Chargebacks and Penalties for Poor Inventory Productivity?
by Victor Engesser & Stephany Goodnight of RVCF
Inventory productivity is increasingly becoming a key area of focus for retailers. As we highlighted in the June issue of the RVCF Link newsletter, inventory is typically the largest asset on the balance sheet for retailers and contributes significantly to the liquidity of the organization. Many retailers are seeing their inventory turns slowing, which has a direct impact on cash flow. At the same time, both retailers and suppliers are under pressure to operate with leaner inventory. We recently read a trade article that got us wondering, "Will inventory productivity become the next element of supplier compliance management?"
In the olden days, inventory management was fairly simple. A retailer met with a supplier, negotiated a price, wrote a purchase order, and paid in full 30 days after the product arrived into the retailer’s distribution center (DC). At that point, the inventory was all theirs to sell (or not sell).
However, over time, compliance management came to be. Retailers expect orders to be on time, in full and in accordance with a myriad of other requirements. As retailers keep "fine tuning" this process, is it possible we have reached a point where suppliers will not only be responsible for delivering inventory, but also for ensuring inventory is sold within a reasonable amount of time? How much responsibility do suppliers have with respect to inventory productivity?
According to a recent article by Daphne Howland in Retail Dive, Amazon is instituting a series of initiatives aimed at improving inventory management on its Marketplace. In July, Amazon began assigning an “inventory performance index” to each seller. We are not sure how this index is calculated, but sellers who fail to achieve a minimum index score will be prohibited from sending new shipments to Amazon until their inventory levels drop below specified limits. Sellers will also be charged a “store overage fee” on the excess inventory.
In the past, Marketplace sellers had been able to pay for unlimited storage. Not surprisingly, Amazon is also taking a harder look at unsold inventory, especially aged (365 days or older) inventory, by adding additional monthly charges to motivate space productivity improvements. Amazon’s fulfillment costs have escalated over the past year as new DCs have been added and Prime members’ expectations for customer service continue to rise.
In light of this, we can envision other retailers questioning whether they should be looking at store space productivity or DC space productivity in a similar way. Until now, most traditional merchandise retailers have made store shelf assortment decisions and planagram location and space decisions while looking at sales and margin metrics. We have heard very little to suggest poor inventory productivity performance has escalated to a compliance program violation or candidate for automated chargebacks. But we also recognize that fulfillment costs are escalating and DCs do not have unlimited space.
Clearly, inventory productivity can be measured and key performance indicators (KPIs) such as inventory turns, DIOH (days inventory on hand), and GMROI (gross margin return on inventory investment) are valuable performance metrics to add to a supplier scorecard. But setting a required performance standard and holding suppliers to this performance as part of a compliance program is not the norm today, and with so much variability throughout the supply chain, a single standard seems unrealistic. However, having supplier performance expectations around inventory performance does seem likely.
We at RVCF would like to hear your thoughts and opinions on this topic. We are especially interested to know if you feel inventory productivity should remain a retailer (internally-managed) responsibility and, as such, a business area best handled as part of the merchant/supplier relationship management process. Or do you feel that inventory productivity should be thought of as an element of the end-to-end supply chain and would benefit if incorporated into the supplier scorecard so performance could be more broadly managed?
Give this some consideration and, if you agree, we can make this topic a part of the Retailer Open Forum discussion at the 2018 RVCF Annual Fall Conference this October in San Diego. We are already planning to delve more deeply into the area of Inventory Management and Productivity during the Fall Conference, with three breakout sessions included in the agenda: Business Processes Driving “Buy Online Pickup in Store,” Selling More with Less – Smart/Lean Inventory, and Best Practices in Inventory Management.
See you in San Diego!