Give me the Goods

	Channel inventory — a distribution view

With all the complexities of planning and inventory control, how are distribution centers accommodating the channels? When multichannel marketing was in its infancy more than a decade ago, the prevalent thinking was to have a single DC that would process both direct and retail replenishment orders. There would be one pooled inventory, one staff and one facility — end of discussion. But logistics thinking is changing.

Looking at the chart “How nine merchants manage distribution” on page 35, the last column on the right shows whether a company dedicates one or more DCs to direct, has separate retail DCs or uses shared facilities between channels.

For example, Companies B and C have multiple distribution centers dedicated to direct orders, and other centers for stores. These two companies' objectives are to shorten the delivery time to the customer and reduce transportation costs to cover the entire country.

But to accomplish this, they have the additional overhead of multiple facilities and staffing, and their warehouse management and order management must be capable of managing multiple inventories and allocating and filling orders.

Adding a second direct DC adds at least 40% more inventory, and sometimes goes even higher. Plus, opening multiple DCs presents a management challenge of transplanting your culture and company philosophy to a totally new group of employees.

As e-commerce in retail companies has grown substantially, logistics management has come to realize that picking, packing, and shipping of small orders is very different from full-carton replenishment to stores. With large volumes it may prove to be more efficient to have dedicated centers for direct.

Company I is a manufacturer with 50 stores and an e-commerce and catalog business unit. It also picks from stores where fast-selling products can be allocated, and the stores ship. The downside to this is that stores are begrudgingly giving up best-selling product. The company's philosophy is to achieve high fulfillment of customer orders, to leverage inventory and to maximize sales.

Another of the real drivers behind this shift is the realization that without having separate sales and stock plans, there is no accountability by business units to make their sales plans. So if the first unit to allocate inventory gets the stock, then there may not be inventory for later drops of a catalog, e-mail campaigns, initial stocks to open stores, etc.

Other companies use a “virtual inventory” concept, not in the sense of drop-shipping, but of the inventory system being able to keep planned sales by product and SKU by channel, and being able to reserve inventory for the channel business unit.

So if quantity of a product is 5,000 and 3,000 is for retail, 1,000 for Web and 1,000 for catalog, while the inventory is housed together in the same bulk and forward allocations, the inventory system keeps each channel's inventory protected. In this way business units are in control of their sales and stock performance.

	Importing's effect

Where we source product is also changing how we can plan and manage it. Much of the multichannel world relies on imported product. Even if you buy from a domestic distributor, chances are that merchandise is imported.

The initial markup, and hopefully the maintained gross margin, is significantly higher to offset the negatives that are cropping up in many businesses. The vendor minimums (often in thousands of pieces) are forcing companies to plan to use product in multiple seasons, leading to higher inventory investment and carrying costs. Long lead times (some below 13 weeks, but most 18-23 weeks) mean that purchase orders are placed long before the promotional planning is finalized, resulting in too much or insufficient stock. Using new products that are imports may lead to large overstocks if a product fails to sell as projected.

Additionally, companies may not be looking at a fully loaded product cost including agent's/broker's fees, demurrage, duty rate, product development costs, and buyer's travel. Couple that with warehouse storage space requirements for container size receipts and the inventory carrying costs. All of this leads to higher inventory and carrying costs and slower turnover.

What to do about it?

• Use mixed container loading, where appropriate.
• Weigh the increase in per unit cost to take smaller quantities.
• Move the entire merchandise and creative planning calendar for promotions back and do each season earlier (no easy task).
• Challenge merchants to look Stateside to try to get the product with smaller quantities, or to develop product in the U.S. and later roll it out off-shore if it sells.
• Tackle the issue of accounting for all the product costs to be sure you have an accurate, fully loaded cost and sufficient initial markup without being overstocked.