Why Inventory Needs a Seat at the Table
The annual planning process for direct retailers typically focuses on three areas:
- How can marketing drive customer demand at a lower cost?
- How can merchandising plan better assortments to increase demand and gross margin?
- How can operations work more efficiently?
These are all critical planning areas for a company looking to achieve its goals, but can you guess what’s wrong with this picture? There’s an empty chair at the table. The inventory planning department is missing. It's not part of the process, and thus not part of the solution.
I was thinking of this during Direct Tech’s 2011 User Conference as our keynote speaker, Bill LaPierre of Direct Media Millard, discussed the shifting balance of catalog and web channels for direct retailers and its impact on their bottom lines. I wholeheartedly agree with LaPierre’s main message that direct retailers need to become web-centric and adapt their marketing and merchandising processes to become expert cross-channel planners.
LaPierre's secondary message, however, detailed the importance of inventory planning in a cross-channel world. His advice to the group: Inventory is a key factor in direct retail success. So much so that inventory planners need to have “a seat at the table” in order to maximize a company's success.
An October 2009 MarketLive study illustrated LaPierre’s point in dramatic real-world terms: “While shoppers indicated a desire to remain loyal to their favorite retailer, 70 percent indicated that they're likely to shop competitors’ websites or retail stores when they encounter out-of-stock products.”
Sobering, isn’t it? When you consider inventory’s direct impact on sales and profits, it’s clear that inventory planners really do need a seat at the table.
The financial impact of inventory planning goes further and deeper than many companies realize. Direct Tech has developed financial return on investment analysis to precisely measure inventory’s impact on sales and profits. The numbers are striking. Here are a few examples from a typical $25 million-per-year direct retailer:
- In-stock inventory grows sales. A 1 percent increase in sales will add $250,000 in annual sales and approximately $100,000 in annual profits to the business.
- More accurate demand planning reduces overstocks and corresponding markdowns. A 1 percent reduction in overstocks will increase annual profits by $50,000.
- Inventory planning improves inventory turnover. A 5 percent improvement in inventory turnover will improve profits by $20,000 and increase cash flow by $100,000.
- Inventory planning reduces overall inventory expense to the business. A .5 percent reduction in overall cost of inventory through planning efficiencies will increase annual profits by $55,000.
- Inventory planning reduces back orders. A 1 percent reduction in back orders will increase profits by $40,000.
Taken together, the figures reveal that annual profits can easily increase by a full point with no other changes to marketing or operating plans. And over five years, optimized inventory planning can add more than $1 million in profits to a $25 million business. I’d call that a significant lift. All you have to do to capitalize on these sales and profit opportunities is to give inventory planners a seat at the table.
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.