In simple terms, inventory management is defined as any practice undertaken to handle your inventory. Your inventory is your stock - those items that your business holds with the intention of selling. And effective inventory management means ensuring you have the right inventory (and the right amount) at the right place and price.
While inventory management might not be the most exciting aspect of running a business, it’s importance shouldn’t be underestimated. Why? Simply put, it can make or break your business. If you don’t believe that, then here are a few reasons to persuade you otherwise:
Every business is different. That means when it comes to choosing which inventory management technique to follow, you won’t necessary have the same as the business next to you. But that’s okay - as Casandra Campbell notes in an article for Shopify, inventory management is highly customisable.
Within the piece, she touches on a variety of techniques that you should consider. All of them will not only improve your inventory management but also your cashflow.
A few inventory management techniques to consider include:
A supply chain management method in which a retailer transfers customer orders as well as shipment details to the manufacturer, wholesaler or even another retailer. This is instead of keeping the goods in stock.
Shortened as FIFO, it means that your oldest stock is sold first rather than your newest stock. While this method works best for perishable products, it can work just as well for non-perishable products. Just to note, your inventory value ties in here since FIFO, along with others including Last-in, First Out (LIFO), is a common valuation method.
Otherwise known as accurate forecasting, demand forecasting refers to the ability to predict customer demand. While it’s not the easiest technique to master, it’s worth considering since it can create repeat customers.
There is also the ABC analysis which is an inventory categorisation method. It is essentially a technique in which you divide your items into three categories which rank from your most valuable items (A) all the way down to your least valuable items (C). This is because not all inventories are of equal value.
As Joffrey Collignon and Joannes Vermorel point out, this method “aims to draw managers’ attention on the critical few (A-items) and not on the trivial many (C-items)”. It’s also referred to as Selective Inventory Control.
Days of Supply, or DOS as it is commonly known, is defined as “the number of days a product will be on your shelf before replenishment is necessary”. It’s calculated when your capacity is divided by the units sold per day.
Understanding how quickly (or slowly) the stock on your shelves decreases is crucial if you want to please your customers. In fact, as you’ll have read above, it can make or break your business.
That's why is crucial for you to understand the factors that can influence your days of supply. With these factors in mind, you’ll have a better chance at staying in line with the demands of your customers. That means you’ll also be able to plan better.
These factors include, but are not limited to:
While there are various factors that influence your days of supply, it can also be used to improve your retail operations.
How? It all comes down to what is known as space elastic demand - the increase or decrease in the rate of sales, which would arise because of a change in the space allocation of a product.
Now, imagine if you have two gondolas, and you’ve merchandised your inventory differently for both. The first is done consistently so that the products decrease equally on the shelf. Meanwhile, the other is merchandised so that the DOS for each product is inconsistent.
While the first will be easy to restock, the second will be a nightmare. That’s because each product will be selling out at different times, meaning that your shelf will have many gaps.
Safety stock, otherwise referred to as 'buffer stock' can help you out here. It’s how much extra stock should be held to ensure you don’t run out of stock, and takes into consideration fluctuations in supply and demand.
“When DOS is extended beyond the shelf by including stock held at stores and distribution centres, the DOS calculation can be particularly helpful for overall replenishment.”
It’s also worth remembering: in-store experience and customer satisfaction needs to be at the top of the list for any store manager. A partially empty shelf means that it’s not. And the last thing you’d want to see as a manager (or even as a customer) are staff members running back and forth in an attempt to restock empty shelves.
Inventory replenishment is defined as “the movement of inventory from upstream or reserve product storage locations to downstream or primary storage, picking and shipment locations”. And it’s purpose is to “keep inventory flowing through the supply chain by maintaining efficient order and line item fill rates”.
Each time a new planogram is imported into DotActiv, the causal data - facings, capacity, minimum display quantity and so on - is written to the database. Following that, the data is exported to a staging table, which can be picked up and used by inventory replenishment systems.
This data is then transferred to the replenishment engine, which will, in turn, order the required stock based on the causal data.
How does this happen and what specific space planning feature makes this information exchange possible? The short answer is that there isn’t actually an specific feature. Rather, it comes down to a combination of features within our Enterprise solution since this is all based on details that are within each and every planogram that is linked to clusters.
That said, while this integration doesn’t take distribution channels (DC) into account from DotActiv’s side, the replenishment engines do look at what stock is in the DC’s before making the final order from suppliers.
That also means that this approach to inventory replenishment takes the supply chain into consideration. So, when a product is delisted, it will remain on your shelf until the stock has been depleted from the DC’s and there is minimal stock in your stores.
Why is this approach better for listing and delisting products? Here are three reasons:
Did you know that a simple increase in the facing of a single product can impact all of your stores? The same can be said if you decrease your facings. And this will all impact your replenishment model.
