In the simplest of terms, inventory optimization means balancing demand and supply by carrying a level of inventory that reduces the possibility of out-of-stocks while simultaneously minimizing the carrying cost of that inventory to the bottom line. When done effectively, optimization has become increasingly important in delivering profitability while streamlining supply chain execution and enhancing the retail customer experience.
Balancing and optimizing inventory across a distribution network hinges upon the ability to identify where inventory is at any given moment. This requires a robust system to provide inventory visibility not only across channels, but also down to specific locations within channels. Furthermore, it is necessary to have solid process execution at the distribution center (DC) and store levels plus tight system integration in order to give an accurate inventory snapshot based on the many different systems and environments traditionally used within a retail enterprise.
In an ideal situation, inventory in the supply chain is fed into a supply chain visibility tool, which is then available for end users to make proper decisions and optimize fulfillment.
Inventory across a supply chain network changes rapidly throughout any given day. This includes inventory in DCs, in stores, in-transit to DCs or stores and on-order to be delivered to any location. The most common problem among retailers is determining in a timely manner exactly how much inventory resides in each area. For a retailer to be able to truly match end-user demand with levels of supply, it is crucial that these numbers be available and accurate.
While real-time visibility is the proverbial “holy grail” of supply chain execution, it is a difficult task for any company to achieve. This is because inventory levels are constantly changing from customer purchases and replenishment activities occurring across all stores and channels. In most retail enterprises today, a mere glimpse (and it is often a “guess”) of what the inventory levels are at any point in time is the best anyone can ask for.
However, in today’s quickly changing retail technology environment, many new systems are now available to view inventory by channel. These are usually order management systems supplied with the inventory available in stores, DCs, purchase orders, purchase requests and other demand in real time. Based on this data, the system can provide an accurate number of each SKU’s Available to Promise (ATP). This ATP number not only provides an accurate inventory number, but also takes into account the date the customer needs the product delivered. Cost savings are also delivered through reducing or eliminating lost sales from inaccurate stock levels, inventory write-offs and shrinkage.
Fulfillment demand across channels
The need for fulfillment agility in the retail marketplace has become a customer expectation. It is well known that customers expect to be able to purchase products in store, online and via their mobile devices. But increasingly, they expect their desired items to be available for delivery to any location (with free shipping) or for pick up in-store within a reasonable timeframe (i.e., pick-up-in-store or ship-to-store). Fulfillment timeframe expectations are also becoming much shorter.
These varying fulfillment methods allow retailers to deplete targeted inventory levels — and can help maintain margins by not losing profit to markdowns. The challenge becomes depleting the appropriate supply — from the “right” locations — while still meeting daily customer demands and simultaneously balancing labor costs and operational needs. When inventory is available in real-time, companies are in a better position to choose the least costly and most efficient option to fulfill the order while maintaining the highest profit levels.
Another option is to enable employees within the store to help fulfill an order or locate inventory. Consider what might happen if a customer enters the store to purchase an item, but it is not available in that specific store. What alternatives does the customer have? Order online? Use the mobile app? While mobile phones are ubiquitous, mobile app adoption is notoriously low. As such, the most effective factor in saving the sale will always be the sales associate.
If sales associates are trained and empowered to help customers make purchase and fulfillment decisions, and equipped with tools such as workstations or mobile devices with applications that enable them to view real- or near-time inventory levels, they will then be in a powerful position not only to deliver a great customer experience but also to explain the value and other options that the retailer offers. This puts the customer in the driver’s seat on how to best fill the order — increasing the likelihood of a sale, possibly increasing transaction size and enhancing customer satisfaction and loyalty.
Brand management and pricing
As inventory transparency and the ability to make better fulfillment decisions increase, so too does the ability to price items more profitably across the network. Visibility of accurate inventory levels at stores, DCs and in-transit enables employees and customers to decide the best place to purchase or fulfill an item but also raises additional considerations:
• Should a company price and size items differently online versus in store?
• Should the same item be priced differently between regions?
• What type of shipping options and pricing should be offered?
• And most recently, what are the sales tax implications?
This is where the world of brand management across the enterprise takes flight.
A good way to handle brand management is based on the lifecycle of the product, with different considerations at the beginning of the season, throughout and at the end. Price continuity in the beginning of a product’s lifecycle is typically much more appealing to a customer than at the end for each item. When an item is first available or put on sale (not clearance) customers typically expect to find their desired color, size and other options of that product in any channel at the same starting or sale price. If the item is at end of life or on clearance, customers tend to look for the lowest available price and hope their desired options are available, but understand that the product may have sold out already.
Tricia Garrett is senior manager, marketing and research, Chris Hammond is a management consultant and Danny Knopp is a Management Consultant with The Parker Avery Group.
The Parker Avery Group
The Parker Avery Group is a boutique strategy and management consulting firm that is a trusted advisor to leading retail brands. The firm specializes in merchandising, supply chain and the omnichannel business model, integrating customer insights and the digital retail experience with strategy and operational improvements. Parker Avery helps clients develop enhanced business strategies, design improved processes and execute global business models by combining practical industry experience with proven consulting methodology to deliver measurable results. For more information visit: www.ParkerAvery.com; firstname.lastname@example.org; 770-882-2205.