Inventory management is a pendulum that is constantly swinging from calm to chaos. When product demand increases, availability decreases. The immediate reaction is to over compensate and substantially increase purchase orders. Demand then declines leaving extensive overstocks. It is a cycle that repeats itself with each new product.
The demand for new merchandise and increased service is constant. Savvy customers understand that few products are truly exclusive. If they place an order and find the item is backordered, they simply search for the item online. The Internet is a great equalizer: Small companies have the same opportunities as large ones if their site is optimized. This can mean that hundreds of sites are waiting to steal your customers, and backorders are an invitation for your customer to seek another source.
Alternative sources are a slippery slope. Once your customer starts the search, what will they find? Lower prices, better service, and quicker delivery are benefits that may be offered by your competition. It may only be an illusion, but it will affect your customer’s perspective of your company.
Before you panic and direct your inventory management team to always have stock available for every item, you must know that too much inventory is as dangerous as too little. It inflates fulfillment costs and reduces profitability. The best solution is to find the balance between overstocks and outages that works best for your company.
Improving inventory management increases service and reduces costs faster than any other initiative. Here are some tips to get you started:
- Identify the top 20% of your inventory. Look at both dollar value and volume. Improving management of the high-dollar items will reduce inventory valuation. Improving management of the high–volume items will reduce processing costs. Focus the bulk of your initial efforts on the items, which yield the greatest results. These products are your “A” or “never-outs” meaning you never want them backordered.
- Balance risk with service. It is easy to swing the focus from cost to service and back. Stop the pendulum by identifying the risk associated with every purchase. What is the cost if the item is backordered? How much will an overstock situation cost? One of the benefits of the Internet is the ease for liquidation. Whether you choose a section of your own site or an online auction, liquidation is much easier.
- Negotiate everything from cost of goods to lead time and packaging. Vendors will often provide extras, even when they won’t reduce the cost of goods. Tie your inventory management with your warehouse management to maximize efficiency.
- When sales volume increases, improve turns, not the inventory level. This is the time to plan and manage inventory carefully. If you don’t, you will end up with multiple warehouses maintaining inventory that is not moving. Or worse, you’ll have to rent trailers to carry the overflow.
- Liquidate quickly. The liquidation process should start as soon as an item is removed from the catalog. Develop a specific liquidation plan and consistently follow it. If you do liquidation in stages, you’ll generate maximum returns.
Debra Ellis is president of Barnardsville, NC-based Wilson Ellis Consulting.