Retailers and ecommerce companies have spent considerable sums to manage and fill customer orders from multiple shipping points (DC, FC, manufacturer, stores, etc.). Whether this applies to you or not, your company can benefit by adopting a strategic approach to optimizing inventory levels in order to maximize sales and profits and improve customer service.
If an item is out of stock when the customer orders, or you can’t get it to them within their timeframe, you’ve lost the sale. Worse still, you may lose them forever; adios, lifetime value.
Assessing the Current Picture
When we talk about optimizing inventory, we’re talking about finding ways to maximize sales and inventory investment without being seriously overstocked or understocked. This is achieved through a complete evaluation of buying and merchandise allocation practices; understanding merchandise assortment and product characteristics (e.g. percentage of new or exclusive items, reorderability, lead time, minimum quantity and freight, etc.); and the inventory management infrastructure you have in place (processes, systems and organization).
It’s important to involve all departments in this evaluation process. In addition to inventory management and merchants, include customer service, fulfillment and finance.
Based on our consulting work with omnichannel companies, the following 6 areas are key to making your inventory management process more strategic and improving your results.
Lost Sales from a Marketing and Ecommerce Perspective
Evaluate customers’ buying behavior when an item is back ordered or out of stock. Have you done any database analysis to determine how this affects your sales and profits? What happens to customer shopping behavior when they’re on your site and they abandon the cart? How much is this costing you in terms of sales and profits?
Lost Sales from an Inventory and Financial Perspective
How do inventory managers and the finance team think inventory can be managed differently to increase sales, and how can optimization impact the top and bottom line?
Many companies have large SKU counts and assortments. What top sellers do you never want to have out of stock, and what is the financial impact of new or exclusive items being unavailable? What fashion-oriented products can’t be reordered in the current season? Which ones simply aren’t performing and should be eliminated? Which can be drop shipped and thus not part of your inventory investment? This is an ongoing process for inventory managers looking to optimize sales without being under or overstocked.
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% of new inventory or more; a third one 60%. This doesn’t mean you have to mirror inventory in each selling or shipping location. We have had clients place slower-moving hard goods in a single central facility, shipping faster-selling apparel from multiple facilities. It’s important to determine what your tolerance is for increasing the inventory investment.
Assess the Processes
Chart out your current inventory processes including seasonal planning, purchasing, forecasting, liquidation of overstocks, financial control of planned sales and stocks and identifying fast and slow sellers. How can these processes be streamlined? Can they be made more responsive to take advantage of rapid changes in customer buying patterns? What needs to change to achieve more optimal inventory positioning?
Deploy Effective Systems
In line with assessing the processes, does your company have the right systems to plan and manage inventory profitably? Do they assist in multi-location stock allocation? Do they allow access across the enterprise to teams outside of merchandising and inventory management?
Assess Your Organization
Inventory is often the largest balance sheet asset and it’s managed by a small number of people, often with less-than-effective systems. Do you have the best organizational structure considering their various responsibilities (inbound freight management, vendor compliance, purchasing, forecasting, liquidation)? Do you have the right professionals in place to develop this strategic initiative?
All of these considerations and decisions factor into the development of your strategy for increasing sales and optimizing inventory. It’s important to involve all the key stakeholders who can contribute to creation of an effective plan.
Brian Barry is President of F. Curtis Barry & Company