That is why it’s so important to manage the space allocation of your products. It’s also the basis for any argument that there is a concrete link between inventory replenishment and space planning.
To manage your space properly, through, you first need to know what the stock and financial implications will be for your stores. DotActiv’s ADDM report plays an important role here.
ADDM refers to additional demand and the report “helps to estimate what the minimum required stock on shelf per SKU should be, and how many case packs should be ordered to fill that requirement”.
Don’t forget the role that space planning and inventory plays in clustered environments where a single planogram can be applied to a few hundred stores. Making changes, however small, can also have a massive impact.
While both retailers and suppliers play a role in ensuring that the inventory replenishment process runs smoothly, they are not the only ones that are important. Your space planners are just as crucial to the process.
Space planners need to gather all relevant information across your retail business to build data-driven planograms that are in-line with your store’s individual performances. The data from these planograms are then used to ensure that your retail business has the correct inventory.
And accuracy is key here. If it’s not accurate, there will be redundant stock sitting in one (or more) of your stores while another of your stores will run out of stock completely. The result will be obvious: a loss in overall sales. But more than that, if it happens regularly, it’ll also mean that your customers will come to expect that you don’t stock certain products anymore.
Your Assortment Plan
Assortment planning - the “process of selecting the collection of products which will be on offer in particular areas (localisation) and specified periods of time (seasonality)” - entails the evaluation of your individual product attributes.
This is so as to address the preferences and needs of your customers. As for why it’s so important, it’s simple: in ensuring shopper satisfaction, as retailers, you can increase the financial performance of your stores. Of course, your assortment variety does increase the cost of your inventory.
Your Inventory Plan
Selecting your collection of products is important. However, it won’t mean much if you select the wrong amount or even select them at the wrong time. It’s now up to you to figure out how much of each product you’ll need at any given time.
In having an inventory plan, you’ll not have to worry about overstocking. An effective inventory plan will indicate “when demand for a specific stock will increase”.
Your Space Plan
When it comes to your space plan, there are two separate functions to consider:
Macro space planning is essentially floor planning and with it, you can determine both the space allocation and positioning of each product category within your store. After all, the more merchandise your customers are exposed to, the more they tend to buy.
On the other hand, micro space planning, otherwise known as shelf planning, determines the optimal positioning and space planning for each product. That includes each sub category as well as each brand within any given category.
The bond between assortment, inventory, and space planning
Whether you’re focusing on your assortment plan, your inventory plan, or even on the different aspects of your space plan, one thing is common throughout: data. More specifically, it’s the use of data.
When data is not shared between these three functions, your efforts become inefficient. In fact, more than that, your efforts become pointless. How can you know how much stock to order if you don’t understand how much space is available for each product? Only data can help you here.
Your inventory planning also impacts your planogram. When a product is added to an assortment, it gets ordered. Likewise, when a product is removed from an assortment but you still have stock, the product will remain on the planogram.
Inventory planning is fairly simple to understand. It’s essentially defined as the “process of determining the optimal quantity and timing of inventory for the purpose of aligning it with sales and product capacity”. It also has a direct impact on your cashflow and profit margins.
In short, it’s about taking all factors into account so that you can hold just enough stock (buffer stock) so that you don’t run out and displease your customers.
1. You don’t have extra storage space
While it’s not necessary a bad thing that you place large orders, you always need to be aware of the amount of space you have available to you before you do. When is it a good thing? When it puts your business in a position to make more margin.
That said, whenever you do decide to place a large order, make sure you understand more than just how much space you have.
You also need to consider the following:
2. Your inventory levels are rising
How do you know when your assortment plan has gone wrong? One way of knowing is when you look at your shelf and realise that you have stock that has been sitting there for far longer than it should. A rising inventory level can also take much-needed space away from stock that deserves it. In an effort to get rid of it, you might be forced to give discounts. Or even worse, throw the stock away.
When reviewing your inventory, be mindful of your stock to sales ratio and be careful that it doesn’t rise too far. If it does, your sales ratio needs to increase too.
3. Your inventory management is not data-driven
If you want to ensure that your inventory planning is as efficient as possible, you must ensure that it’s not done in isolation. That means it needs to be data-driven. It also needs to be integrated. The reason is simple: assortment planning, planograms and other category management functions are dependant on inventory planning and vice versa. This interdependency means there also needs to be a data exchange between the functions. With your inventory management system being data-driven, you’ll be better placed to offer the right product at the right place and at the right price. And you’ll have enough stock too.
4. You’re experiencing out of stocks more often than not
If you are finding that your store is running out of stock more often than not, you need to discover why as quickly as possible. One reason is that your inventory management capability is not as strong or as sturdy as you might have initially thought. A sturdy inventory plan, as stated above, allows you to avoid overstocking. More than that, it anticipates how much stock you need so that you never run out.
