Canada: Strategic Inventory Management – Providing What Matters, When It Matters

Last Updated: July 10 2012
Article by Alain Michaud

Retailers are under constant pressure. Growing competition, a wider variety of sales channels, more private label and proprietary brands - each of these is requiring retailers to be more reactive to customer demands.

In order to succeed in a constantly changing environment, many retailers are working to align their strategy, operations and inventory decisions to be more nimble and marketsensitive. Such an approach requires both a strategic as well as tactical approach toward inventory management - one that begins with a strong understanding of where the money is coming from. Leading retailers focus their attention on increasing access to the products that make them the most money, while putting less emphasis on everything else. Strategic inventory management requires a higher degree of engagement with vendors and manufacturing partners than ever before. It means working closely with suppliers to understand what activities underpin delivery of final goods, and whether certain activities can be handled concurrently to speed up the process and provide more flexibility in terms of the end product.

Being successful isn't about being average. It's about being able to provide what customers want, when it matters the most.

Winning strategies for inventory management

Focus on what matters

In most retail chains, a very small percentage of items are the primary drivers of sales and profits. The "80/20 rule" (80% of the profits come from 20% or fewer of the items) holds true for most retailers.

Leading retailers concentrate on investing in safety stock for the items that drive their sales and profits. They ensure these items are readily available, while looking for savings opportunities in the balance of their inventory.

Where is your money coming from? How can you increase availability of your most profitable products, while potentially reducing your investment in other items?

Be agile

While customer demand can change almost overnight, the reaction time of retailers is not always as versatile. When it comes to inventory management, retailers have to consider a range of factors, such as supplier and transportation lead-times. These issues can make it hard for retailers to make adjustments to their inventory in time to take advantage of changing market conditions.

Leading edge retailers work closely with their suppliers and manufacturing partners to understand the activities required to get products to market. This process provides them with a chance to discuss whether activities can be modified - for example, by having activities occur at the same time instead of consecutively - in order to speed up the process. Freeing up time in the process can make it easier to tailor a product closer to delivery.

In the apparel industry, fabric needs to be selected and purchased, but this is often only the first step in the manufacturing cycle. Later steps might include dyeing the material and cutting it into different sizes and styles. By understanding the timing of individual activities, retailers can shift some of their decisions closer to when the product will be sold. Such a move gives them more flexibility to respond to the latest business trends on what is selling, what isn't, and what might be needed to fill a market gap.

How are your products produced? When do you make final inventory decisions? What opportunities exist to finalize your inventory decisions closer to your desired retail date to take advantage of the latest market intelligence?

Be proactive...and nimble

The retail market is dynamic. While some trends may last for months, others start and end within days or weeks.

Industry leaders mine through mountains of data in order to identify potential and rising trends. Their ability to evaluate the market and identify trends early enough to take advantage of them is a significant competitive advantage.

When a retailer applies demand forecasts and can identify service level and overstock opportunities early, they can adjust their inventory orders in advance of the rest of the market. This can put them in a better negotiating position with suppliers when timing of a product needs to be pushed up or pushed out.

How do you evaluate market demand, and then adjust your demand forecasts and inventory accordingly? What relevant trends affect your business? How do you leverage this information when dealing with suppliers?

Don't be average

Over the years, many retailers have compromised their performance in the interest of being more efficient by managing multiple locations based on performance averages. As a way to keep things simple, these retailers ensure that every store's inventory includes the same products, quantities, and sizes.

In reality, different locations have different customer profiles. What works in one location might not work in another. Fortunately, thanks to technology, there are options. Leading retailers recognize local characteristics and plan, buy, allocate, and replenish their products based on local requirements and demand patterns.

In a retail operation, responsibility for inventory performance is shared across a number of business functions - from headquarters to store operations. Leading organizations recognize that everyone has a role to play in achieving desired outcomes, and work to encourage understanding and buying among employees for corporate goals and objectives. These retailers incorporate accountability throughout their operations, and identify ways to measure profitability and performance.

A range of metrics can be used to determine whether a retail operation is meeting its inventory management objectives. These metrics are typically built around service, profitability and productivity. For example, metrics typically include measures such as in stock, service level and inventory turn among others. But it's not just about the metrics themselves; the timing and actions generated as a result of performance measurement are what is critical.

In order to respond to changing trends, leading retailers have processes to monitor and track performance metrics on a daily, weekly and monthly basis. Such frequency allows them the chance to adjust their course before it's too late to make a significant impact.

How often do you measure the performance of your inventory? What processes do you have in place to make corrections or respond to ongoing results? Are you positioned to achieve the results you want over the long-term?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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