Managing Inventory and the Impact on Profitability

Retailers profitability is significantly impacted by inventory shortage through paperwork, external and internal theft. Investment is heavy on reducing shortage through various shortage awareness programs, cameras and equipment, security tags, court appearances, travel and supplies and perhaps most importantly, the labor required to staff shortage awareness and prevention programs. While retailers invest heavily in trying to reduce shortage, considerably less is spent in managing one of their largest assets, inventory exclusive of shortage implications.

Control over inventories is often a distributed function. Merchants and/or planner distributors have control over procurement, timing of price changes, redistribution of stock, etc. Information Technology develops the systems which help retailers improve the job of inventory management. Distribution and logistics personnel control routing, processing, store distribution, distribution networks and other inventory related functions. Retail stores effect inventory presentations, execution of inventory functions, and perhaps to a greater extent, the way in which the inventory is sold.

Inventory management requires centralizing and controlling all inventory functions, including inventory shortage and control, an expanded role from the recent trend of supply chain management. Supply chain management, while purporting to control supply chain activities, is at best a warehousing, distribution, and logistics function. Many retailers have become insolvent or close to insolvency because of the lack of control over inventory. Many more struggle to make the projected operating profit because of poor inventory turns, poor margin on inventory, lackluster sales, or a combination of the above. Few retailers, if speaking candidly, would admit that sales, markdowns, margin and turn is where it should be to maximize profitability, now or over the past several years.

Another, perhaps more pressing issue of the decentralized approach, is that performance scorecards are not aligned with the business strategy across functional lines. Competing business objectives translate into competing business results, a mixed bag at best. Company culture may further complicate inventory management as turf battles rage, especially in environments which drive compensation across competing functional business objectives. On the other hand, the malaise associated with “socialistic” cultures has the opposite effect…nothing is better than something and something is too risky.

The short-term focus on profitability, at least in public companies, further exacerbates the issue of inventory management. Retailers, in trying to achieve short-term goals, attempt to meet discrete and black & white plans that were established months ago. The lack of dynamic inventory management systems that review trends, automatically revise plans, assist in managing vendor relationships, initiative markdowns, forecast sales based

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partially on price elasticity, and optimize profits leave retailers will few choices. Consequently, they assign the function of inventory management, across geographic regions and in some cases across continents, to a highly distributed organization who rely upon their experience to make decisions resulting in a see-saw inventory process…oops too high or opps too low.

In the last few years, retailers have begun to understand the huge hidden cost associated with inventory mismanagement…labor costs associated with poor performance. Even so, many costs go unrecognized or are not part of an activity based costing system which attempts to assign accountability for inventory mismanagement. The cost of warehousing, distributing, store placement, revising store placement, restocking returns, restocking fitting room merchandise, signing, price changes, vendor charge-backs, shuffling stock, damages, job-outs, stock balancing, repackaging and the like are simply reported on the expense line. Some retailers take an “anything goes” approach in an attempt to maximize sales while others take a “nothing goes” approach in an attempt to control the expense line. Neither approach seeks to optimize profitability over the long-term.

The role of customer satisfaction is paramount to efficient inventory management. As retailers have continued to cut store personnel, another short-term approach and have moved to more self-serve, with few exceptions, the reliance upon knowing what satisfies a customer and keeps them coming back has become increasingly difficult. Signing, advertising, additional services, customer friendly layout and design, brand development and loyalty and a myriad of other challenges have taken the place of store personnel in an attempt to lower operating costs and increase multiple sales, impulse buying, enhance product differentiation, lower return rates, encourage higher margin purchases, etcetera. Additionally, retailers must be much more astute in their placement and securing of inventory due to shortage ramifications. Decisions are made that invariably have an adverse effect on sales and inventory turn or margin improvement. While many retailers strive to be more like Wal-Mart, the very nature of their business dictates otherwise.

The Inventory Management Cycle is illustrated below. How well we manage these activities determines how profitable retailers will be in the future. To think that we can effectively manage these challenges under separate umbrellas is to believe that inventory management is a part-time business requirement where the effort outweighs the return. On the contrary, not having a functional head solely responsible for inventory management will lead to undesirable results…results that could take years to turn around. Not having a functional head blurs lines of responsibility and understanding weakness more difficult. Furthermore, unless we understand the true costs associated with inventory management and poor inventory productivity, and can review the benefits of alternative approaches, retailers will continue to be inventory complacent…accepting mediocrity instead of stellar performance. As consultants, we are frequently asked, “What are inventory best practices”. Our response is always the same…adopting a holistic operating model approach that improves customer relationships, significantly improves

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inventory productivity, enhances sales and margin, and saves millions in operating costs…and it all starts with a comprehensive organizational focus on inventory management.

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Or ga n I zat ion Or ga n I zat ion

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Inventory Management CycleProduct

Development DistributionStore

Operations

Strategy & Plan Development

Concept Development

Design & Development

Production Planning &

Tracking

Production

Receiving

Processing

Warehousing

Shipping

Transportation

Direct Customer Orders

Order Fulfillment

Non Merchandise Management

Inbound/OutboundProduct

Movement

Stockroom Management

Product Preparation & Presentation

Selling

Product Management

Backoffice Functions

Vendor Management

Planning Purchasing Placement

Line Planning

ConceptualAssortment

Planning

Financial/Merchandise

Planning

Ordering

Vendor Negotiation

Performance Analysis

MarginManagement

InventoryMovement

Replenishment

Allocations

Forecasting

InventoryAnalysis

Pool Stock Management

If you are concerned with managing your inventory and seek assistance on fresh approaches to improving profitability, please contact Pat Jones at 256-682-3510. Many retailers have found The GARR Consulting Group’s approach to client assessment a valuable benefit to other initiatives focused on performance improvement.