How Inventory Planning Supports Marketing Decisions
Mistakenly viewing inventory planning as a strictly operational process for reducing costs and improving efficiency is common. Many retailers are focused only on metrics such as in-stock rates, fulfillment percentages, back order rates and inventory turnover.
Many smaller retailers (say, under $10 million in annnual sales) simply don’t believe that improvements in inventory planning will provide enough incremental profit gain for a company its size to justify investing in staff, systems or processes. However, they may be overlooking a crucial piece of the puzzle: how inventory planners help marketing and merchandising teams grow sales and increase gross margin.
The Best-Laid Plans …
Multichannel retail planning typically has two phases: initial preseason planning and the in-season adjustments that follow. Marketers, merchants and inventory planners all work together to develop the best initial plan possible, then inventory is purchased to support that plan.
It's when consumers start buying that the scrambling begins. Customer response to the product selection and marketing message is always different than planned. Average forecast error — the amount of deviation from initial plans — typically runs at a whopping 30 percent to 40 percent industrywide.
The High Cost of Forecasting Error
Here’s the kicker: “average error” reflects both sides of the inventory ledger, meaning the plan is wrong in two directions at once. For example, you might have planned to sell 1,000 units of an item, but customer response prompts a reforecast to 1,400 units, a potential lost sales of 400 units. Meanwhile, another item pegged for 1,000 units proves to only sell 600 units, leaving an overstock of 400 units.
By extension, we see that for a $10 million business an average error rate of 40 percent could mean potential lost sales of $4 million, with simultaneous overstocks of $4 million (at retail)!
Thus the in-season reforecasting performed by inventory planners is crucial to profitability. It’s where knowledge, systems and processes can have their greatest impact. In short, these timely, well-informed plan adjustments will help any business accomplish the following:
- make faster, smarter repurchase decisions when reordering inventory to fulfill projected shortages;
- cancel or delay purchase orders for unneeded inventory;
- direct consumers to the highest quality inventory to optimize sales, reduce wasteful marketing expenses and clear out excess inventory; and
- initiate markdowns on overstocks to maximize gross margin and dispose of unwanted inventory (quick response yields the best possible gross margin while minimizing inventory carrying costs).
The idea is to take the right action at the right time and to continually optimize business performance using the best and most recent information available. The speed and quality of inventory planners’ decisions can heavily impact both top-line sales growth and bottom-line profits, even for a smaller retail business. The relatively low cost of investing in inventory planning staff, systems and processes will deliver immediate, significant and enduring sales and profit gains for your business.
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.