Fit management of your inventory levels will reap rewards

We’re living in retail times where the cost of making an inventory mistake is high. Consumers are selecting their products in a cautious and saturated market, whilst retailer operating costs such as rent and wages are typically rising.

As a result, a margin of error in a retailer’s inventory management has become more punishing than ever before.

One wrong pricing decision; the incorrect allocation of stock across a large network of stores; or a poorly chosen mix of promotional goods, can result in a significant loss of margin, availability, overstocks and a misalignment of supply to demand. The damage to the brand is also apparent as tired merchandise reduces the effect of a fresh and inviting offer.

Correct inventory merchandise levels are a key indicator of the health of a retail business and, as a writer once put it, “too much or too little inventory is simply the result of either deficient or insufficient information”.

The goal is to always improve decision-making and, in our view, having the correct level of inventory is 80% science and 20% art. It’s disastrous to get these two the wrong way around! For example, highly seasonal apparel represents a very different challenge than perishable fresh food in inventory planning. Regular basics like T-shirts differ from more expensive, slow-selling consumer electronics or jewellery and require a ‘fit’ and different approach.

Rather than suffer unplanned markdowns and out-of-stocks, some retailers will re-allocate inventory and transfer it across the store network to try and solve the problem mid-season. While this may reduce markdowns and lost sales, it will increase cost of goods sold, impact supply chain capacity, increase handling and therefore reduce margins. Of course, overall assortments may be profitable, but increasingly it is vital to ensure that each assortment is as profitable as possible and that margin leakage per item is minimised.

Remember that the goal of inventory management is to get in and get out and not be caught with inventory that can’t and won’t sell.

To understand the impact of these decisions, consider space allocation as an example. Space is a premium resource and return on space per category is a key element of maximising profitability. However, with many stores, often of different sizes or layout configurations, the standard approach is to balance the better results of allocating space per store with the more manageable overhead of simply planning a number of space allocation options and then assigning these across the groups of stores.

In many cases, the trade-off will often err towards reducing operational costs as distinct from maximising sales and profit opportunities. Overall, the majority of categories may be profitable, but increasingly it is vital to ensure that each category is as profitable as possible and that each store’s performance and use of space is maximised.

Whatever channels are used and whichever merchandise is sold, there are critical decisions to be made. How well each is made will directly influence the profitability of the assortment and the business as a whole.

Happy fit retailing.

Brian Walker is Managing Director of Australasia’s leading retail consultancy, Retail Doctor Group.