“Open to Sell” – The New School Approach to Inventory Management

With the holiday season upon us, retailers, market analysts, and financiers alike remain wary of the economic environment and how it will effect consumer spending this year.  In order to stay afloat in the midst of this market volatility and uncertainty, strategic inventory management becomes imperative for all retailers – especially those already in distress – which could make or break the biggest revenue generating time of year.

Inventory management is a perennial struggle in the retail industry. Retailers have made noticeable strides in becoming more efficient at managing inventory following the 2008 financial crisis, but old habits die hard and many are slipping backwards and face serious challenges as we enter this holiday shopping season.

One of the biggest issues I see across the board is that so many retailers still adhere to the old school “open to buy” approach to inventory management when what is needed today is an “open to sell” mentality.

What’s the difference between “open to buy” and “open to sell”?

The open to buy approach is a historical-looking, formulaic method to buying inventory that does not take developing trends into consideration. The retailer looks at what was bought last year and modifies the levels of various inventory categories depending on expected demand for the upcoming season – which is oftentimes based on little more than a hunch.

Today’s best retailers are taking a more analytical and focused approach on what’s selling, what’s not selling and how much items are selling for, also known as an “open to sell” approach.   This method tracks which items are going out the door in real time, allowing retailers to place their focus on margins. At the end of the day it is margin – not revenue – that pays the bills.

In today’s data-rich world, inventory analytics and trend monitoring separates winners from losers. The teen apparel segment is a prime example of this. Responding quickly to trends is a constant challenge for merchants in this category, and one that is critical to maintaining relevance with young consumers and competing in a crowded environment.

Taking an analytical approach to inventory management may seem obvious, but far too often it is overlooked and many retailers are still strategically guessing more than strategically planning for their inventory. So, what can you do to step it up if this sounds all too familiar?

Leverage social media and ecommerce analytics. With social media influencers like Pinterest, Instagram and Twitter, you have a wealth of data at your fingertips. Watch what your customer base is responding to online and get a view into what your competitors are doing. Even if you are not capturing the data in a systematic way, social media can provide a goldmine of information, especially for those in fashion-related segments.  Website analytics from your ecommerce site can also provide invaluable information on how consumers are responding to products. Investing in an online analytics provider that can help analyze these metrics can provide meaningful insights and leading indicators for the next season.

Invest in your data strategy. Resources are tight for most, but finding dollars to put toward data analytics will be worth the investment. Simply increasing your team’s access to industry intelligence services can do a lot to inform seasonal planning. Taking it a step further by creating a new position or small team devoted to tracking and analyzing trend data along with your own sales and marketing stats can pay dividends if implemented correctly.

Take action. The most important practice is to act quickly and adjust your inventory planning as you notice changes in trends and demand that are driving consumers one way or another. Maintain an open and frequent dialogue with your suppliers and work to streamline inventory management processes to stay nimble. While it is nearly impossible to hit your projections head on, having an inventory management system in place that allows you to navigate your business plan as consumer preferences change will allow you to have the right product, in the right place, at the right time.

As you head into the holidays and start planning for the year to come, consider ways you can shift your inventory management approach from “open to buy” to “open to sell.” Progressive retailers are already reaping the benefits of leveraging data to better manage inventory not only during the holidays, but also throughout the year. Why not join them?

Andrew H. Moser is Co-Founder, President and CEO, Salus Capital Partners