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The True Cost of Poor Inventory Control

Darren Gilbert
by Darren Gilbert on Oct 12, 2017 5:46:18 PM

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Controlling the inventory that comes into (and goes out of) your stores is vital to your overall business. Why? Let’s put it this way: if you can’t control the flow of your inventory consistently, there will always be some kind of problem that you’ll need to confront.

And who wants to be that retailer? The one who has to think more about putting out fires than the overall health of their business. The short answer is obvious.

So what are the causes of poor inventory control, you may ask. More important than that, what are the possible solutions? We cover both below:

Reasons for poor inventory control

When it comes to understanding the causes of poor inventory control, it’s necessary to split it into its two parts. It can either break down during the planning stage or on the operations side.

Miscommunication when planning your inventory

The planning side of things is about knowing how much inventory you need to put on your shelf. You also have a relative amount of control over this side of the inventory management process.

For example, you’re going to put three mugs on your shelf. They’re going to have three facings deep, which means you’ll have nine mugs in total. Since a case pack contains 12 mugs, you know that while you have nine mugs on the shelf, you’ll have three in your store room as backup. As soon as you go down to six on the shelf, you can plan to order another case pack.

But what happens when you change your space allocations in your stores? While you technically have control of your inventory, you don’t have the additional data required to stock your stores.

A breakdown in your supply chain

On the other side of the inventory management process is your supply chain. This is the operation side of inventory management process and you unfortunately don’t have full control over it. It also doesn’t take much for it to break down.

For example, your supply trucks can get to your distribution centre on time and with the right stock. Your distribution centre can move your stock to the correct stores without a problem. But if the merchandiser is too lazy to unpack the boxes, the whole chain breaks. It is that finely balanced.

A look at the consequences of poor inventory control

Abandoned shopping baskets

If you ever want to question the importance of proper inventory management, you only need to look at what happened to Target Canada. In 2015, the retailer announced that it would be closing down all 133 of its stores. One of the many reasons was due to their new inventory system, which resulted in an inventory management disaster of $5.4-billion loss.

Of course, a major store closing down because of poor inventory management really only happens once in a couple of years. It happens, but it’s not an everyday occurrence.

The real (and thus bigger) damage occurs every single day when customers abandon their baskets.

Imagine your customer walking into your store in search of a product. After placing five or six products in their basket, they can’t find a key product. So they decide to abandon their basket and walk out to find a store that has all the products they need.

It does need to be noted that no two consumers are the same so you will have a few who aren’t picky and will simply pick up a different product, thus transferring demand. However, it also happens more often than you think.

Out of stocks and overstocked stores

As result of miscommunication when planning your inventory, you’re not getting the right amount of stock to your stores. That means you can suffer from out of stocks.

But when does this become a big problem, you may ask?

Here’s an example: let’s say the item that pulls in your customer is a high profit item. Meanwhile, all of the other items in their basket are near cost prices so while you do lose out, it’s not that bad. However, consider what happens if you swop that around. The item that pulls your customer in is a foot traffic generator but all the other items are high profit and your customer drops them.

Now consider the compounded impact that it would have on the profit margins of your stores.

On the other side of this is the problem of overstocking. While it’s not the same as out of stocks, it does make up one side of the same coin. In overstocking your stores, you’re sitting with dead stock in your store room. You’ve also already paid full price for stock and you’ll end up losing money by either selling it at a considerable discount or sending it back to the distributor.

At the same time, all of this dead stock is taking up valuable space in your stockroom.

How to combat poor inventory control

Ensure you have a backup plan if your supply chain breaks down

In an ideal world, your supply chain won’t break down. Of course, we don’t live in a perfect world so the chances are good that you will experience a break in the chain at some point in time.

Since you don’t have full control over your supply chain, it’s highly recommended that you have a backup plan in place. That sounds like an obvious advice. It is. And yet, it’s a point which can be easily overlooked.

The plan doesn’t need to be elaborate. It just needs to help where the supply chain breaks down. A simple strategy of having a backup supplier is sufficient.

For example, if you have (or are about to) run out of stock of a certain product, you need to know how you’re going to fill that gap on your shelf. Or know that you must follow a merchandising principle. Don’t just leave the shelf open.

Have control measures in place when planning stock control

Since one of the causes for poor inventory management begins at the planning stage, it stands to reason that you need to consider putting measures in place right at the beginning.

How? One way is to ensure that you track, measure and implement any plan. And this plan needs to come right from the top and filter all the way down to your stores.

For example, your head office has a plan that they want to implement. This plan needs to be distributed and implemented at store level.

Once the plan arrives, it’s the responsibility of the store to take the plan, place all products on the shelf and merchandise everything. Once merchandised, they can relay that information back to head office to show that the plan has been implemented. The result is your inventory is where it should be, and you don’t have dead stock.

Ensure your space isn’t disconnected from your replenishment engine

To ensure that you don’t have poor inventory control, your supply chain must be spatially aware. That simply means your space needs to be connected to your replenishment engine.

In a previous blog article we wrote about your range being disconnected from your space. In that case, in working on a new range, you know you only have three drops you need to fill, for example.

But what you haven’t done is you haven’t told the replenishment engine that your space has changed.

To fix this, you need to ramp up your replenishment engine. Thus, you can make sure that with any anticipated increase, you will be able to do the initial stocking of it, and then on top of that, make sure that your replenishment engine is aware that there are more products sitting on the shelf.

Conclusion

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