Inventory Planning in an Omnichannel Environment
Merchandise and inventory planning for catalog retailers used to be a thorough, highly detailed process from start to finish. The goal, of course, was to establish the best possible product assortment and inventory plan to optimize the sales and profits from the catalog mailing.
This approach was driven in large part by the fact that the catalog typically functioned as the single marketing event. After all, the catalog was "the store" for the customer, so when it arrived in the mailbox it was critically important to have not only the best possible product assortment in place to maximize customer orders, but also sufficient inventory in stock to fulfill those orders. Considering inventory reorders from suppliers could take weeks if not months to arrive, the initial plan needed to be as close to perfect as possible.
E-commerce has changed all that. The shift to the website as "the store," along with the ability to adjust marketing decisions in real time, have fundamentally shifted planning priorities for catalog retailers.
The new best practice approach to merchandise and inventory planning is to invest less time developing the initial plan and more time managing contingencies, which will allow you to react as perfectly as possible once customers start purchasing.
This is more than a refinement to the historical approach to planning; it's a completely new way of doing things to meet the customer's omnichannel expectations. To nail this strategy, an effective plan will incorporate these three key components:
- Treat the initial inventory planning as an investment exercise. As a company, you're essentially investing your cash in inventory in anticipation of a profitable return on the investment. You need to take a top-down approach to spending your money in such a way as to create a balanced portfolio of inventory. Your portfolio should include both reliable, known products (i.e., "safe" inventory) as well as "higher risk" new products, some of which are bound to be highly successful, while others will fail spectacularly.
- Create specific marketing plans for each product through your various selling channels to account for all your inventory commitments. While it's important to cover all your bases, don't overthink planning at this stage. If you invested in 10,000 units of a product, make sure you have appropriate marketing plans to sell it vs. another item where you purchased only 2,500 units. That said, don't be anxious if you haven't accounted exactly for all 10,000 units or 2,500 units. "Close" is OK! Keep the Pareto Principle in mind — spend most of your planning time on the 20 percent of the items that will deliver 80 percent of yours sales.
- Put contingency processes in place to react as quickly and perfectly as possible when the customer first responds to your product assortment. E-commerce has given you a marketing lever that allows you to adjust your marketing quickly. Nowadays, it's easy to adjust your plan by increasing your marketing to items that have too much inventory and pulling back on the items that have too little. Merchants and inventory planners should embrace this new ability.
Your market has changed, bringing new, timely marketing options that didn't exist 10 years or 15 years ago. If you can adjust your planning processes to use these new options and make the best use of your staff's planning time, you'll find it much easier to optimize the sales and profits from your inventory investment.
Joe is Vice President of Product Solutions at Software Paradigms International (SPI), an award-winning provider of technology solutions, including merchandise planning applications, mobile applications, eCommerce development and hosting and integration services, to retailers for more than 20 years.
Joe is a 34-year veteran of the retail industry with hands-on experience in marketing, merchandising, inventory management and business development at multichannel retail companies including Lands’ End, LifeSketch.com, Nordstrom.com and Duluth Trading Company. At SPI, Joe uses his experience to help customers and prospects understand how to improve sales and profits through applying industry best practices in merchandise planning and inventory management systems and processes.