Live from DMA05: Manage That Merchandise

Atlanta–You can move substantial profit to–or from–your bottom line through properly controlled inventory, according to consultant George J. Mollo Jr., principal of consulting firm GJM Associates. In his Oct. 18 session “Applying Merchandise and Inventory Management Techniques to Uncover Hidden Profits,” Mollo explained that measures such as backorder and cancel rates, demand, fill rates, overstocks, and returns are key to managing your business. For example, for a $50 million cataloger, a 1% increase to the final fill rate can boost net sales by $500,000; a similar decrease in the final fill rate can have a comparable negative effect.

Backorders are inevitable, but you have to determine what is an acceptable rate for your business. The cost of a backorder ranges from $8 to $13 for apparel and $10 to $13 for hard goods, Mollo said.

He noted that “30%-40% of backorders are caused by bad timing, not bad forecasts,” most often because catalogers didn’t bring in the inventory in time. But internal communication–particularly with your customer service reps–can save some orders that may have been lost to cancellations. For instance, if a customer calls to order an item and it’s not in stock, if the phone rep can say, “I see we’re scheduled to get 300 more in next week, and 400 more the week after,” the customer is more likely to place the order knowing it will likely be fulfilled soon.

Your reps can also be helpful with solving returns mysteries, Mollo said, recounting an experience he had when he was with Disney. The company had one product with a huge return rate and didn’t know why. The topic came up during a quarterly meeting of the returns committee, and a rep said “I can tell you why–the zipper sticks.” Disney had the vendor replace the zipper on the product, and the return rate went down.

Mollo stressed that while you should strive to improve the majority of your items, don’t try for 100% accuracy on all products. When it comes to inventory forecasting, he said, “‘almost right’ now is better than ‘exactly right’ later!”

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