10 Tips for Improving Your Inventory Management

As Amazon’s multi-fulfillment-center strategy continues to put pressure on multichannel merchants, having an effective inventory management 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 $2 billion in sales, decided to close one of its three distribution centers and double the square footage of another. There was significant overlap between two centers in terms of store locations serviced. Their strategy now focuses on identifying potential overstocks, right-sizing the inventory and liquidating low-moving product without significantly damaging profits. Their inventory plan looks at the organization and systems to monitor results.

Another client has five small DCs which reach more than 90% of their customers using one-day ground – an efficient shipping cost model. However our concern is that a significant percentage of orders are on a split shipment, multi-DC basis, meaning operational and shipping costs aren’t being optimized. Their systems don’t 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’re 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’re not surprised by that. When they sell out a SKU at the store level, depending on the type of product, it might not be replenished. For example, fashion products may not be re-orderable from the vendor. In contrast, staple or basic SKUs may be available in a 2-6 week timeframe. Thus individual stores may end up with fragmented inventory assortments and multiple locations may be needed to complete a direct order. Additionally, returns 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 points you need to consider as you develop and refine your inventory strategy:

1). Inventory allocation for customer orders: On an order-by-order basis, how will you achieve the highest fill rate without having to ship from multiple DCs for a single order, increasing your costs? This needs to be done online with business rules in the software and without manual intervention.

2). Additional inventory required: If you are using a multi-DC strategy, how much additional inventory is required? Our experience is that the second DC adds 30% more inventory and the third adds more than 50% in addition to that.

3). Organization: Do you have strong inventory management analysts? Are they skilled in working with your systems? How can your staff be organized differently to plan and manage inventory tasks more effectively? These include pre-season planning, purchase order processing and re-buy functions, as well as liquidation of overstocks and slow-moving product. When we look at the payroll and benefit costs of the personnel involved in these functions it totals far less than 1% of net sales. This is a small expense compared to the importance. Many companies are still looking at inventory management as a clerical activity when having the right inventory availability plays a much more important role. Do you have sufficient and experienced personnel in place considering the importance?

4). System support: including exception reporting, inventory on hand and on-order availability by location, as well as projection of how SKUs are selling vs. when purchase orders need to be placed to prevent stocks-outs. This also includes having the ability to reserve a SKU quantity to a customer order, and vendor management to monitor and track vendor-shipped orders.

5). Use of drop ship vendors: many direct businesses are gaining sales without having to own the inventory. This is a great way to extend an assortment without a huge inventory risk.

6). Sales goals: if your stores are experiencing slow or no growth while direct-to-customer sales are booming and are being filled from the sales floor, does the store get credit for these sales?  Or are the sales shown only as direct? Each company needs to work through what is fair and reflects the sales and stock goals store management is responsible for.

7). Process improvement: with the large SKU counts in many businesses, we find it benefits them to look at the entire process of planning and managing inventory. It will be important to change the systems used to support inventory to gain efficiency.

8). Metrics monitored: what KPIs do best-in-class companies use to manage their inventory investment? Do you have these in place?

9). Supply chain improvements: many distribution functions are looking at the total supply chain for improvement rather than just within the warehouse. These include vendor portals for exchanging purchase orders, vendor scorecards, invoices, other electronic data interchange (EDI) transactions and abstract syntax notation (ASN).

10). Liquidation strategy: what online and print strategies and media do you have in place to reduce overstocks and slow-selling products?

As I said earlier inventory is often your largest balance sheet asset. Having the right-sized inventory as well as effective inventory management processes are the key to profitability and an improved customer experience. To help you think through how it can be more effective, you can click to download our white paper, 23 Ways to Improve Inventory Management.

Curt Barry is Founder & Chairman of F. Curtis Barry & Company

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