Inventory Management... Have you heard of it?
The foundation of retailing would be making sure you make your customers happy through a personalized interaction and you are able to sell as much as you can to these customers in the most profitable way. Personalization, conversion and cost control.
Many retailers agree that the biggest challenge in running their business is in inventory management. But in the current, hyper-competitive and somehow unpredictable, context, bringing to life the principles of retailing becomes complex. And all things happen at such speed that any issue affecting stock has a direct impact on retailer’s profitability. I have even heard retail business is about managing risks associated to stock…
When talking about poor inventory management, most people think about out of stocks. This is probably the most notorious effect as it immediately impacts the customer satisfaction. But there are other symptoms that show poor inventory management, some of them easily identifiable:
Reduced sales (lost sales)
Increased product obsolescence
Symptoms only show that something is not running properly. Behind them, there are many and diverse root causes, internal and external. Detecting, quantifying and solving them will result in a more balanced stock position and, from the finance perspective, in margin and working capital improvements.
Main causes of poor inventory management
There are many internal and external factors that provoke issues in managing the inventory:
Inaccurate forecasts: low and/or not calculated at the right level,
misallocation of the inventory,
unclear replenishment priorities,
supplier fill rate reliability,
competitors’ aggressive price reductions,
weather, regulatory and, finally,
unexpected customer shifts in demand.
As per the list above, it may seem that improving inventory management is a really challenging task. And it is indeed. And has more to do than just investing in an expensive, fancy software solution.
Improved inventory management capabilities. Step 1: Back to basics
First step of the inventory management improvement journey is ensuring there is a robust foundation that minimizes the errors due to the human factor and miscoordination. Based on my experience, main sources of human-based inefficiencies are:
poor visibility of business levers, and
low compliance to planning and execution.
So, building blocks for a solid inventory management capability are:
Standardized processes to ensure flexibility, reduced response time, consensus, coordination and accountability
Proactive stock management through a set of kpi’s and alarms
Advanced forecasting & replenishment capabilities where demand is properly segmented and with clear service levels to enable focus and prioritization
Data quality management effort to ensure data integrity, cleansing, preparation
Stock visibility across the whole supply chain
Process compliance and continuous improvement mechanisms
Improved inventory management capabilities. Step 2: Dealing with complexity and unexpected events
Once the inventory management function has solid roots, dealing with the market context will depend further capabilities. Complexity may come from different sources:
supply chain/logistics/network restraints,
sensitivity to weather or other variables and, finally,
customer propensity to shifts in preferences.
A quick look to the topics above shows that there are both predictable and unpredictable events. There is not much to do with unpredictable or unexpected ones except having the mechanisms to quickly detect and react. On the other hand, there are some capabilities that contribute to eliminating the predictable ones, such as:
Supplier integration to create a unique, end-to-end value chain
Process automation to reduce errors and lead times
Real time data capture and monitoring to reduce response time, and
Ability to generate different scenarios to solve an (expected or not) issue
The supply chain control tower
Control towers have been a hot topic for a while already. A control tower is a software platform, with different layers (integration, monitoring & alarms, scenario generation and, even in some cases, autonomous decision making) that combines real time data processing and advanced analytics to support better decision making across the whole value chain. In other words, it is the technology that connects all dots and enables scaling the capabilities.
Issues around inventory management are not new to business. In fact, it has been a hot topic over the last 60 years. Too many variables, some predictable but others not, jointly with a long list of logistics restraints, have made this function one, if not the one, of the most difficult to master and optimize results.
Control towers have appeared in the market with the promise to be definite solution to this challenge but, although there is no discussion that they are bringing analysis to another level, bringing plans to life requires solid foundations that have more to do with people and robust processes.
Thus, before engaging in any inventory improvement initiative, start by doing an internal diagnostic to make sure there are no basic, critical capability gaps that will threaten the future ROI of the project.