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Stock inventory: Snakes and ladders

Knowing what's in the back room is just as important as a sexy-looking front of house space. Jai Breitnauer explores the balance between stock control, customer fulfilment and cash flow.

By Jai Breitnauer | October 8, 2015 | News

Loo-roll-gate, as it’s now affectionately known in our house, occurred on a rainy winter’s day in 2014. Having just moved from a well-proportioned bungalow in Christchurch, to a beatiful but almost storage-free villa in Auckland, I was surpised to open the only large cupboard and find it stuffed with three months worth of toilet paper. “It was on discount,” said the husband. “And we always need loo paper”.

It was an endearing schoolboy error that didn’t take into account some basic truths: we had very limited funds until payday; there was now no room to store towels and sheets; loo-paper is often on promotion at the supermarket. So I was surprised to find similar mistakes are quite common in retail.

“In New Zealand, a polished looking front end often hides anachronistic backroom practises that cost the business money – and that cost is being passed on to the consumer,” says replenishment specialist Joshua Fagan. In his roles working for Woolworths, McDonalds, and IBM, Fagan has noticed a lack of good management practises around stock can result either in poor customer fulfillment, or too much investment in slow moving product lines. The result is an increase in the price to the consumer, a situation tolerated in ‘old’ New Zealand because of our relative isolation. But in this new global economy, where overseas companies like Marks & Spencer are offering competitive prices and free international delivery, domestic retailers need to keep prices down and service level high.

“Globally, we’re seeing a downturn in retail and an increase in competition,” says Fagan. “Most retailers are already doing their utmost to drive up revenue with a fierce front end sales and marketing engine. But what’s happening out back? Consumers want a readily available range at a competative price, and optimising stock efficiency is key.”

The role of stock management

Take this example: your keen business eye has spotted a growing trend for reversible ponchos in Europe, and you’ve decided to start importing. You know your market are young, professional women who like to look cool, so you place your small flagship store near Britomart and take a concession in Dunedin’s trendy Wall Street Mall. Now you need stock – but there are issues.

Firstly, your stock lead time. You need to order direct from the manufacturer in Bangladesh, but it’s four weeks until you can take delivery. You expect to sell 10 ponchos a week in each store, and they come in batches of 100. If you place an order for two cartons, this will give you ten weeks worth of stock in each location. But – and this is issue number two - your stockrooms can only handle five weeks worth of stock. This means you need to find storage in each location, which involves paying a third party. This introduces you to problem number three – cash flow. You’re a start-up business, and you’ve ploughed all available budget into store fit out, marketing and product development. Not only can you not afford third party warehousing, but bulk ordering isn’t feasible either – you need to make sales to get your cash flow up. Finally, you need to factor in the cost of transport and duty.

“There is a three-way balancing point,” says Fagan. “How much stock you can hold, versus how quick it moves through the supply chain, versus what availability you want.”

Your poncho store can’t afford to invest in ten weeks worth of stock, and can’t store it either. But it can afford to buy and store five weeks worth of stock, and then re-order in a weeks time after sales have improved cash flow. This second lot should arrive just as you sell out from your first delivery, and two weeks after you will place your third order. That way you are investing in the minimum amount of stock needed for optimum customer fulfillment, using transport as storage and maximising cash flow efficiency.

The fluctuation game

“Seems simple enough, what do I need the software for?” I hear you ask. Well, of course, things aren’t that simple in real life.

Imagine the concession next door to our Dunedin poncho shop is taken over by a rival, and your demand suddenly drops. You reduce your order by half to accommodate, but you haven’t accounted for a spike in oil prices. Transport is now more expensive than buying and storing in bulk. Plus, the Splore music festival is next weekend and the weather is terrible… Everyone is going to need a cool poncho. If you haven’t optimised your stock equation to account for these variables, you’ll find yourself facing high demand, with low supply and passing the cost on to the consumer to maintain profit margin. Fingers crossed the shop next door made the same mistake, otherwise your business is in trouble.

“Inventory optimisation software allows you to craft and implement inventory policies across a large SKU set relatively quickly,” says Fagan. Instead of a one size fits all approach, you can place value importance on different products and programme in the factors that influence your inventory – such as hot weather for ice cream parlours, or a cold winter for insulation fitters. “The more often you review your policies, the more often you can adjust for changes in demand to reach that magic point where 80 percent of your products lines are supported by 20 percent of your capital”.

Head in the cloud

Despite its obvious usefulness, the uptake on Inventory Optimisation Software has been slow. One major factor is price point. Until recently most systems involved investment in expensive hardware. Jordan Lewis from Vend believes that the cost involved made them inaccessible to many smaller retailers and start-ups.

