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Chargebacks and Penalties for Poor Inventory Productivity?

Posted By RCVF Admin, Saturday, August 4, 2018
Updated: Saturday, August 4, 2018

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!




Tags:  Amazon  Chargeback  Chargebacks  Inventory Integrity  Inventory Management 

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A Retailer's Perspective on Omni-channel Trends

Posted By Administration, Thursday, January 15, 2015
Updated: Wednesday, January 14, 2015

by Steven Lahr, Lahr Consulting LLC

Retailers face some of the biggest challenges and stiffest competition doing business in today's omni-channel environment. Inventory integrity – having the right product in the right place at the right time – is paramount in competing for and maintaining customer loyalty. Suppliers still struggle with the concept of a "perfect order" as well as what constitutes a shortage and how to improve inventory integrity.

Over the past fifteen years, retail supply chain teams have been working on systemic solutions to speed the flow of product and reduce the costs within retailers' distribution centers. With the implementation of warehouse management systems (WMS), utilization of the advance ship notice (ASN), leveraging GS1-128 barcodes, value-added services (VAS) performed by the suppliers, etc., the end goal became moving inventory through the supply chain quickly, efficiently, and accurately to prevent out-of-stocks and ensure goods were available for purchase by the consumer.

Retail supply chains benefited from all of the capital spent on technology. Cross-dock percentages prior to the technology implementations were in the mid 40% to the low 50% range; after, percentages increased to the 60% plus range with significant operating cost reduction and the ability to reallocate vacated space to additional store capacity, pushing off the need for capital expense to build new DC's. These DC's and systems were designed for speed and efficiencies – product moving directly to the outbound doors and to the stores.

However, in many cases auditing remained a manual process and inconsistent with no systemic methodology regarding the way a shipment was audited or if it flowed through. Shortage chargebacks have gone down as the cross-dock percentages have gone up; this has created a false sense that the problem was getting better. Simply stated, the retailers' facilities haven't had a sustainable process or technology to perform audits.

Retailers are presently focused on omni-channel strategies as senior leadership has a high level concern regarding inventory integrity and inventory reliability in the network and in the stores. Supply chain teams are challenged to implement technology that can manage and direct shipments for auditing based on each supplier's inventory integrity scores. Retailers are focused on improving inventory integrity issues such as overages, shortages, substitutions, and incorrect UPC's in order to establish a confidence level with their customers. Capture of the carton contents went from a manual review to a systematic scan of each individual item in the carton. Industry standards for auditing run at 3% of the total volume coming through the distribution centers. Suppliers struggling with shipment integrity are prorated at a higher percentage and are audited at a higher percentage, delaying the delivery of goods to the store floor.

This trend is only going to accelerate. Retailers are taking aggressive inventory positions and tightening the amount of inventory they are carrying. Where there was once a "need for speed" through cross-docking, retailers are now writing more orders as bulk to gain a better allocation, closer to the sale. This means that these goods will be going through VAS areas in the DC's prior to distribution to the stores. As previously mentioned, there will be an increase in shortage detection as carton contents are being distributed through break pack or backstock for post allocation. This combination of shortages, overages, and substitutions can be daunting if not understood and managed. If you are not auditing a percentage of cartons leaving the distribution center you are setting yourself up for a bad score on inventory integrity and an increased risk for compliance charges.

Another shift in addition to inventory integrity is having multi-channel flexibility. This capability will assume a larger role in retail. The expectation will be that the suppliers adapt and have the flexibility to handle different order types – direct-to-store, direct-to-consumer, bulk, replenishment, and mark-for-store. Each order type has an expectation of performance through the supply chain. The need to quickly service the stores, and ultimately the customer, is going to drive an increase or decrease in business between retailers and suppliers. Retailers and suppliers need to grow their supply chain relationships as integration of the chains and flow path strategies become the expectation from company leadership. Sustainable workflows need to be created so that there are fixed times for purchase order entry, allocation and packing at the supplier's DC as well as fixed pick-up and deliver through the retailer's DC. This model has proven to take 7 to 10 days out of the supply chain.

So what is the cause and effect of not addressing or reacting to inventory integrity and omni-channel trends. The obvious is suppliers will continue to get hit with chargebacks and, with the implementation of auto-detection systems in the retailers' DC's, the charges could go up dramatically. The bigger picture is that inventory integrity and multi-channel flexibility is going to be the priority for retailers and supply chain teams.

These shifts have resulted in the retailers accelerating omni-channel strategies. Engagement is critical. Suppliers need to collaborate with their retail partners in order to optimize performance and implement sustainable solutions. Not addressing these trends will drive profitability losses and have a negative effect on sales and turn.

These trends and practices are not going away – they will only intensify over the next couple of years. It is imperative for the suppliers to act now. The next generation of compliance systems is built around auto-detection and accuracy issues will start with the receipt of the ASN. These systems will automatically send back the ASN to be fixed and retransmitted creating additional rules that the retailers will establish to improve inventory integrity and supply chain excellence.

Steven Lahr, Lahr Consulting LLC, is a 30-year senior supply chain and operations executive who specializes in developing supply chain improvements through operational compliance, vendor integration and flow path strategies. For the past 14 years, Steven was Director of Vendor Integration and Compliance for Dick's Sporting Goods, where he designed and implemented the company's compliance program. Steven developed and led the vendor integration team for Dick's Sporting Goods and was responsible for improving purchase order writing, implementing sustainable flow paths that accelerated flow of product, and developing operational efficiencies that helped to reduce product lead times and replenishment inventories. Steven has also held a variety of leadership positions with Bradlees and Federated Logistics, contributing the supply chain optimization of both companies

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Tags:  Inventory Integrity  Omni-Channel  Shortages 

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