Inventory Management: 4 Keys to Improving Holiday Inventory Management

For many multichannel retailers, the fourth quarter holiday season is the single most important sales period of the year. Nearly 40 percent of multichannel catalog and e-commerce retailers' sales occur in the fourth quarter, and the majority of these sales occur in a six-week period from November 1 through December 15.

From an inventory management perspective, this creates a perfect storm of challenges: extremely high demand, a short selling season coupled with long vendor lead times, limited cash available to support increased inventory requirements, a bloated freight system, and inventory handling dependent upon over-stretched distribution center staff.

After months of preparing and executing marketing, merchandising and operations plans, it's painful when there's not enough inventory to service the demand generated by those activities. The quality and timeliness of inventory management decisions in the fourth quarter can mean the difference between financial success and failure for the year.

The following four best practices are good any time of the year, but are especially important for holiday inventory management success.

1. Accurate information. Accurate information enables more precise demand planning, creates confidence in exception reports and allows buyers to react to their changing inventory needs with better, faster buying decisions.

Inaccurate sales and inventory information leads to inappropriate buying decisions. It also causes staff inefficiencies as time is spent remedying information and buying errors. This is magnified in the fourth quarter when precious time is spent gathering and double-checking data, rather than making buying decisions that will improve sales and profits.

Yet, with the importance of timely and accurate information, and the availability of systems and expertise to provide accurate information, it's always surprising to hear multichannel retail executives say, "We don't do a very good job managing information." A high priority for every multichannel retailer
must be to build discipline to capture accurate sales information by source, maintain accurate purchase order information and inventory levels, and actively manage merchandise assortment plans and 
marketing plans.

2. Management by 
exception. Whether your inventory problems are overstocks or out-of-stocks, the 80/20 rule applies with inventory in the vast majority of real-life situations. Twenty percent of the items in your business typically account for eighty percent of your problems. Focusing precious time on these exception items is particularly important in the busy fourth quarter, due to the financial impact of each decision.

In the fourth quarter, every decision is more impactful because of higher sales volumes. Higher sales means bigger volume purchase orders, an increased likelihood of lost sales and back orders, and larger 
season-ending overstocks to be liquidated. To capitalize on opportunities for success, invest the time and effort to design and implement exception reports for buyers aimed at the relatively few items that will generate the largest profit. It's simply good business.

3. Speed of decision making. Time is a critical factor for multichannel retailers. The customer demand expected by inventory planners changes daily. Marketing plans are changing until the last possible moment, as does inventory supply information — whether it's a manufacturing problem, delivery delay, quality failures, lost inventory in the distribution center or unexpected large customer orders.

Since buyers are ultimately responsible for delivering the right inventory to the right place at the right time, they're especially time-dependent. They're balancing two opposing, time-sensitive factors: the accuracy of demand plans and the uncertainty of the supply chain.

Experienced buyers understand the value of each day. Each day's sales information improves demand plans, sometimes significantly. Placing a purchase order on Friday rather than Monday can mean the difference between pre- and post-holiday deliveries.

The most successful multichannel retailers establish detailed weekly calendars to align marketing plans with purchasing deadlines, so buyers have the best possible demand plans available as they place their purchase orders.

4. Understand the financial 
impact of inventory. Buyers are responsible for procuring the right inventory in the right location at the right time. What determines "right"? Is the key metric inventory turnover, order fulfillment, sales, cash flow, profit or some combination? All of those metrics are important, but for the short- and long-term health of the business, the key metrics are profit and cash flow.

Consider incremental profit margin, or the incremental gross margin from additional sales minus the incremental selling, operating and distribution costs to achieve those sales. Incremental costs can include the carrying costs of inventory, expedited versus regular freight fees, the cost of processing and shipping back orders, and the incremental freight costs required to move inventory between stores.

The operating cost of a back order to a direct retailer can easily be $12-$15, for example. If the gross margin of a product is only $10, the retailer must question whether to pursue the sale when each sale loses money. When faced with overstocks, it's necessary to understand the trade-off between lower in-season gross margin and the cost to liquidate the inventory through an alternative channel. When evaluating an incremental purchase, the cash flow impact of increased inventory must be considered when the minimum order quantity exceeds anticipated near-term demand.

The best multichannel retailers invest in educating their buyers to understand inventory's impact on cash flow and profit to ensure that every buying decision results in a positive contribution to profit and protects cash flow.

Craig Harding is president and founder of inventory management provider Direct Tech, Inc. (charding@direct-tech.com).