Actionable Insights From APT's Retail Practice

Inventory That Fits Just Right

February 24th, 2017 | Posted by APT in Retail

“Get comfortable with days of inventory, not weeks,” said Home Depot’s senior vice president of supply chain, in The Wall Street Journal.

Home Depot is not alone in reducing inventory levels. Nordstrom and Ross have also joined the ranks of retailers trimming inventory in hopes of slashing backroom and distribution costs, minimizing markdowns, and decluttering stores. Yet retailers that reduce inventory in the wrong way will also mark down their profits. Before shifting strategies, retailers seeking to “right-size” their inventory must consider the impact of limiting inventory on sales both in-store and online.

Companies can pinpoint which assortments and inventory levels fit just right by testing new inventory levels and assortments in a subset of stores, and comparing their performance to that of similar stores.

Avoiding Stock-Outs and Discounts

One risk of reducing inventory levels is that it may result in costly stock-outs, which can lead to lost sales if customers are unable to quickly locate satisfactory alternatives. Especially given the high premium that shoppers today place on convenience, empty shelves may damage brand loyalty.

While cutting inventory is a popular strategy to avoid offering deep discounts to clear out unpopular items, retailers need to ensure they are cutting the right items. With limited stock, stores can’t afford to accommodate items that do not sell well, and their assortment must reflect an understanding of which items and styles customers truly want.

But how can retailers determine how to effectively refine their inventory levels and assortments? And how can they establish in which locations different quantities and offerings will thrive? By testing new stock levels and assortments, decision-makers can quickly identify which strategies are most successful, and where. For example, a retailer may want to test offering three of each size and color of an item instead of two, and based on the initiative’s performance in a subset of stores, find that increases in sales justify the cost of the additional inventory.

Experimenting with different product styles and lines as well as inventory availability across channels enables retailers to better anticipate local needs and optimize their ability to efficiently fulfill demand without overstocking. Conducting transaction-level analysis of customers’ purchases can also help brands better understand which items are typically purchased together, informing optimal assortment – there are enough considerations here to compose an entirely separate blog post.

Leveraging these insights to strategically reduce inventory will enable retailers to free up capital to invest back into other programs, like critical digital or omnichannel initiatives that will further drive business value.

Refining Fulfillment Strategy

The increasingly omnichannel nature of the retail landscape heightens the challenge of getting the right products in the right place, at the right time. Companies must determine not just how many of which products they should stock to meet demand and increase revenue, but also where they should stock them: in-store or in distribution centers.

Many retailers are attempting to right-size their in-store inventory by offering certain products as online exclusives. Target, for instance, scaled back the number of products in backrooms and stopped carrying bulky items like patio furniture in stores.

Other stores are seeking to make cutbacks based on new fulfillment techniques like ship-from-store, which lululemon recently expanded. Before rolling out this type of omnichannel initiative more broadly, it is crucial to test and measure the incremental impact. For instance, consider a company introducing a ship-from-store program to fulfill online orders. This approach may effectively reduce costs, but it could also cause stock-outs within the store, and ultimately an in-store sales decline that outweighs any savings. Such a scenario makes it essential to evaluate fulfillment programs with an omnichannel lens to understand if they truly drive sales across channels.

In addition to issues with stock, designating stores as fulfillment centers for online orders may overwhelm employees’ workloads, causing unanticipated negative consequences on the customer experience. The operational shifts necessary to establish these in-store fulfillment processes will most likely require re-evaluating staffing decisions. For example, retailers may need to add additional staff to each shift, to ensure there are always enough employees available on the sales floor while others are busy filling online orders in backrooms.

Testing programs – and then evaluating the impact across all channels – is the most reliable way for retailers to refine their inventory strategies. Equipped with the right tools, retailers can effectively position themselves to innovate profitably and capture the value of cutting inventory while reducing the risks.

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