By Daniel Shim
The pace of change in the retail industry is occurring at such breakneck speeds that few retailers have the opportunity to take a moment to consider how emerging and disruptive trends are fundamentally transforming the business and potentially making historical best practices outdated and irrelevant.
In fact, a business concept that is increasingly becoming a focal point for many retailers is omni-channel, an initiative designed to provide customers with a seamless
brand experience across all engagement channels – digital, store, mobile, social and perhaps many others to come. However, as omni-channel goes beyond the theoretical phase and becomes an essential strategy for retailers, there are significant operational implications for one of the most important assets on a retailer’s balance sheet: Inventory.
Smart and effective inventory management is a complex task requiring large teams of planners and allocators to manage it for various engagement channels. In fact, in my prior career, I managed a team overseeing hundreds of millions in annual inventory for a large multichannel apparel retailer, and I can attest to the diligent and careful balancing act that these roles required. Too little inventory can lead to unsatisfied consumer demand and missed sales opportunities, whereas too much can reduce margins as deep markdowns become necessary to clear obsolete products.
“Turn can be a very fuzzy number.” -Paula Rosenblum, managing partner at RSR Research
For such reasons, retailers closely monitor their inventory turnover rates (calculated as sales divided by average inventory) to find a healthy equilibrium that satisfies both customers and the company’s bottom line. Yet the management of inventory turnover has traditionally been segmented, with each business unit maintaining a separate team of planners that manage their respective inventory autonomously and without much interaction. Today, managing inventory has become an even more complicated operation as more retailers adopt omni-channel strategies and optimize their inventory across channels to improve fulfillment, customer engagement and inventory productivity.
In talking to Paula Rosenblum, managing partner at RSR Research, she said that she sees the practice of inventory management and evaluating the health of inventory turn becoming increasingly complex as channels converge.
“Turn can be a very fuzzy number,” according to Rosenblum. “If a company calculates turn solely based on average inventory available in a specific channel, they may be making business decisions on distorted information. In addition, turn does not do a good job of quantifying opportunity cost. A company can be overstocked in some product, and be completely out of stock on the more desirable product, but turn, as an average, will look okay. Needless to say, focusing on turnover rates without factoring in certain business practices directly impacting it is probably not a best practice in modern retailing.”
Evaluating inventory turnover in isolation can produce some unintended actions. Stay tuned to learn what those are.