Inventory Management: 4 Keys to Improving Holiday Inventory Management
4. Understand the financial impact of inventory. Buyers are responsible for procuring the right inventory in the right location at the right time. What determines "right"? Is the key metric inventory turnover, order fulfillment, sales, cash flow, profit or some combination? All of those metrics are important, but for the short- and long-term health of the business, the key metrics are profit and cash flow.
Consider incremental profit margin, or the incremental gross margin from additional sales minus the incremental selling, operating and distribution costs to achieve those sales. Incremental costs can include the carrying costs of inventory, expedited versus regular freight fees, the cost of processing and shipping back orders, and the incremental freight costs required to move inventory between stores.
The operating cost of a back order to a direct retailer can easily be $12-$15, for example. If the gross margin of a product is only $10, the retailer must question whether to pursue the sale when each sale loses money. When faced with overstocks, it's necessary to understand the trade-off between lower in-season gross margin and the cost to liquidate the inventory through an alternative channel. When evaluating an incremental purchase, the cash flow impact of increased inventory must be considered when the minimum order quantity exceeds anticipated near-term demand.
The best multichannel retailers invest in educating their buyers to understand inventory's impact on cash flow and profit to ensure that every buying decision results in a positive contribution to profit and protects cash flow.