Singular Solution to Multiple Inventory Issues – Attacking the Inventory Glut

Unquestionably we’ve officially entered the time of year that retailers and hard core shoppers live for – the holiday shopping season. Soon, we’ll begin to see that frenzied pace of activity in stores and on the websites of retailers everywhere. In addition, the degree of scrutiny on just how well these retailers meet consumers’ ever-increasing expectations for efficiency, convenience and value will reach its zenith over the next 60 days will also be intensified.

To underscore my point, look no further than the recent and very insightful Wall Street Journal article by Suzanne Kapner, which examines a major issue that could hurt retailers’ profit margins, but will quite likely have consumers whistling a happy tune: an inventory glut is being built up by department store chains which very likely will result in big markdowns in an effort to clear merchandise.

Kapner’s article comes on the heels of recent third-quarter financial results announcements by Macy’s and Kohl’s which both acknowledge that softer quarterly sales increased inventory levels. Kapner quoted executives from Michael Kors Holdings Ltd. and Ralph Lauren Corp., who both conceded a buildup of their inventory at big department stores. Other large retail chains have been cited in various financial analyst reports for similar backlogs.

Another sub segment of the retail ecosystem grappling with this issue are specialty stores and apparel manufacturers. A report recently issued by Macquarie Research identified 10 companies experiencing faster inventory growth than sales, including Lululemon Athletica, Nike Inc., Under Armour Inc. and VF Corp. Macquarie said these brands are experiencing “a build-up in inventories beyond the natural increase ahead of the holidays.”

This is hardly the first rodeo for these brands and retailers. Each of these companies have historically proven to be adept at anticipating consumer wants and needs come holiday time. Yet, each of these qualitative and quantitative data points above support a seemingly simple but fundamental axiom: those retailers that do a better job of matching supply and demand are in a far stronger position to retailers maximize profits, minimize the cost of fulfilment and meet customer demand.

This raises the question: How can this state of retail Nirvana be reached?

As omnichannel retailing evolves, the industry is recognizing that a single stock pool become the most efficient way to service all channels. This stock pool could be physically held in a variety of locations, most commonly warehouses and stores and essentially, every product ordered is fulfilled on a first come first served basis.

One of the challenges of operating individual inventories for each channel is the significant overstocking that occurs. Inventory can be regarded as comprising of two elements, the cycle time component and the safety stock component.

There are three primary reasons to focus on a single stock pool:

• Savings in inventory costs
• Equal or consistent service to a consumer, regardless of whichever channels s/he shops
• Improved sell through and lower clearance markdowns

To operate a single stock pool requires real time or near real time visibility of inventory everywhere in the enterprise. This includes every warehouse and store and, as far as possible, inventory ready to ship at the manufacturer and inventory on boats or on other modes of transport. In the very long term, it may also come to include inventory at wholesalers and at franchisees, though this is likely to be a long way off, but within the life of new systems investments made today.

Of course, getting to this state has its challenges and questions. Most notably, which organization actually owns the stock? Other issues include the lack of industry consensus on how multi-channel retail organizations should be structured and how channel managers and merchandise management teams divide and conquer product selection and inventory management and distribution.

We will have much more to say about the single stock pool topic in the coming weeks and months. In the meantime, however, it will be fascinating to see which retailers and brands win the inventory management game this season.

How is your organization handling this issue?

Who do you view as the best positioned to do so and why?