How to maximize profitability from your inventory investment in a highly complex retail environment:
5 keys to successfully increasing your profitability
Let’s be honest – accurate trend forecasting is difficult in normal times. And today’s combination of a constantly shifting macroeconomic environment, growth of omni-channel capabilities and an ever-changing shopping journey are making it even more challenging. The new formula for retail profitability calls for speed, discounts, and specialized customer experiences. And retailers looking to improve their profitability and increase their gross margin return on inventory investment (GMROI) need to think about their inventory strategically.
For those retailers seeking to gain the most profit from their inventory investments, here are five (5) strategies for success:
- Focus on what matters to your customer
We’ve all heard of the “80/20 rule,” and in most retail chains, it is true that a very small percentage of items are the primary drivers of sales and profits. Identify your most profitable products and locations. Then, increase the organization’s focus on their performance, while reducing the investment and time on those items or locations that are less important to the customer and therefore contribute less to the profitability of the business. Support the emphasis on “what matters” by creating actionable, exception-based processes based on specific criteria that will highlight opportunities for those important items/locations and ensure they are action-based by embedding them in day-to-day practices.
- Increase flexibility and responsiveness into production cycles
All retailers, particularly those that go from design-to-consumer, face an incredibly challenging environment trying to balance long production lead times with constantly shifting consumer demand. However, retailers that have successfully identified ways to increase flexibility and responsiveness into their production cycles are winning and increasing profitiability. One only has to look at the success of fast fashion retailers such as Zara to see the benefits of this strategy. Retailers who shave months off final inventory commitment dates are in a much better position to align inventory with customer demand and thus are in a better situation to generate more profit. For example, although apparel retailers must procure the fabric, if they can work with their partners to understand timelines for when the fabric must be dyed and then cut into specific styles and sizes, they can base their decisions on the latest business intelligence on what is selling, and avoid as much as possible producing what the customer is not responding to. All retailers can benefit from rethinking the timing of their inventory investment decision and find opportunities to adjust and respond to consumer demand.
- Leverage the gift of speed
Speed really does matter; especially when it comes to the financial and market share rewards that come with being able to be first to identify and capitalize on trends and opportunities. However, being first won’t deliver profit or market share if actions are not focused on the desired results. Retailers are overwhelmed with data from structured point-of-sale data to the unstructured information flooding from social-media sites such as Facebook, Twitter, Pinterest, Instagram, etc. There are not enough hours in the day to get through it all, but by applying the “Focus on What Matters” strategy, along with predictive analytics, retailers can use data to react and act as demand shifts. By updating demand forecasts and quickly identifying under/overstock opportunities, retailers are able to adjust orders in advance of the rest of the market. Moving up, pushing out or cancelling orders and negotiating returns or additional funding is much harder when the rest of your competitors are trying to do the same thing at the same time.
- Don’t settle for average
To keep it simple and in the interest of efficiency, retailers have historically managed multiple locations and products based on store and category performance averages; however, this doesn’t work. The result of this “averaging effect” is often that every store’s inventory includes the same products in similar quantities and in the same sizes. Retailers that leverage technology with leading practices approaches to turn merchandising, planning, buying, allocating and replenishing decisions to local tastes and customer preferences and demand patterns will experience success. By tailoring inventory investments to the local level in terms of breadth, mix and depth, retailers realize significant inventory productivity and profitability improvements.
- Measure what matters
The increase in data availability has also given rise to a proliferation of reporting. Drive inventory performance and measure profitability through the judicious use of performance metrics to ensure everyone in the organization is aligned around the company goals, not just a handful of inventory planners. Leading retailers design measures built around profitability and service—sales, customer service levels, margin and inventory productivity—that are monitored regularly across multiple business functions and are formally incorporated into the performance review process.
Following these five strategies will help any retailer improve their return on their inventory investment and maximize profitability on their investment.
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