The best of inventory

Inventory management and forecasting are strategic issues. Companies that recognize this fact can typically provide higher levels of service to their customers and post higher profits.

Developing a comprehensive inventory strategy involves a number of departments — including fulfillment, marketing, and merchandising — as well as inventory control. It also involves implementing inventory best practices. Here are 14 best practices that will most likely benefit your business the most.

1. Synchronize promotions

   Successful strategic inventory management relies on tying creative and marketing plans to merchandising plans. Marketers and merchants need to develop companywide planning calendars and projections for all promotions in all channels — catalog, online, e-mail, stores, space ads. Merchants and the inventory control group then plan product purchasing, availability, and receipts to support these events.

   There are three aspects to this planning. First, the marketing department compiles and continually updates the marketing calendar. Second, the marketing team plans the expected orders by week for the promotions. Third, the inventory control and merchandising teams plan the demand in units for the promotions.

   Often it's e-mail campaigns that trip up multichannel merchants. The campaigns may appear on the marketing calendar, but all too frequently no one decides which items will be promoted until four to eight weeks before the actual date of the promotion. By then product has been ordered and may already have arrived in the distribution center. This lack of planning can cause contention between channels for best-sellers, leading to customer frustration and backorders.

2. Revamp the organizational structure

   To implement more-streamlined inventory practices, many companies have adopted a new organizational structure: The merchandising department handles product selection, sourcing, and development and works with the creative department on promotions. The inventory control group is primarily responsible for overseeing the prior season's category and item history, working with the merchants on assortment planning, managing the inventory, forecasting, reordering, receipt planning, post-mortem evaluation of item performance, and vendor communication and compliance. Merchandising may still place initial purchase orders, but in most cases inventory control will pick up relationships with vendors and do the necessary reordering and stock balancing.

3. Take a longer view of item planning

   Rather than planning items one promotion at a time, plan an item across promotions. Doing so enables you to plan receipts in line with promotions, reduce backorders, make minimum order requirements, and significantly reduce planning time.

4. Enforce vendor compliance

   The inventory control team is generally responsible for administrating vendor compliance policies because they communicate most frequently with the vendors. One of the basic goals of a compliance program is to push inspection up the supply chain. Problems can be more readily corrected if they are identified before product ships to the distribution center rather than upon arrival at the DC. Compliance policies should include routing guides, item specification sheets, retail and direct packaging, accounting and paperwork standards, company contact lists, chargeback policies and schedules, and advance shipment notice (ASN) and systems standards.

5. Track key inventory metrics

   An industrial engineering axiom states that what isn't measured can't be improved. From an inventory perspective, the metrics are the same for online sales as for catalogs, although the forecasting systems requirements for Internet promotions may be different from those for catalog inventory. The metrics include

   • top-line and bottom-line growth
   • maintained gross margin
   • initial customer order fill rate (see chart at left)
   • final fill rate/returns/cancellations
   • gross margin return on investment (GMROI)
   • turnover
   • cost of backorders
   • age of inventory
   • measures of overstock
   • write-downs as a percentage of costs.

   Key metrics for stores would include

   • top-line and bottom-line growth
   • comparable-store sales (year over year)
   • maintained gross margin
   • turnover
   • GMROI
   • weeks of supply
   • markdowns/margin loss from write-downs
   • age of inventory
   • sell-through percent
   • stock-to-sales ratios.

6. Select the right systems

   At the heart of capturing these metrics are your retail and direct systems. Keep in mind that metrics produced by systems will be used for dashboard reporting to top management and that management will need drill-down capability to see details at lower levels of reporting such as merchandise divisions.

   Ideally a multichannel merchant wants to implement channel-appropriate merchandise planning, forecasting, trending, and performance systems now. In the real world, many multichannel companies are still working through what their requirements are specifically for e-mail and Internet forecasting functions. Analyze your Internet demand and determine how different it is from catalog demand, and develop systems functions accordingly.