Looking for better ways to improve your inventory performance? Ray Goodman, senior vice president, retail and multichannel solutions for Omaha, NE-based software services provider Direct Tech, offers these suggestions:
1) Look at historical performance and adjust for product presentation and frequency of placement in front of the customer. For example, how many times is a catalog is being mailed vs. the average historical performance of that time period? On the Internet, is the item highly visible? Is it featured in a directed e-mail campaign with a click-through? The more people see the product, the more likely it is to be ordered.
2) Consider like-item history. If a product has not been offered previously, create a forecast based on the performance of similar products.
3) Apply relevant metrics. Each channel has a distinct set of metrics to help you gauge how a product will perform. Within the catalog division, for instance, they may look at an average item index to compare how past or predicted sales of any given item compares with that of the average item in the book. Let’s say you have sold 1,000 units of a coffee mug. The catalog in which that mug appeared offered 20 products overall, of which 10,000 units in total were sold. So the average item performance is 10,000 divided by 20, or 500 items. Next you would compare the 1,000 coffee mug units sold with the average item’s performance, giving you 1,000 divided by 500. This would give you an index of 2 for the coffee mug.
This metric could also be used for the Internet and retail channels, for a specific time period; you may want to consider the performance of certain items in April and May compared with other items in April and May. On the Internet, you might also look at how often a customer views an item and then buys it. If I know that for every 1,000 page views I sell 15 units of a product, I will plan for this.
4) Manage an open-to-buy plan. Every company should manage its inventory requirements against an available open-to-buy plan. This ensures that a company has the right amount of inventory for the time period being planned. For example, at any given time, I may not want to have more than $1 million worth of merchandise in the warehouse, and I will base purchases on that. So if I am at my $1 million limit in the warehouse, and I want to purchase $20,000 worth of widgets, I need to sell $20,000 worth of merchandise before making new purchases.
Typically, the open-to-buy plan is broken down into product categories. For example, I may decide that I want to have $3 million available in women’s clothing at any given time. Of this I may allocate $100,000 to outerwear for the fall and only $20,000 to outerwear for the spring. It is important to review and adjust the open-to-buy plan as the marketing strategies change within your company.
5) Purchase inventory using a consolidated continuous inventory method. This will leverage your ability to buy larger quantities across all channels while you buy only what is required for a specified period, in order to better manage risk. For example, if I am shipping four separate catalogs and expect to sell 30 dresses for each of the four books, I might buy 80 at one time and then replenish the last 40 later on. This way I am maintaining more flexibility than if I purchased 120 at once but still getting some advantage from bulk purchasing.
Interested in learning more? Be sure to attend Ray Goodman’s session “Inventory Forecasting: a Multichannel Experience” during the 17th Annual National Conference on Operations & Fulfillment (NCOF) in Schaumburg, IL from April 29-May 2. For more on the conference, go to www.ncof.com.