“Vend was the first major player in cloud based POS software on the market,” says Lewis. “Available on iPad and other devices, it meant an end to cash registers and expensive hardware. It made complex retail tools more accessible to all.”

Vend have now extended its offering to become an Enterprise Resource Planning (ERP) tool with real time reporting, and it’s not the only one. Takapuna-based tech start up Unleashed is an inventory management specialist with add-ons, and many of the premise based systems like SAP, are now offering on-demand functionality without specialist hardware investment. These cost effective, real-time solutions allow businesses to maximise cash flow efficiency without making a major investment in their own business infrastructure.

Lewis argues that, with all these cloud-based innovations, there’s never been a better time to talk about cost efficiency from inventory management.

“Online systems provide retailers with real-time adjustments on stock levels through all channels and outlets,” says Lewis. “Staff in store have maximum visibility on product availability and location. Your business manager can see exactly where product is, and consider the costs involved in moving it to the desired location. Most importantly, systems like this should prevent problems fulfilling customer need without retailers having to invest in massive amounts of inventory. The software will prompt you to reorder, based on real-time stock levels, cost and demand data, allowing you to take delivery of replenishment stock at the moment you sell out.”

Cautionary tales

Juanita Neville-te Rito, CEO of retail agency Hotfoot, agrees that these new real-time systems offer a level of functionality that is essential to improving customer experience.

“One of the main challenges in retail is the transparency of stock for the customer – they want to know where their desired product is, and how to get it quickly,” she says. “Retail is essentially about curating products for shoppers and tight inventory management is the backbone of a positive customer experience.”

However, te Rito suggests retailers exercise caution when investing in shiny new software, and work with a specialist in this area. “Stock optimisation software provides a good foundation for business practises, but it does require a level of monitoring and analytical sophistication that many retailers may not have.”

Andrew Buxton from ecommerce firm eStar agrees. “You need to have good processes and measures to get the most out of software. A lot of retailers probably can’t even tell you what their stock turnaround is,” says Buxton. “Holding less stock but still meeting demand is where you drive the advantage, but reporting around inventory management is still not well understood and often executed poorly.”

Buxton believes that before getting excited about what new software is on the market, retailers should make sure they have basic knowledge systems in place. “Inventory management in New Zealand right now is a processing problem, not a science problem.” He suggests that for a start, retailers reduce the number of brands they carry. “Give your customer choice, but don’t carry too much variety of stock that does the same job.  Helping customers choose by sensibly curating the products that are stocked is important.” Understand product demand across different SKU sets, know your storage capabilities and extend your awareness of logistics issues. These standard inventory management processes need to be in place to get maximum benefit from software.

This is an exciting but challenging time to be in retail in New Zealand. As the world opens up to our domestic consumers, we need to focus on our point of difference – a high level of service, a tactile cutomer experience, and an omni-channel facility to complement our in-store offering. Getting inventory management right is the backbone of good business practise, the foundation that will allow optimum customer fulfillment balanced with optimum cash flow efficiency.

Vend's Jordan Lewis

Ecomplexity

According to Jordan Lewis from Vend, any retailer not operating in the ecommerce sphere is missing out. But many retailers avoid it due to concerns about extra cost.

“It’s true ecommerce adds a layer of complexity to your inventory management processes, but with the right processes and systems in place, you can maximise profit without increasing stock levels,” says Andrew Buxton from ecommerce solutions specialist eStar. Buxton notes that next day delivery for online orders, particularly in ladies fashion, is an area of growth – and that fulfilling online orders from regional stores is more cost effective than using a separate distribution cente.

 “Most retailers carry between 6 and 16 weeks worth of stock at any one time,” says Buxton. “Online sales account for about 6 percent of retail sales.  So it is easy to fulfill online orders from stores without any significant increase in those store stock levels.  Managing replenishment with automated tools and good reporting on exceptions to adjust in-store stock levels. Simply that means you can add sales with the same level of stock investment.”

Buxton is concerned that retailers put too much emphasis on the upfront experience – i.e., building a sexy website - and cautions this needs to be balanced with good practices to manage fulfillment. “There’s nothing worse than for a real customer who has already paid for their goods to find their product is out of stock, or that it takes a long time to arrive.  Having local stores gives New Zealand brands and retailers an advantage with the right systems and processes.”

With companies like Mighty Ape – which has custom built its software and distribution centres to ensure same-day product delivery – it’s more important than ever retailers with an ecommerce layer integrate their instore and online inventory management practises, to ensure a quick and seamless customer experience from order to collection or delivery.

This story was originally published in NZ Retail magazine issue 739, August/September 2015.

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