In simple terms of business strategy, there are only two ways to increase margins and put more money onto the bottom line for any business: 1) Increase sales and 2) decrease costs. That may sound simplistic, but the strategies that go into each are not. In retail, and big retail in particular, strategies around the optimization of inventory management are fertile ground for both of these two overarching concerns.
Inventory Concerns at the C-Suite
At the executive level, leaders view inventory as a key part of the balance sheet. This was also explored in a recent Wall Street Journal article. (Retailers Rethink Inventory Strategies, June 27, 2016, Paul Ziobro). How a business manages their inventory needs affects some very fundamental key metrics: return on capital invested (ROCI) and free cash flow. Simply stated, the more inventory a business has in transit, sitting in a warehouse, or visible on a store shelf, the less free cash it has to leverage other opportunities or manage other daily business concerns. For public companies, those two metrics are points of discussion on every quarterly earnings call. From a strategy perspective, companies value real cash on hand. This is illustrated by the large number of fortune 100 companies that have an amount of cash on hand that would seem out of proportion with the rest of their business. This happens as business reacts to the speed of activity in its competitive landscape. If cash is chronically tied up in heavy inventory needs, there is less cash to leverage opportunities, such as an acquisition, that may come along.
What Are "Optimal" Inventory Levels?
There are still many retailers who hold to the philosophy, "if it's not on the shelf, I can't sell it." In other words, they have concerns over the potential for lost sales. Of course, every business wants to sell something to every customer who walks in the door—and no business owner wants to see a customer walk out the door without finding what he or she wants. Further, having a shelf that isn't full of product sends a bad message to consumers. Another key contributor to inventory issues is buying and ordering policies at the company. Buyers will often seek to buy larger quantities of anything, knowing they can negotiate a better unit price. Buyers are also often evaluated on purchase price variance.When employment retention and advancement are dependent upon isolated metrics like this, corporate buyers take the larger quantity every time, naturally. In the long run, however, this strategy fails, as it doesn't account for larger business concerns: it obligates a disproportionate amount of balance sheet cash and inflates logistics costs by artificially clogging inventory flow. (And it's the wrong way to evaluate your corporate buyer group.)
New Fundamentals for a New Business Environment
For some time now, inventory management has been built on a simple price versus volume model. It has also been based upon a rather simplistic view of location and customer preferences. Today, however, business must change to support a more sophisticated consumer, and a much more complicated buying environment. We call this an omni-channel environment. Businesses must be able to meet a consumer's need whether they are inside a brick and mortar location, on their couch at home, or using a hybrid of the two, such as in a "pick up in-store" scenario. Added to this "omni-channel" approach are online resellers, affiliates, drop shippers, and any number of other ways product is delivered to consumers. Inventory strategy is no longer local—it's global. Each of these new retail channels requires a specific strategy regarding inventory needs and a unique shift in supply chain management, bringing exponential complication to the job of getting product into position to be sold. While business personnel work hard to make the policy changes and strategy adjustments to accommodate the omni-channel environment, there are precious few tools that offer real solutions to logistics problems.
New Tools to Meet Today's Complicated Inventory Problems
There are two questions that must be of paramount concern to every Operations Officer in retail:
- How do I get the information I need to understand every aspect of my inventory needs?
- How do I make inventory optimization decisions that will drive the right mix of inventory into the right channel locations?
Both of these issues speak to the mandate of every inventory management office: how to balance cost, customer satisfaction, and return on invested capital. TBM uses InvOpt, a cloud based SaaS product that enables smart decisions based on actionable insights through a multifaceted analysis engine. It's supported by best-in-class consulting that allows our clients to achieve a 10-40% reduction in inventory and an increased service level of 5-15% with a payback time of six months. We deliver the advanced models and tools to identify best-case approaches for optimal working capital reduction. Pair those results with TBM’s deep experience driving process improvement and our clients will be able to implement and sustain gains—and learn how to leverage those gains for longer-term profitable growth.