Our Take: The Post-Holiday Retail Inventory Strategy Reset
Every year, like clockwork, within the first few weeks of the New Year stories trickle in about retailers’ inventory fiascos during the busy holiday shopping season. This year was no different, from big box stores to shoe and other specialty retailers, many faced challenges implementing the right inventory strategy to carry through the industry’s busiest and most profitable season. Arguably the worst thing that can happen to a brick and mortar retailer is to run out of stock on the shelf. So what can be done about it? There are many factors at play but a good place to start is to establish a smart inventory strategy to meet service levels across channels.
Five Steps to Improve Your Retail Inventory Strategy
Establish a Continuous Review Process
The idea of running a model to “set and forget” inventory targets is out of date. Retailers that quarter-over-quarter meet and exceed customer demand and are able to thrive by establishing a continuous review process. This ensures that you are reviewing and adjusting inventory targets at the SKU-location level, rather than using rules of thumb across broad categories, leaving shelves bare or backrooms overflowing with inventory. It’s critical to determine how inventory planning fits within your S&OP process alongside demand and supply planning.
When working on client engagements, I’m always surprised to see that many retailers are not utilizing demand segmentation as much as they could, or should, be. Particularly for retailers that sell a wide variety of products, demand analysis can play a big part alongside more traditional factors such as sales volume, margin and handling characteristics in establishing not just an inventory strategy, but also play a role in transportation and sourcing processes. One retailer that we worked with implemented a more comprehensive segmentation practice, down to the SKU-location level, not just reducing inventory levels but allowing them to reach an aggressive two-day service goal.
Address Seasonality and Special Events
In nearly all businesses, demand can fluctuate dramatically from one season to the next. For retailers who can see a 10-40% increase in sales over the holiday season, it’s critical to adapt inventory targets to address the unique requirements of the season. In order to reach desired service levels companies cannot wait for a demand signal to drive changes to the inventory strategy – by that point it’s too late. In order to thrive, retailers must rely on forecasting and demand planning to make more accurate projections of what’s ahead and adjust their inventory strategy accordingly – addressing not just safety stock, but also prebuild/prebuy inventory, cycle stock, and in transit inventory.
As is the case with most business solutions, a one-size fits all inventory strategy isn’t the best business move. In order to most successfully meet customer demand retailers should move beyond static inventory targets and design a seasonal solution, for every key season. This may include both changes to the network (additional stocking locations, pre-positioning product and new product flow-paths) as well as inventory stocking strategies.
Optimize Your Inventory
Re-assessing your inventory strategy can be smart for the bottom line and increase efficiency, but sorting through the thousands of potential tweaks and strategies can be overwhelming. Scenario analysis allows organizations to test alternate strategies, using their own data, within the safe confines of the model before implementation. By using scenario analysis and simulation retailers can test alternative manufacturing and distribution strategies. Additionally, this can illuminate other factors and help professionals understand the key drivers behind their current inventory situation including service levels, demand uncertainty, supply variability, lead times and more, and better take those into account when formulating the go-forward strategy.
In the past, e-commerce and brick and mortar stores operated in silos, sometimes as practically separate businesses. This is inefficient and doesn’t foster growth or innovation as one arm of the business could be replicating or competing against something that the other arm has already implemented. In order to scale the business, all channels need to be working in tandem and making the most of their omni-channel operations. We are seeing more and more retailers integrate inventory strategies across channels to both reduce inventory and improve in stock performance
To learn more about inventory optimization with LLamasoft, click here to download our ebook, “Using Inventory Modeling to Develop a Holistic Inventory Strategy