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Planning Inventory a Critical Component of Value Chain Management?
By Robert Bruce, VCC Associates, Inc.
Is inventory management driving you crazy? Do you have too much inventory on the wrong products and yet you are still out of stock on the critical ones? Yes, inventory management issues, such as these, have been around for years - so how do you finally resolve them? One of the strongest ways is through solid inventory planning, sales forecasting and replenishment approaches that begin the journey. Value is essentially consumer service, consumer satisfaction, in stock, price/value impression, shopping experience, revenue and net profit generation. Outside of labor expense, one of the highest expenses for a retailer is usually inventory.
One of the first steps you should take is conducting a detailed review of all of the drivers, components and associated interdependencies that affect and contribute to true value creation from fundamentals to a more strategic migration plan. Dynamic planning of inventory is the integrated planning of core components:
- Store Operations and Disciplines
- Merchandising and Shelf Management Techniques
- Replenishment Strategies
- Demand Planning and Management
- Collaborative Trading Partner Relationships and Partnerships
- Distribution and Logistics Coordination
- Supply Chain Analysis
The key to success is a methodical approach to tying all of these components together in a coordinated and synchronized way to create sustaining value.
Remembering Sam - The use of the word "value" started years ago in the 80's when the phrase supply chain was gaining popularity. No one appreciated the "value" of the customer more than Sam Walton, the founder of Walmart Stores. Sam put the customer first in everything he said and did. As many of you may recall from retail history, Walmart had many slogans over the years. One of the most memorable is "the customer is boss." As David Glass, a former CEO at Walmart, used to say, "If you are not working to create customer value then you are working on the wrong things..." That is what drove us to start using the word value rather than supply as in supply chain. What it is all about is creating value throughout the extended retail supply chain.
The Challenge - Planning inventory synchronized and tailored to consumer demand requirements has been and is the challenge. Inventory management is the intersection of customer demand and alignment of product supply and those who drive all decisions based upon this demand through supply requirements are on the way to creating a customer demand driven value chain - creating value throughout and defining a true competitive advantage. So, working on the components of planning inventory drives the migration of analysis downstream to customer demand and point of purchase all the way back upstream to sharing and incorporating supplier demand forecasts to drive production requirements, distribution and logistics assets and resources - they all interrelate.
From inventory to defining what drives it, the merchandising requirements, the flow in store, replenishment requirements and timing as well as the synchronization upstream throughout the whole supply network, make all decisions intertwined. There is a multitude of decision points that need to be optimized within each category and then optimized with all of the other supporting decisions throughout the extended enterprise. Otherwise, one might optimize the replenishment decision on when and how much to drive product to the store shelf when in fact the decision sub-optimizes the total picture and actually decreases true value. The answer is in the "W's."
The Five W's
- Who is responsible for the inventory on hand?
- What quantities are being replenished?
- When is replenishment being triggered?
- Where is the product - on the next delivery or in the backroom?
- Why are we carrying so much inventory in total?
Oh, there are a quite a few of the "W" questions and you have probably heard them all. But to answer all of these questions can lead to a truly customer demand driven, coordinated and collaborative process end to end.
Diving into the Details - It is interesting that even though they are different businesses – from apparel to consumer electronics or grocery - how unique product requirements have cross applications leveraging similar techniques. Like a ladies apparel top, laptop or summer/seasonal product, they all have short life spans and take a special focus. Yet, many of these specialized approaches have application to efficient inventory planning. For example, let's focus in on yogurt. A colleague asked me a few weeks back for a client, "How do you set the reorder point for yogurt?" Yogurt historically has had a short expiration date and not knowing the client's situation my questions were:
- What is the total days of shelf life prior to expiration or "sell by" date published from the manufacturer and then what is the number of days available for sale when it hits the store?
- What is the time being lost by the time the product gets to store shelf?
- How long is it in the supplier's or retailer's distribution network (finished goods, regional centers, etc.)?
- What is the average days in transit from ship point to destination (retail distribution center, store delivery cycle or ship direct to store)?
- What is the days of shelf life compared to the average daily rate of sale or forecasted sales?
- How many days of supply is a replenishable pack size or inner pack?
- How many days of supply does the modular facing represent?
- What is the average rate of sale and consumer demand sales forecast over the replenishment cycle?
- How much safety stock is accounted for covering consumer demand sales forecast error and fluctuations in supply?
- Can an average store sell through the pack size prior to expiration date?
The answers to these questions may lead to more work needing to be done on demand forecasting and supply side logistics cutting lead-time, trimming the pack size or increasing the replenishment frequency.
Not all items are created equal - It is apparent from this simple example that not all items are the same and are often drastically different from one store to another and one market to another. Across stores pack sizes, shelf allocation, replenishment methods and frequencies often should not be the same. Herein lays the opportunity to further refine inventory and product flow. There are different ways to address the challenge, but the common rule is not all products have the same requirements and need to be handled differently. The art is keeping inventory "always in motion" and never sitting in warehouses or stores.
"I'm Ready to Leave" - For me this comment reflects a somewhat disgruntled shopper, my wife. My wife had seven items on her list as we entered the store. After an hour in the store and several observations from my part and hers, we reached checkout. The conclusion? Of seven items, this retailer was out of stock on three, two items were priced higher or much higher than she knows from the competition, they were in stock on two and we bought one item not on her list. So, she walked out purchasing two items or 28.6% of her list - not good. As a typical shopper, she will either defray the purchase or, more than likely, go to a competitor that she shops less frequently for five of the seven items on her list.
The takeaway on her shopping cart was that the shopping list in stock position was only 71.4% and against what she actually bought, was less than half of that. The retail purchase, margin, profit and customer satisfaction essentially has been degraded or, more importantly, moved to the competition. Conversely, many other items carried more inventory than needed which is a profit drain. For all the store cleanliness, pleasant employees and clearly marked isles, they lost it on in stock and price.
The Moral of the Story - There are a variety of challenges and questions that arise when planning inventory that lead down to store operations, replenishment rules, and collaborative trading partner relationships and back upstream to the extended distribution and logistics network. All of these areas need to be pursued and aligned to create true value. Managing inventory begins the journey to optimizing and synchronizing a dynamic and fluid value chain.
Robert Bruce, Co-Founder, VCC Associates, Inc.
Robert Bruce is a co-founder of VCC Associates, Inc. providing SME Advisory Services for Enterprise Collaborative Demand Management
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