Less Overstock Boosts Ecommerce Fulfillment Space and the Bottom Line

inventory management

Inventory management is a strategic ecommerce issue that affects profitability and customer service. Additionally, many fulfillment centers have overstock inventory tying up valuable space. While an item’s inventory cost is the majority of the expense, it is only part of the costs incurred when you consider credit borrowing, labor and facility expenses and lost opportunity costs.

In working with clients to evaluate fulfillment center space use, one client’s additional costs were 11.25% over and above the cost of inventory. In states with inventory taxes or higher labor and facility expenses, additional costs can be 25%.

Identifying Potential Overstock

Objectively evaluate the level of overstocks. In one operational assessment of fulfilment center space use for a multichannel book publishing client, we analyzed SKU level sales of every item compared to on-hand inventory (i.e. on-hand quantity divided by total sales over a time horizon).

The client’s results: 60,000 square feet of the total 360,000-square-foot fulfillment center was holding slow-moving product. In this case large booksellers typically negotiate return privileges for slow sellers. While painful, they liquidated the overstock and freed up space over time.

Have you performed an analysis of your potential overstock?

Liquidation Strategy Considerations

Here are 7 guidelines to consider:

Make improving inventory performance a strategic initiative: In most companies, inventory is the largest balance sheet asset. Here are several critical aspects to formulating a strategy.

Developing a comprehensive inventory strategy involves a number of departments: Fulfillment, marketing, merchandising, inventory control and purchasing.

Recognize Pareto’s Law: Reducing overstocks can be an emotional issue with merchandisers and purchasing departments because it implies failure. It truly should not be – it has been shown that 20% to 25% of the SKUs give you 70% to 80% of sales in most businesses. Markdowns and slow-moving inventory are a fact of life. It’s important to continually address it to free up cash and fulfillment center space.

Exception reporting of slow movers: Does your inventory analysis identify candidates for liquidation in the total assortment based on rate of sale and stock on hand, as illustrated above?

Make your first price cut the deepest: Customers are savvy and know if they’re getting a real deal. As illustrated above, what additional costs are incurred monthly? Holding low-margin product can become costly. Additionally, many consumer products have a short lifecycle and you don’t want to be left with large remainder quantities by waiting for them to sell at full price.

Assign responsibility: In your organization, who analyzes and decides on inventory to be liquidated? Companies with large assortments sometimes put a single person in charge – separate from the buyer – to move the slow-selling product through various media and lowering prices. Also, make key inventory metrics and goals part of the buyer/merchant performance review including markup, backorder rate, gross margin and inventory turn.

Synchronize promotions and purchase order placement: Do you have a merchandising and marketing calendar of what will be offered? This often helps buyers understand the purchase order requirements over multiple offers, reducing backorders and overstocks.

Recognize the need to liquidation media and methods: There are a number of factors that go into selling off price including category and willingness to reduce price multiple times to reduce stocks. The following paragraph discusses this in more detail. All of these are critical to managing inventory as a strategic objective.

Methods to Reduce Overstock

Here are 12 methods of liquidation that our clients use:

Relist or re-photograph slow sellers:  Use this if the prior copy and photo didn’t show the product well. But a great photo and copy isn’t going to sell a below average selling product.

Develop call center programs: Use inbound and outbound scripts to inform and sell the customer and move product.

Package inserts and flyers: include in every outbound package and refresh with new products regularly. Customers receiving your shipment today should be the most satisfied and open to an additional sale.

Special website offers: make clearance specials easily identifiable or pop up.

Email blasts: given the low cost of this medium, use it to feature items with large quantities to liquidate.

Ecommerce marketplaces: investigate use of eBay, Etsy, Amazon, Walmart, Rakuten, etc. and their applicability.

Warehouse and tent sales: use this to move major overstocks as well as small remainder quantities. Schedule semi-annual events. It takes preparation and advertising.

Barter agreements: can move large quantities but it has to be product that has value to both partners.

Employee sales: these can be part of the benefits offered on a regular basis or as a semi-annual event. Discount may typically be 15% to 40% off retail. You may break even on cost.

In-kind donations: give product to charities, schools and churches that can use it or resell the product. You can earn deduction at tax time.

Return to vendor: usually has to be pre-negotiated as part of purchase order. You may get 100% of the cost if there is no restocking fee.

Liquidation companies and jobbers: they can move large quantities but you only recapture ten cents on the dollar.

Not all of these may not be appropriate for your company based on products, quantity to be liquidated and the age of the inventory.

All media and methods need to be tracked to determine which give the highest cost recovery. Collect by media and item how many units are sold at the specific selling price. That may not be as easy as it sounds. Can your sales/inventory system track item sales histories at multiple price points? Determine the additional costs of slow-selling product and calculate an item profit or loss.

Keeping inventory lean ultimately improves profitability and frees up fulfillment center space, with a focus on processes and asset management.

Brian Barry is President of F. Curtis Barry & Company

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