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Is Your Capital Getting Caught Up In Inventory Value?
Darren GilbertSep 20, 2017 5:00:56 PM6 min read

Is Your Capital Getting Caught Up In Inventory Value?

Rising inventory value is a problem that all retailers should be well aware of. Why? Since inventory value - also known as inventory holding - refers to the cost associated with storing inventory that has yet to be sold, any unnecessary increase can cause considerable damage to your business.

Let’s say your business has R100-million of unnecessary stock lying around, for example. That R100-million could have funded a store opening. But that opportunity is now lost. Of course, it’s more than just that.

Stock is not the only thing that drives your business. There are other areas of your business that you need to look after. But with that R100-million locked in, you can’t consider them. That means any much-needed store revamps must be put on hold. And don’t forget about the impact that it can have on looking after your staff.

What are the causes of rising inventory value, you may ask. More important than that, though, what are the solutions?

You’ve used a decentralised buying method

One reason for rising inventory value can be attributed to the processes (or lack thereof) that surrounds the way in which you buy your products. More specifically, it’s to do with the method known as decentralised buying.

Decentralised buying allows individual stores to look after how they purchase their products. That means they have total control of the buying process. From the outside, that might sound like a great idea. Individual stores should know their customers and so should get to choose their own stock. But it’s far from an ideal method. It can, in fact, cause a significant problem.

How? In going the route of decentralised buying, your store managers, who are acting as your buyers in this case, aren’t held accountable for what they bring into the business.

For example, Supplier X will offer a special on a product and the store manager might take it because it’s discounted and they thus think it’s a good buy. But they aren’t thinking. Have they checked if their store has enough space for it? And will it even sell?

What follows is range bloat. And that’s just the beginning.

Fortunately the solution is fairly simple: instead of taking a decentralised approach, you take a centralised approach. It’s essentially the opposite so you’ll have one central control point where buying decisions are made.

The good thing about this is that not only will you have one central place to store your range, but you’ll have better control over it. You also have the opportunity to implement category caps since these address both range bloat and accountability at a central level.

That said, with category caps, you want to ensure that you caps stay in line with your average congestion. Your congestion essentially refers to how full your gondola can be without it looking messy. And every category has a different congestion level.

For example, the baby diapers category has a higher congestion level than the pens and stationery category. So, you can hit almost 90% congestion for baby diapers because they are large size products and it’ll still look okay. That’s not so for pens and stationery. If you give that category 90% congestion, it’ll end up looking messy. Your brain can’t concentrate on that number of products so you’ll need to target a much lower congestion.

You should also seriously consider implementing a localised assortment strategy. As we’ve noted in previous articles, with a localised assortment plan in place, you’ll not only satisfy the needs of your customers but you’ll also improve in-store experiences.

Your range is disconnected from your space

Overstocking can happen at any point. It can happen at the opening of a new store. It can happen at the closing down of a store. Most importantly, it can also happen anytime in between.

One reason for it happening at all is because your range is disconnected from your shelf space. Let’s take the opening of a store as an example here. If you’re disconnected from space, that means you don’t know how much stock you must order for your store. You can certainly guess. You can even look at a similar sized store and base your decisions off that. But that’s not advisable.

On the other hand, if your range is connected to space, you’ll know what your minimum stock order is. You’ll know what your capacity stock order is. And then, you’ll also know how much additional stock you should order based on your rate of sale by cluster data. Remember, you need to ensure that your inventory is completely aligned with your rate of sales and the space available to you.

With that taken care of, you can also then look at the rest of your stores’ performance as well as your general chain performance. From there, you can determine if you’re going to need to order full capacity of stock. You can also estimate if you’re going to do the same turnover as those other clusters of stores. In doing that, you can then order capacity plus X, for example.

The result is that you’re only laying out money for what your business needs. You thus won’t overstock or even under stock on your products. Considering money in the bank is far better than having dead stock lying around, your business wins.

Your inventory management data is not integrated

In order to have any control over rising inventory value, you need to ensure that your inventory management data is integrated. After all, if you want your inventory planning to be as efficient as possible, you can’t expect to do it in isolation.

It’s worth noting that an integrated solution requires a daily feed of both store stock and DC stock levels in the business by product. This would be over and above your normal sales data feed

A solution in this instance is what DotActiv calls the ‘5-week rule’. Essentially, what it says is once you have a product marked for discontinuation, the supply indicator is switched off. Your business will thus no longer order that product in. The supply indicator feeds into any replenishment engine that your business is using. And it’s managed automatically so that there are no human errors.

The rule allows for your stock to firstly deplete properly before being removed from your planogram (POG) by making use of a POG indicator that is automatically managed by the system. In letting your stock deplete naturally, you’re getting most of your money back. You can then throw that last stock into bargain bins or freely merchandise to get rid of it.

That means that you won’t be sitting with stock that you have to ship back to the supplier for a rebate that is going to be far less than what you bought it for. Without the rule in place, the other option is to throw extra stock into bargain bins, which means you’ll ultimately lose money and you don’t want that.


Darren Gilbert

Darren Gilbert joined in 2017 and is the content manager. He has a Bachelor of Arts in International Studies from the University of Stellenbosch.