Channeling Inventory Management Tactics

Aug 15, 2004 9:30 PM  By

If you have a retail division in addition to your catalog/Web business, one of the myriad back-end decisions you have to make is whether to manage your store inventory separately from the merchandise for your direct division. The number of stores you operate, the size of your direct division, the amount of merchandise overlap between divisions, and the product line itself help determine which decision is best for your business.

Anthropologie’s separatist approach

Marketers with more than a few stores or that are planning to expand their retail division generally manage the inventory for their stores independently of their direct merchandise. Philadelphia-based apparel and home goods marketer Anthropologie is a case in point.

Managing retail and catalog/Internet inventories together “gets sloppy,” says Michael Robinson, Anthropologie Direct’s managing director. “You wind up holding back too much inventory to satisfy the catalog, and then the timing may not be right for the stores.” If a product is exceptionally popular among catalog and Web buyers, it could even sell out before stock has had a chance to make it to the stores — especially if the catalogs are hitting the mail several weeks prior to the retail season.

A division of cataloger/retailer Urban Outfitters, Anthropologie manages its retail inventory with an “open-to-buy” method, which creates a “line of credit” that better enables a company to react more quickly to changes in inventory needs. “It’s a much more reactive business,” Robinson explains, “constantly looking at how sales are trending, and changing plan by reducing inventory, reducing prices to move out inventory, or placing new orders for inventory.” (For more on open-to-buy, see “An Inside Look at Open-to-Buy,” April 2004 issue.)

Catalog inventory management, according to Robinson, is “much more of a planning business. Most of our inventory is imported, so we have little opportunity to react to catalog sales. So we do a lot of up-front planning, starting on the global scale of what our sales plan is for the catalog and breaking it down to individual projections by item, based on history and trends.”

Another difference between retail and direct inventory management has to do with what Ted Hurlbut, president of Medway, MA-based retail consultancy Ted Hurlbut & Associates, terms “instant item suitability” in retail.

“The catalog is locked into items and SKUs and targeted fulfillment rates, so catalogers are replenishing and reordering based upon algorithms designed to hit targeted in-stock rates, which in turn are based upon projected sales on an item-by-item basis,” Hurlbut says. “But in retail, because there’s instant item substitutability, if you will, consumers can choose from several items if they don’t see, say, the color of a top they’re looking for in their size. They can instantly switch to another color. So retailers can forecast inventory by category rather than by item.”

Nailco: separate, sort of

At the same time, retailers have to maintain a flow of goods at average stock levels, rather than accommodating the spikes and dips that follow a catalog drop, says merchandising consultant George Mollo, principal of Nanuet, NY-based GJM Associates. For that reason, if a product or product line isn’t selling well via catalog but sells out at retail, the marketer may choose to tap into the catalog inventory to restock store shelves.

That’s what Nailco Group, a cataloger/retailer of beauty supplies for salon professionals, does. “Even though stores keep track of their own inventory, they pull inventory from the same distribution center as the catalog/Internet,” says president/founder Larry Gaynor. “The only inventory that is truly isolated is that at the store locations. We warehouse inventory for stores/catalog/Internet.”

Farmington HIlls, MI-based Nailco, which operates 19 stores, employs a practice called economic order quantity. “We take the amount of goods we’re trying to bring into the store, take the sales we’re trying to achieve, divide that by the inventory turns, and allocate it to the goods we’re bringing in,” Gaynor says.

Say Nailco sets a goal to sell 24 blow-dryers a month. “Stores achieve eight turns per year,” Gaynor explains. “So you take eight turns divided into 12 months and get 1.5. Then 24 times 1.5 is 36. So we would bring in 36 pieces to start. Once we have tracked the item for three months, then our software program, called Trend, automatically converts the item to auto-reorder levels based on sales so that we no longer have to guess the correct quantities. The software uses economic order quantity so that the monthly sales levels and reorder quantities are tracked precisely.”

Nailco offers most of its new product in the catalog and on its Website before placing it in the stores. “We get three months’ history on a new product, which gives us a great idea how hot it will sell at retail,” Gaynor says. But Nailco’s stores have their own inventory tracking and ordering process. “This allows for local preference and also allows us to sell items that we cannot sell in the catalog or online due to manufacturer restrictions,” Gaynor says.

Appleseed’s: together but separate

Women’s apparel cataloger/retailer Appleseed’s operates two stores, both of them near the company’s Beverly, MA, headquarters. Because its retail operations are small and local, Appleseed’s maintains its direct and retail inventories together, says Claire Spoffor, senior vice president of marketing and retail. Nevertheless, Appleseed’s forecasts store inventory separately, she continues, “and we hold the inventory [virtually] aside to ensure that we’re not ‘broken’ in the stores when an item takes off and that we have full-size inventory runs with every size offered available.”

What sells well in the company’s two stores doesn’t necessarily sell well in catalogs, and vice versa. Appleseed’s sells more sweaters and novelty jackets in its stores than in the catalogs, while basic blouses and skirts do better in mail order. What’s more, “we need to have a freshness every two weeks” in the stores, Spofford says, referring to the need to either move quantities of SKUs around the stores or out of the stores.

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Glossary of Terms

Managing your inventory can be tricky enough, but mastering some of the specific terms and jargon can make it a bit easier — especially if you’re entering retail distribution. Inventory Operations Consulting, an inventory management, materials handling, and warehouse operations consultancy in Kenosha, WI, offers a comprehensive glossary on its Website (inventoryops.com); we’ve included some highlights below.

ALLOCATIONS

Actual demand created by sales orders or work orders against a specific item.

CARRYING COST

Also called “holding cost”; the cost associated with having inventory on hand. It is primarily made up of the costs associated with the inventory investment and storage.

CYCLE COUNT

The process of regularly scheduled inventory counts (usually daily) that “cycle” through your inventory. The marketer determines how often certain items/locations are counted.

DISTRIBUTION REQUIREMENTS PLANNING (DRP)

Process for determining inventory requirements in a multiple plant/warehouse environment. DRP may be used for both distribution and manufacturing.

FORECAST

An estimate of future demand. Most forecasts use historical demand to calculate future demand. Adjustments for seasonality and trend are often necessary.

INVENTORY TURN

Number of times inventory is replenished in a year. Generally calculated by dividing the average inventory level (or current inventory level) into the annual inventory usage (annual cost of goods sold).

JUST-IN-TIME (JIT)

Usually thought of as describing inventory arriving or being produced just in time for the shipment or next process. Actually, JIT is a process for optimizing manufacturing processes by eliminating wasted steps, wasted material, and excess inventory.

LEAD TIME

Amount of time required for an item to be available for use from the time it is ordered. Should include purchase order processing time, vendor processing time, in-transit time, and receiving, inspection, and prepack times.

ORDER CYCLE

Also called “replenishment cycle”; refers to the time between orders of a specific item. Most easily calculated by dividing the order quantity by the annual demand and multiplying by the number of days in the year.

SAFETY STOCK

Quantity of inventory used in inventory management systems to allow for deviations in demand or supply. Safety stock calculations will take into account historic deviations and use a required service level multiplier to determine the optimal safety stock level.