Inventory Control and Management

There has been a lot of discussion among retailers on tightening inventory controls and improving their supply chain.  Walmart is famous for negotiating deals with its vendors to allow them an edge over their competition.  Their automatic replenishment system is supposed to keep their turns at the highest level and avoid out of stocks but as most of their customers have discovered, execution still relies on human beings and we cannot expect 100% if we are realistic.  This has been an argument I have had my entire career with marketing departments.  My favorite quote was from one of my former bosses who said we do not have all angels or all devils working for us.  True.  The recent discussions on inventory control have been on how to reduce overstock while not missing sales.  I was in a location yesterday and the shopping experience was all too common.  The retailer was working on reducing cigarette inventory.  Of course this is an admirable task.  Most retailers carry way too much of this high priced SKU.  The store had followed its suggested order from the back office system and had reduced the number of cartons it carried on hand.  Unfortunately it had reduced them drastically.  And now they were missing sales.  During my visit, three customers came in to purchase a cigarette carton.  This chain averages 50% of its sales in cigarettes.  It also has $70,000 in other product in the store.  The HBA section is peg items and has eight feet of too many items to count.  It has 15 cooler doors and is a flagship store for this operator.  So why are they missing sales?  Too many times we pressure a manager to achieve a reduction in inventory but do not provide additional guidance on how to do it effectively.  Every time I have asked stores to cut cigarette inventory, guess what gets cut?  Marlboro.  Not a good strategy.  The store manager sees numerous cartons of Marlboro and that is what he is ordering so that is what he stops ordering.  The 200 other SKU that he does not sell are still sitting there.  He can’t reduce that inventory.  It has no where to go.  So what can he do?  Stop ordering what is selling.  Now the customer suffers.  Next the store manager is getting “the call”.  Why are you out of stock? What is wrong with you?  All too common.  A more sensible approach is to pressure the supplier to buy back the dead inventory and then de-authorize those items.  Stop sending them to the store.  Each department in the organization needs to take responsibility for inventory.  Accounting and IT need to provide the reports needed for marketing and operations to reduce SKU in a sensible manner with an exit strategy for each product.  Marketing then needs to only allow true sellers into the stores.  No rebate up front and carry it for a year type deals should be allowed.  There are retailers such as 7-Eleven that are putting all discounts into on invoice cost and review their turns religiously.  No wonder they are still a gorilla in the convenience store arena.  Recent earnings reports for soft goods retailers showed that not only were commodity cost increases not being passed along to customers but additional inventory markdowns were needed to get rid of old inventory.  Fashion is much more ruthless than food.  At least with food you know when it is going out of date.  Fashion can turn much more quickly and without warning.  This led to most retail stocks being hammered this past week as Wall Street became skittish.  How can retailers convince investors they have the next new thing?  Retail has always been described as “not rocket science”.  We have product lines, four brick walls and customer service.  Location and presentation help us convey the selling message to the customer but all this can be wiped out by the dreaded words, out of stock.  The worst thing we can do is place this all too important process in the hands of our least experienced people.  Again, the whole organization needs to take responsibility for the process.  Only then will inventory be controlled without disastrous results.  For more discussion on inventory management, see discussions on the groups featured on Linked In.