Inventory Management: Focus on the Fundamentals

Instead of anticipating the doom and gloom of market conditions no one can predict, stay focused on the fundamentals to get through these tough times, and position yourself for greater profitability when up markets return.

Simply put, it’s a matter of what you know, when you know it and what you do about it.

What You Know
It’s as basic as understanding what you need and what you have to spend to get it. It starts with data integrity. Successful companies understand the importance of data integrity in their ability to accurately forecast and buy inventory at the most advantageous terms.

• Know demand. From a forecasting standpoint, this means capturing demand accurately from your order management system by offer or event, then matching back as much of the demand as possible to the source driving each sale. If your order management system allows, you also want to capture phantom demand (aka lost sales) to forecast the total potential future demand.
• Know vendor terms and costs. Make sure all vendor-related data is accurate and up-to-date as well. Staying current with lead times, product costs and discount terms helps minimize the total costs associated with each product you purchase and speeds the buying process, which ensures products are on hand to meet anticipated demand.
• Know your budget. It’s not only important to have a budget. You also must have the means to consistently measure spending against it through open-to-buy tracking. This gives management and the inventory department the information each needs to manage the overall inventory investment. It ensures you have the inventory on hand along with a place to store it.
• Know your product assortment. While perfection is the goal, it’s not always possible to be perfect and complete. Give control buyers as much information as soon as possible — rather than all the information when it’s too late.

  An 80 percent-complete assortment plan delivered six weeks earlier is much more helpful than a complete assortment plan that’s too late for quality forecasting and timely vendor production and delivery.

When You Know It
Timing is everything. The sooner you have information, the more quickly you can take action. This is especially important as it applies to forecasting
and purchasing.

• Speed matters. Providing buyers and control buyers with timely information on a monthly, weekly and even daily basis improves the quality of the decisions that are made. It also shortens the time to make them.

  The more time you’re able to remove from the decision process or the supply chain replenishment cycle, the greater the improvement you gain in order fulfillment and inventory levels.

  One day’s delay in expediting a critical purchase order, for example, can mean the difference between a shipment spending three weeks on a boat or three days in the air.

What to Do About It
When it comes to inventory management, the key word is “act.” The longer it takes for you to act, the more opportunities you miss and the more costly the consequences. This applies to every point in the process.

• Prioritize the problems. In most cases, the 80/20 rule can be applied to merchandising and forecasting. It’s not uncommon for 20 percent of the products to require 80 percent of your attention.

  Whether the problem is forecast errors, overstocks or out of stocks, the earlier you know which 20 percent of the products have the greatest need, the sooner you’re able to take the necessary actions to improve results. Generating hot lists and exception reports on a regular basis lets you focus your time for maximum benefit.

• Make your best buy. Once you know what products you need to buy to meet forecasted demands, be sure to act. Make your purchase to take advantage of the best terms and ensure timely delivery, whether it’s regularly stocked, manufactured or imported.
• Minimize the impact of problems. Warehouses are full of misplaced optimism. The quicker you’re able to respond to overstocked inventory, the more likely you’re able to act in time to liquidate the products while getting the highest dollar recovery. Or you may still have time to cancel the order and incur a cancellation fee that’s more cost effective than trying to sell the product.

How Do You Know?
What gets measured gets managed. That’s why it’s important to select three or four specific metrics that allow you to measure inventory performance.

Include at least one for order fulfillment and one for inventory efficiency. Then review them regularly. The discipline of consistent measurement over time is as important as the metric itself.

With fewer customers and less money to spend, merchandisers are looking for new ways to capture their share of these dollars. But the real secret to keeping your business on track is no secret at all; it’s a matter of getting back to the fundamentals, especially in the area of inventory management. So consider these five fundamental pointers:

1. Know what products you need to have on hand, when you need them and the true costs of acquiring them.
2. Set budgets, and check routinely, at least monthly, if not weekly, to be sure spending is within these budget limits.
3. Focus on the products that need your attention most, using hot lists and exception reports so you’re not wasting time on those that don’t require intervention.
4. Shorten reaction times to eliminate costly delays in availability and delivery.
5. Simplify metrics, and regularly measure performance against them.

Ray Goodman is senior vice president of Direct Tech Inc., a provider of marketing and merchandising systems for multichannel commerce companies. You can reach him at (402) 895-2100 x206 or rgoodman@direct-tech.com.