Inventory control, also known as stock control, is defined as the process of maintaining an appropriate amount of stock so that a business can both meet customer demand and keep any unnecessary costs to a minimum.
To get this right, you need to have a robust system that can help you to control your inventory. Of course, problems can arise and even the most robust system can break down.
So what exactly causes poor inventory control? To find the answer, it comes down to understanding that a loss in inventory control can stem from two different sides of your business. It can either begin right at the beginning, during the actual inventory planning stage or nearer to the end, which is during the operations stage when your inventory is on its way to your stores.
1. Miscommunication when planning your inventory
The planning stage of inventory control is all about knowing how much inventory you need to place on your shelf. You also have relative control of this side of your business since you know how much is going into your store and can thus order your inventory accordingly.
For example, you place three mugs on your shelf and they're going to have three facings deeps, which means you have nine mugs in total. Since a case pack contains 12 mugs, you also know you have three mugs in the store room as back up. As soon as you sell a certain amount of mugs, you can then place an order for another case pack.
It all sounds straightforward. And it is. But what happens when you change the space allocations in your stores? While you'll still have control of your inventory, it will be poor a best. That's becasue you won't have the additional data required to stock your stores appropriately.
2. A break down in your supply chain
While you have some control during the planning stage, you most certainly don't have control over the second part: the operations stage.
The operations side of inventory control revolves around your supply chain. And it doesn't take much for it to break down.
Considering that there are so many different moving parts in any given supply chain, there is always a chance of something going wrong. It could be something has big as a supply truck breaking down, which means you store doesn't reach your stores in time to sell. Or it could be as small as a merchandiser not interested in unpacking a few boxes.
Abandoned shopping baskets
A major store closing down is a huge consequence of poor inventory control. You only need to look at the news around Target Canada a few years ago to confirm that. Of course, such an event isn't a daily occurrence.
The bigger damage happens every single day: dropped baskets. Otherwise known as abandoned shopping baskets, it happens when a shopper walks into your store, looks for a product but can't find it, and so walks out your store mid-shop. And it doesn't matter if it's just one item or a few they can't find.
As a result, whenever they go looking for the product they couldn't find at your store, they'll have it in the back of their mind that you probably don't stock it. Even if you do.
Out of stocks and overstocked stores
By not communicating properly when planning your inventory, there is a disconnect between the stock you want to arrive at your store, and the stock that actually arrives. The consequences of this confusion should be obvious: you'll either not have enough stock in your stores or you'll be overstocked.
To fully understand the consequence of out of stocks, let's use the example of an average customer shopping in your store. Imagine the item that pulls them in to your store is a foot traffic generator but all the other items in their basket are high profit. And your customer drops the basket because one or more products are out of stock. That's only a single shop but you only need to consider the compounded impact it would have on your profit margins.
On the other hand, in overstocking your stores, you're essentially putting dead stock in your store room. Also known as obsolete inventory, that's the stock you can't sell. And since you've already paid full price for this stock, you'll end up losing (and wasting) your money. Plus, all of this dead stock is taking up valuable space that could be used for products that are actually selling and making you money.
Have a backup plan if your supply chain in case your breaks
Considering the fact that everything around your supply chain is mostly, if not all, out of your control, it's recommended that you have a backup plan in place.
It sounds like an obvious bit of advice. It is. Your more advanced retailers will undoubtedly have a robust supply chain that will include a backup plan if some part of it fails. But that doesn't mean that it is also not easily overlooked by other retailers, both big and small.
Regardless of how big or small you are, you must seriously consider having a backup supplier.
As for the complexity of the plan, it can be simple. So long as it can help you where the supply chain breaks, it should be okay.
Have specific control measures in place when planning stock control
Before you begin planning what inventory to stock, it's necessary to ensure you have a way to track, measure.
For such a plan to work, it also needs to come from the top (Head Office) and filter all the way down to your store level where it will be implemented.
How do you ensure it will work as initially outlined? Simple: once the plan arrives at store level, it's the responsibility of the store manager to implement it. Once done, they will inform Head Office and provide evidence if need be.
Ensure your space is connected to your replenishment engine
Your supply chain must be spatially aware at all times. What that simply means is your replenishment engine needs to know exactly how much space is available on your shelf.
It's not the same as having your range connected to your space. In that case, its focusing on your range that fills your drops. And so you send the planogram off to be implemented.
But what you haven't done is you haven't told your replenishment engine that the space allocations might have has changed from one facing to three facings.
To correct it, you must increase your replenishment rate to the appropriate amount. By doing that, you'll ensure that with any anticipated increase, you'll not only cover the initially stocking of the product, but also ensure that your replenishment engine knows that there are more products sitting on your shelf.
For inventory control, it's important that all your systems are talking to each other.