When sales are better than expected, most catalogers are thrilled. Then again, “better than expected” also means better than projected, and in these lean, mean inventory times, many marketers get caught short. This past holiday season, many catalogers had trouble fulfilling increased demand, which led to backorders, cancellations, and general bad will among customers. As holiday 2004 looms, two catalogers that struggled with inventory issues last year share what they’ve learned.
No guts, no profit
The lingering recession has taught many catalogers to play it safe with inventory. But last year The Talbots, for one, found that it was playing it too safe. “For three years we ran on very lean inventories, cutting back in response to the economic environment,” says Margery Myers, spokesperson for the Hingham, MA-based company. The apparel cataloger/retailer had a conservative outlook for 2003 and continued to reduce inventory levels to minimize risk. This strategy worked well until the fourth quarter, Myers says, “when it began to limit our ability to make sales. We weren’t able to get back into our popular styles in time for the holiday selling period.”
Myers says that by the fourth quarter of 2003, inventories in the company’s core misses/petites retail business were down by more than 20% from their year 2000 high. By late November, total inventories in the core business were down about 6% from the previous year; by the end of December they were down 18%.
Specifically, Myers says, the company ran short of some apparel with extensive embroidery and other handwork, as well as imported garments that could not be reordered in time to improve inventory fill rates.
The inventory shortage hit the company’s catalog division especially hard. While Talbots can shift merchandise from store to store based on demand levels, the company is stuck if it starts running short on items that appear in the book; the catalog also can’t minimize its exposure by taking the items out of the window display.
Fashion marketers that rely on selling clothes with their own brand name are especially prone to inventory management problems, says Stan Fridstein, general partner of Agoura Hills, CA-based catalog and retail consultancy Synapse Infusion Group. The crux of the problem, Fridstein says, is that apparel catalogers must place orders for manufacturing six to nine months in advance, to give the factories making the clothing time to order the piece goods — the raw material to create the products. Since apparel depends heavily on fashion trends, the extensive lead time forces buyers to guess what will be popular months from now.
There is no way to predict or control fashion trends, but even apparel catalogers can have a better handle on their inventory management if they base purchases on the previous year’s demand rates rather than sell rates. For example, if the company ordered 300 leather jackets last year but received orders for twice that amount — which it was unable to fill — all other things being equal it would make sense the next year to order about 600 leather jackets. To make ordering based on demand easier, Fridstein recommends training customer service representatives to keep a log of the products customers originally requested before learning that their first choice was out of stock.
Talbots’s inventory shortfall forced the company to reduce circulation of its fall and holiday catalogs by an undisclosed amount. Myers also notes that the problem affected the company’s semiannual clearance event. Because the sales inventory was fragmented down to a few pieces from each line, “there really was not much there for customers to coordinate with what they had,” she explains.
But Talbots is increasing its inventory this year, with spring purchases up a percentage in the low single digits over last year, Myers says. The marketer is also ensuring a greater depth in sizes for each “hero” item highlighted with large spreads in the catalog. And this year Talbots will commit to buying more of the items in the hero shots earlier in the season. In prior years, Myers says, the company would not order those products in large quantity until the middle of the selling season, waiting to see how they sold before ordering more. “But we are making commitments to those items ahead of the season — before we start to run on lean inventories.”
Restoring order to inventory
Corte Madera, CA-based home decor cataloger/retailer Restoration Hardware could have used a more efficient approach to its inventory management last year. The company’s direct division, RH Direct, planned for 20% sales growth in 2003 but ended up with 50% sales growth compared with 2002, says Jason Malinowski, director of planning and operations for RH Direct. The division felt the impact through higher backorder levels and more cancellations, he says.
Coupled with the higher-than-expected sales growth was an increase in SKU count for products, such as adding upholstery options to furniture pieces. The number of special-order upholstery SKUs tripled from 800 in fall 2002 to 2,400 last year. Sharply increasing the number of SKUs is “a merchandise strategy that if left unchecked can have bad consequences,” Malinowski points out.
To better manage its inventory, RH Direct added two assistant inventory planners in April to its staff of 30. Offering more SKUs has been positive on the sales front, “so we added head count to keep up with it,” says Malinowski.
The company also holds weekly meetings with the heads of retail and direct inventory management, Malinowski says. During these meetings the two department chiefs run down their SKU lists, discussing how much of each item each division has and whether they can transfer inventory depending on demand variations between the retail and direct sectors. Weekly meetings also occur between the directors of the company’s two warehouses, in Tracy, CA, and in Baltimore, MD, to balance the merchandising supply more efficiently between the two facilities.
What’s more, RH Direct earlier this year invested in forecasting and rebuying software, says Malinowski. Developed by Sausalito, CA-based Forerunner Systems, IF/SO makes monthly inventory buying recommendations. Criteria include rate of sale, current inventory level, and future purchase orders, as well as selling curves, vendor lead time, desired amount of “safety” stock, and desired weeks between purchase order receipt dates.
A major challenge of handling inventory for the direct sector, says Malinowski, has been calculating how much inventory to order for each month when the merchandise demand among catalog drops overlaps. A drop that occurs in January, for instance, may still be generating merchandise demand in March, even though another catalog mailed late February.
Restoration Hardware hopes that the IF/SO software, which the company’s four inventory planners will have installed on their desktop computers, will meet the challenge. “It handles each demand curve and projection and tells you what it means for each month’s purchasing needs,” Malinowski says. The software’s price tag was in the “low six figures,” he says, which includes quarterly maintenance fees and licensing fees.