The New Reality of Inventory Management
Along with our entire team, I recently had the opportunity to meet with a large number of merchandise and inventory planners at Direct Tech's User Conference. Over three days of presentations and networking, one thing became very clear: Inventory planning for cross-channel retailers has gotten complicated!
- For catalog retailers, it's no longer as simple as planning demand for a single mailing every four weeks.
- Brick-and-mortar retailers are trying to adopt direct retail planning techniques and vice versa.
- Online retailers have learned that inventory decisions have far-reaching financial consequences. As a result, they're rushing to adopt forecasting and purchasing processes.
It's a balancing act in every channel. Too much of the "wrong" inventory kills cash flow and hurts gross margin, but crucial sales are missed when you have too little of the "right" inventory. Meanwhile, all retailers struggle to accommodate demand and margin planning in response to ever-increasing promotional activity. The amount of details and complexity is overwhelming.
For 30 years I've advocated for more detail in the planning process. Now, however, I believe the best response to this overwhelming new reality is "less." Less data, less complexity, less time planning insignificant details. It's time to focus on the right planning, to free up your time and brain so you can make sound decisions that affect sales, profits and cash flow.
Catalog inventory planners, in particular, are at a "letting go" moment. The intricate planning processes that were so good for so long no longer work particularly well. It's time to simplify.
As these issues swirled at the conference, I found myself asking these veteran inventory planners, "Why do you care?" For instance, if you sold 1,000 units of a polo shirt last week, why do you care whether the marketing source was an email, an Amazon.com sale, a catalog, a store promotion, etc.? Your marketing team needs to care a lot since it's tasked with spending its marketing budget wisely, but why do you care? If you have a 26-week lead time reordering inventory from overseas, why do you care whether 12 percent or 13 percent of your business occurs the second week of May?
In other words, why manage demand planning details at a level you can't control and that doesn't allow you time to read and react to your business. Maybe it's time to let go of the old model.
I believe the new cross-channel planning model is to make your best base-level plan at the highest possible level of aggregation — e.g., a seasonal or quarterly plan. Plan demand in four or five annual increments rather than 40 or 50. Then add a second planning layer to adjust demand for known promotional activities (including catalogs) and known anomalies or changes from prior periods. Certainly consider seasonal sales trends from one product to another. Finally, put excellent tools in place to recognize changes in demand trends and quickly respond to changes with revised forecasts and inventory purchase or liquidation actions.
Don't get me wrong, I'm advocating for better, not less planning. Inventory is your largest expense and requires thoughtful planning, always focused on maximizing order fulfillment, cash flow, sales and profits. In this new planning paradigm, you care more than ever. You can actually free up time from details to focus on high-impact inventory planning decisions.
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.