, etc.) to stay on top of inventory management.

READ: 14 Inventory Best Practices to Implement in Your Company

Vendor compliance and supply chain logistics

In most multichannel businesses the size of the product assortment and vendor base have grown dramatically. Supply chain logistics and operations have become increasingly complex with modes of transportation, importing, retail versus direct packaging, technology used to manage supply chain logistics, etc. All this necessitates setting standards with vendors so that you aren't working on an exception basis with every one.

Vendor compliance is at the heart of efficient supply chain strategies and management. Routing inbound shipments to reduce freight costs and scheduling inbound appointments can help speed product flow through the DC, significantly helping in turn to reduce inventory levels. Automating supply chain logistics through advanced shipping notifications (ASNs), RFID, and cross-docking to stores can go a long way toward reducing supply chain logistics costs, but these cannot be implemented without a comprehensive vendor compliance policy.

Start small by communicating your company vision, the need for on-time delivery, routing guides, inbound dock standards like carton labeling, product specifications, accounting and paperwork requirements, contact list, and the true costs of back orders. Begin a charge-back policy and implement it with your largest vendors. Later, you can add other items that are typically included, such as service level standards, packaging, labeling, case labeling, value-added services, supply chain logistics requirements, scheduling appointments, cross-docking and direct-to-store requirements, charge back for non-compliance, etc.

The trend is to push compliance back up the supply chain to your vendors. This means as many value-added services as possible — packaging, marking, quality inspections — performed by vendors or merchant reps in factories. Catching errors at the source and using source-based services speeds inventory flow, and any such issues are cheaper to deal with in the vendor's environment.

Organization overview

In larger retail specialty stores, merchandising is a separate organization from distributors or allocators who plan, manage and liquidate inventory. Merchants select and source product. Distributors or allocators determine the quantity of product that goes to which stores, generally the quantity to purchase and reorder and when to take markdowns.

In department stores, buyers may still do the selection, vendor sourcing, and inventory control as a team divided into categories or departments. But larger retail businesses have adopted the distributor/allocator model.

While the same group of merchants may select product for a multichannel business, store inventories and direct channels may be managed by separate inventory control groups.

Ten years ago, many companies had separate merchants for eCommerce. Today, there are positions called eCommerce merchandising, but they're more about how to depict product on the website. Merchants and inventory control source, purchase, and manage most assortments.

In catalog and eCommerce companies, inventory control is also split from merchandising (product selection and sourcing). The concept is that a separate group will have more time to manage and analyze inventory and place rebuys. Inventory control is where much of the everyday vendor communication on purchases, deliveries and compliance resides. The reality is that inventory control may be more attuned to working with an advanced inventory management system and analysis.

Many multichannel merchants today are hiring a forecaster rather than have each control buyer do the forecasting. An evolving business model has inventory control reviewing marketing's projections, getting their input and adjusting their projections in their inventory management system to what they feel the plan is — if they feel that the catalog is faster or slower — to calculate more accurate inventory rebuy requirements.

Accountability for inventory

There are many inventory metrics that retail, catalog and eCommerce businesses measure. Because the channels are different, the metrics vary. Here are a few of the major ones.

Retail: sales and stock plans; weeks of supply; store service levels (stock outs); turnover; gross margin return on investment (GMROI); returns; markdowns or write down plans; age of inventory; new store inventory coverage.

Catalog and eCommerce: sales and stock plans; turnover; gross margin return on investment (GMROI); cancellations; returns; markdowns or write downs; age of inventory; initial customer order fill rates; final order fill rates; coverage percentage when catalog mails.

The overall accountability of merchants, buyers and inventory managers for sales and inventory is important, since inventory is the largest single balance sheet asset, and how it's planned, managed and deployed largely determines customer service and profitability. Building some of the key measures into individual performance evaluations of buyers and inventory control personnel is essential.

This is old hat for large retailers, but catalog and eCommerce businesses are implementing more metrics each year. Inventory management techniques and its business models must evolve to meet multichannel growth.