Avoiding the Inventory “Trap” – Leveraging your Biggest Asset to Maximize Profitability

May 1, 2017

As retailers struggle to cater to a new consumer who shops like none other before, they are under significant pressure to deliver omni channel capabilities that support the anytime, anywhere, anyhow product availability that customers are now conditioned to expect.  In this new reality where consumers use e-commerce to browse, and then visit a store to purchase, retailers are required to figure out the right inventory investment throughout the supply chain, while keeping a close eye on the cost of each decision.

 

A consequence of greater complexity being driven by omni channel capabilities are pockets, or in some cases piles of unproductive inventory being “trapped” in the wrong place.  As unproductive inventory builds up over time, retailers are faced with two key challenges: 1) the escalating costs of dealing with that inventory — whether through transfers, deep markdowns, or worst case scenario through write offs; and 2) the impact to the customer who sees the “old stuff” rather than the newness, which would ideally drive repeat visits and transactions.

 

So what can retailers do to avoid the inventory “trap,” while maximizing inventory profitability and leveraging the breadth of omni channel capabilities that their customers have grown to expect?  Here are five (5) guiding principles:

 

1. Lift the Fog on Aging and Accuracy

Full visibility to inventory throughout the supply chain is quickly becoming critical to inventory productivity and being able to meet customer demand.   Ensure there is a consistent way to measure aging using standard metrics, along with periodic and on-demand reporting of inventory age.  Retailers also need to make the discussion of inventory age and related clearance activities a key component of period business reviews, open to buy meetings and incentive compensation determination.  Focus efforts on operational improvements impacting perpetual inventory accuracy to avoid building up buffers of inventory to mitigate risk.

 

2. Set Lifecycle Management Disciplines

The ability to impact unproductive inventory starts with the quantification of the buy.  Ensure that the buying practices tie explicit expectations regarding how long the items should be carried in the assortment to the quantity purchased.  Along with the lifecycle, set realistic sell-through goals for the product before it goes to clearance.

 

3. Product Flow for Maximum Flexibility

Although new omni channel capabilities such as fulfill from store can help address inventory imbalances, it comes at a much higher cost than utilizing the distribution center to fulfill orders.   To maximize inventory productivity and margins, retailers need to focus on building inventory deployment processes to be as responsive as possible to initial demand and work to find ways to increase inventory deployment flexibility early in a product’s lifecycle.

 

4. Tune tools and practices to increase buying and allocation precision

All retailers should ensure that their inventory deployment processes, metrics and systems align with product lifecycle characteristics and margin risk rather than treating all items and all locations the same.  In many cases, while demand streams and inventory fulfillment practices have evolved, systems and practices have not been reviewed and adjusted to align with the new inventory management realities being impacted by the evolving customer shopping journey.

 

5. Balance choices with the cost of investment

Retailers can no longer afford to send everything everywhere if they want to minimize unproductive inventory.  Retailers need to be strategic about the products they offer by customer type/location.  They need to determine the right mix of product by location. This means they need to align the mix to the customer profiles and make smart decisions about how to protect the sale by having enough choice, but not over-invest in unproductive choices.

 

Rather than investing in processes and business models to address the excess inventory once it is trapped, retailers should instead proactively focus on building the sustainable processes that will help avoid falling into the trap in the first place.  With these guiding principles in mind, retailers will have the right levers in place to avoid trapped inventory and can successfully maintain healthy inventory productivity and profitability.

 

HRC Retail Advisory focuses 100% of its time and energy on helping retailers to proficiently adapt to the rapidly evolving retail environment. Learn more about our Retail Strategy Consulting services.