Apr 04 2016
Inventory management is definitely the most enduring, and probably the least sexy challenge in the retail industry. I recently came across an article that joked that the only time a CEO gets fired up about inventory management is when their inventory manager leaves – because only then do they remember what an exact science it is.
The consequences of disrupting such a delicate balance can be extremely costly. While having too much product creates unproductive inventory and significant holding costs, having too little can cause out of stocks that lead to lost sales and unhappy retailers. Not to mention the complications that arise when phantom inventory renders your tracking system completely inaccurate. Inventory management is a complicated game, and very few retailers play it well.
Despite being a critical determinant of success, inventory management hasn’t always received as much attention as it deserves. But when Walmart estimated that its out of stock problem was costing $3 billion in annual revenue loss, it became one of the hottest topics in retail. Though known for practically having written the textbook on supply chain management, Walmart continues to suffer stockout and overstocking challenges. Blaming its woes on disorganized warehouses and high restocking costs, Walmart is always looking at opportunities to simplify the process.
Walmart certainly isn’t the only big box retailer plagued by inventory management concerns. The rise of e-commerce in recent years and pressure to compete with the likes of Amazon has only exacerbated the problem for big box chains. After celebrating 34% growth in online sales in Q4 last year, Target is not only investing heavily in its digital strategy by launching a Target-specific e-commerce startup; it’s also extending the functionality of its brick and mortar presence, having stores serve as fulfillment centres for online sales. However, merging in-store and online sales into an omnichannel experience has made for a tricky supply chain to say the least.
Where Did All The Products Go?
Walmart, Target and other retailers’ inventory management issues can be attributed to a wide range of factors. In the age of globalization, omnichannel experiences, and impossibly high customer expectations, retailers are being torn in multiple directions and their supply chains are struggling to keep up.
Their solution? Simplification.
The first step to simplifying their business involves minimizing their product assortment. By focusing on their most relevant categories and using data insights to determine which products and brands are achieving the best margins, retailers are hoping to transform their brick and mortar locations into more efficient selling machines. The added benefit is that fewer SKUs in-store takes some pressure off of the supply chain, allowing greater resources to accommodate online sales fulfillment.
The trend towards decreasing product assortment has important implications for brands. It means that significant numbers of SKUs, and even entire brands, are on the chopping block. In fact, Walmart cut 15% of its product assortment in October, and Target recently announced plans to head down a similar path. As e-commerce continues to gain momentum, it’s safe to say that the practice of downsizing in-store product assortment in big box chains will continue.
Staying on the Shelf
The bottom line is that shelf space is shrinking – both literally and figuratively. While it’s already incredibly competitive to get on a buyer’s in-store roster, decreasing product assortment means that it will only become more difficult to gain and maintain shelf space at key retailers.
The good news? Today’s brands have unprecedented access to point of sale data insights, empowering them to maximize sales, grow margins, and increase inventory turns; and importantly, to build a business case for keeping their products on the shelves at their key retail accounts.
The modern retail analytics solutions on the market today are allowing brands to demonstrate their value to buyers by:
- Keeping shelf space as productive as possible: By tracking SKU performance in real-time, brands have the ability to look critically at their facings, and the agility to pivot product offerings quickly. This means vastly reducing the sales losses associated with unexpected circumstances, such as unsuccessful product launches and unseasonable weather.
- Avoiding out of stocks: Finding vacant shelves is bad news for both the retailer and the supplier. With greater access to point of sale data and inventory metrics, brands are able to keep track of inventory turns and units on hand at the store level, and proactively suggest locally-optimized reorder points and quantities to their buyers to avoid chronic out of stock issues.
- Optimizing marketing spend: By tracking sell-through tied to particular promotions, brands can use insights learned from past campaigns to drive sales and maximize efficiency in their marketing spend. They can also work with their buyers to build successful and mutually-beneficial promotions.
- Building a strong relationship with buyers: Now equipped with intel on their sell-through rates and inventory turns, brands have the data necessary to frame more productive conversations with their buyers. They are able to contribute meaningful insights and strategy to line reviews, and demonstrate the value that their brand adds for the buyer by maximizing sales and gross margin.
As product assortment continues its decline, buyers’ expectations of their brands are changing. To stay on the shelves, brands will need to be knowledgeable and agile, and continue generating comprehensive data-driven insights to reinforce the value that they add for their retailers.