The best of inventory

7. Master the art of master scheduling

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   A system with master-scheduling capability takes into account all promotional plans by item. It will also add demand projections by week, subtract returns and cancellations, add in the expected receipts and plot delivery dates for purchase orders (Pos), and then calculate whether an item is running short or overstocked across channels. Because the calculations are by week, you can see where more on order is needed or the effect of delaying Pos on the net requirements.

   To acquire a system with this capability, management needs to make a significant investment. In a recent client study the costs ranged from $400,000 to $1.5 million. Software companies are looking to develop full-fledged retail, Internet, and catalog planning and inventory management functionality; no one vendor has all the functions needed today.

8. Adhere to exception reporting

   A natural outgrowth of systems with master scheduling, exception reporting helps rebuyers and inventory managers know where to take action without their having to review every item every week in detail. Retail and direct inventory systems both use exception reporting. Types of exception reports include

   • management reports (for instance, top 50/bottom 50 in sales)
   • product characteristic reports (e.g., all items in a certain fabric across departments)
   • Pos needed based on stock-out calculations, on hand and on order, and projected demand with item/vendor lead time
   • ranking reports for returns, cancellations, gross margin, and liquidation
   • forecast variance plan to actual
   • slow sellers and candidates for liquidation
   • new vs. repeat performance
   • imported vs. domestic product.

9. Identify lost demand

   To capture and plan for phantom, or shadow, demand, catalogers must record order information in the contact center. For Web sales, analytics systems are starting to have the capability to report when items move in and out of a customer's order process. Once you've captured the metrics, you need to report to the merchants the consequences of being out of stock in cases when customers substituted items for those that were sold out. Then the numbers need to get into merchandise planning for the next season. Catalogs have found that best-sellers that were out of stock might have been able to sell an additional 10%-30% based on phantom demand.

10. Plan by assortment

    Preseason assortment planning of categories and products relies on the past sales performance of items or, for items not sold in the past, similar product, along with item availability. Retail assortment planning is top down by category and bottom up by item.

11. Track inbound receipts

    Inbound tracking of receipts not only benefits the fulfillment operation but also helps inventory management. Smaller companies often lack this capability, and it can really hurt their DC planning and their customer service.But many freight consolidators and carriers, including United Parcel Service and FedEx, offer tracking services. Or you can implement inbound systems so that vendors send ASNs when purchase orders have shipped. UPS and FedEx both provide this service.

12. Create coverage reports

    Coverage is defined as having sufficient quantities of products already in the DC when a promotion is in-home. Companies need to develop coverage reports to show how much is in DC vs. the initial demand projected. There are always some games played in this area with management. Because 50% or more of orders related to a catalog drop take place in the first four weeks after the drop, if you don't have sufficient quantities of a product by the time the catalogs hit mailboxes, you're going to create backorders early in the promotion.

    Merchandising and inventory control need to follow up closely with vendors to ensure higher initial coverage by the time first orders arrive. As for the initial coverage rate, defined as the quantity of units in stock by product and SKU before a catalog mails or an e-mail promotion is sent, you should have sufficient coverage for the first two to three weeks in all SKUs, but most businesses are well below these levels.

13. Balance understock/overstock

    What is the balance point between the cost of being out of stock on an item ($7-$12 per unit on backorder, according to our proprietary studies) and the cost of overstock (margin loss you experience from liquidating categories of product)? Chief financial officers often try to identify this at a top level. Merchants and inventory control experts need to identify how much risk lies in being under- or overstocked as they do the merchandise planning. New items, exclusives, and imports obviously have much more risk. Exclusives and imported merchandise may also have higher minimum quantities.

14. Optimize your SKUs

    SKU optimization crosses finance, DC, and inventory lines. In the past decade, many catalogs expanded the range of color and size SKUs for individual items, and sales increased accordingly. Merchandise with high SKU counts (bedding, shoes, apparel) creates the biggest challenges. Now companies recognize that the cost of fulfillment (labor, space) and liquidation for slow-moving items can be high compared with their actual sales. SKU profitability or optimization needs to be determined with fully loaded costs (advertising costs, fulfillment costs, overhead, etc.).

Curt Barry is president of F. Curtis Barry & Co., a Richmond, VA-based consultancy specializing in contact centers, fulfillment, systems, inventory management, and benchmarking.