How do you evaluate your merchandise vendors? If you ask Merchandising, Operations and Accounting about vendor compliance and their performance, chances are you’ll get widely different answers. The merchandisers will consider the sales and margin and the vendor’s product development capabilities. Operations has to deal with QA and defective product problems, vendor packaging rework and late deliveries being escalated. Accounting will tell you about the vendor’s paperwork practices which are not according to your vendor compliance standards and result in chargebacks. Many companies are developing a holistic view of vendor performance through a periodic formal vendor evaluation using a vendor scorecard.Read More >
Sales without inventory—now there’s an oxymoron. Many of us who cut our teeth in the retail and catalog trade know that you have to own inventory to make sales. In fact, for many businesses it’s the largest balance sheet asset.
In the late 1990s, dot.com companies with their “virtual inventory” concept tried to change all that. And guess what? These business models and inventory management best practices never really went away. It continues in both large and small businesses of many different types today.
There are two scenarios for running a business with little or no inventory. The first is the traditional vendor drop-ship, which requires no inventory. The other is to build a just-in-time inventory model, which entails warehousing certain products, typically those that need to be fulfilled frequently.
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How are backorders affecting your profitability? From our consulting with clients on how to improve their merchandise planning, forecasting and inventory control processes and systems, we see the range of costs over 15 years to be $7 to $12 for each unit that goes into a back ordered status. I have seen the cost be much higher for shipping heavier weight packages. I am sure you are asking yourself how can it be that much? Or as many companies say I am just not going to take back orders.
Let’s take a look at what makes up the costs and what sales you are giving up by not taking back orders. For this example I’m using data from our proprietary data base of operations costs. Let’s assume the company’s orders are 50% Internet and 50% phone orders through their Call Center. The company processes 250,000 apparel orders last year with an average of 2.5 items per order; $75.00 average order value; 625,000 units ordered and had a 15% back order rate. With its 15% back order rate that equates to 93,750 back ordered items.Read More >
Let’s take a fresh approach to implementing inventory management best practices to see if there are some ways you can redouble your efforts and find further ways to reduce expenses. One thing many of us have learned over the past couple of years is that there are numerous areas to reduce expenses and rethink the ways that we are doing business.
Companies have shown that they can be much leaner and service the customer at the lower total expense levels. While it’s been painful; it has been achieved. We believe that companies will be slow to add back expenses as business improves. In this context of having reduced expenses significantly, we take a look at deploying inventory management best practices to further reduce and contain expenses in your business.
Inventory. As you assess your company’s 2014 performance, be sure to include an objective evaluation of how well you used inventory best practices this year? Was it anywhere close to being optimal (i.e. acceptable under or overstock levels)? Did the management of inventory positively service your customer and gain the sale?
In the last couple of years inventory availability has really become central to how well omnichannel retailers can sell to the customer from a variety channels, stores and distribution centers. Surveys show that more than 50% of the time the customer starts the selling transaction with an inquiry about inventory availability and/or comparison pricing. Then the omnichannel delivery mechanisms of ordered on the Internet picked up at the store; or ordered on the Internet and shipped from the store, or shipped from a company DC become crucial. In order to capitalize on omnichannel, Wal-Mart, Target, Kohl’s, Neiman Marcus, etc. have made tremendous systems changes to “open up accessibility” of their inventory at both the store, and distribution center level. Frankly, it’s impressive the inroads they have made.
Often times we meet with multichannel companies that don’t have reporting that accurately reflects the inventory turnover ratio, or they debate how significant this KPI is, and the need to analyze turns. By taking a financial view of inventory turns, companies can manage the inventory asset even better, which in turn leads to stronger profitability. Larger retail and multichannel businesses manage turns tightly in order to remain competitive and drive profit margins. Companies must bear in mind that on the balance sheet, inventory is typically one of the largest assets.
By managing turns, multichannel businesses are able to benefit the overall business in many ways. These include the ability to:
Companies that sell through multiple sales channels; retail, internet, and catalog, will be taxed to perform at the expectations of their customer’s experience with major brands. The ability of the customer to research a product and order on the web are already here. But now consider that they can decide based on expediency of need and closeness to a store, where to have it delivered/picked up. With major retailers you can elect to pick it up in the store the same day which is rapidly becoming the norm. This is true from shopping for electronics, apparel or even auto parts.
Few merchants today would claim to have reached this level of inventory management, as developing such a strategy can be complex. But there are compelling economic reasons to try.
In most multichannel companies, inventory is the largest dollar asset on the balance sheet, which means that how well you plan, forecast, and manage inventory will to a large degree determine your profitability. Inaccurate forecasting ultimately produces backorders, and backorders can result in dissatisfied current customers; they can also turn away potential new customers.
Although the cost of poor inventory management doesn't have a separate line on a company's P&L statement, it can be steep. According to our proprietary studies with dozens of companies, the true cost of a backordered unit of merchandise runs from $7 to $12. For a company processing 200,000 orders a year, with an average of two items per order and a 20% backorder rate, the operations cost to the company could run as high as $480,000. This does not include costs related to prospecting, expediting backorders by inventory control, returns because of late shipments, lost margin, additional air freight, and customer ill will or losing the customer all together.
Faulty planning and forecasting can also produce overstocks that must be liquidated, at a loss of as much as 4%-10% of merchandise margin (between initial purchase margin and maintained margin), depending on the product category.
Direct marketers are well aware that they need to resolve inventory issues across channels. In a recent AMR Research survey of retailers' plans for upgrading their multichannel systems, 22% of the respondents cited Web-enabled inventory management and visibility as a key strategy they will be working on in the next 12 months. The AMR report, “Technology Trends in Inventory for Retailers and CP Manufacturers,” went on to say, “The lack of data consolidation for inventory and order management further illustrates retailers' immature inventory management and order processes.” The report also lists customer loyalty and multichannel customer order fulfillment among the top five concerns of respondents.