Post 7

Minimizing Retail Inventory – a consequence of Mitigating Retail Out of Stock

Did you know –

  •  86% of the items in a store have more than 1 week of inventory in the store
  •  Fast moving items have six-times the out-of-stock rate than slow moving items

Many Retailers we speak to are concerned about Out of stock, and are equally concerned about inventory. For a Retailer, inventory is one of the biggest costs. “Bad inventory” consumes funds, takes up space, requires handling, and is subject to expiry and shrink. Identifying “bad inventory” and lowering it frees up valuable working capital, and frees up valuable shelf space that be re-allocated to faster moving items.

Can a Retailer really minimize inventory without addressing OOS? Can these two problems really be addressed in isolation?

Consider the following scenarios:  

quadrant

Figure 1

QuadrantMnemonic Description
Quadrant-Four Customer Walk-outs Efforts at minimizing inventory without an understanding of demand at a fine-grained level leads you to “Customer Walk-outs”.
Quadrant-ThreeOverdoneFocusing only on customer demand, and avoidance of OOS at all costs, leads to this state. In an “Overdone” state you strive to meet customer demand by over-stocking. Inventory costs increase.
Quadrant-TwoOperationally EffectiveStocking just enough and in a timely manner at the stores to meet customer demand leads to the state of being “Operationally Effective”. The most desirable state and positioning.
Quadrant-OneMissed OpportunitiesInadequate understanding of customer demand, and mismatched inventory leads to “Missed Opportunities”. OOS increase, customer experience diminishes, and inventory costs increase.

We submit that Retail Inventory and Retail OOS are two sides of the same coin. Solving one well also ought to address the other. Addressing Out of stock effectively also leads to optimal inventory. In other words, it is not possible to solve one without addressing the other. It is necessary (and possible) to solve both simultaneously to attain operational effectiveness.

As Retailers move from Q1, Q2 and Q4 to Q3 (Operational Effectiveness), customer experience improves, inventory goes down, inventory velocity/throughput improves, valuable shelf space can be re-allocated to higher selling/fast moving items, cash gets freed up, and cash flows accelerate. Operational Effectiveness requires predictive store ordering, prioritization of SKUs, responsive scheduling of store deliveries, and responsive shelving practices.

As we address the twin issues of Retail inventory and Retail OOS and move towards being “Operationally Effective”, we need to identify, confront and make trade-offs. For specific sub-categories and on some occasions we could consciously choose the positioning of “Overdone” or “Customer Walk-outs”.

In some categories   and during some times in the year we may choose the positioning of “Overdone”. This happens when cost of carrying the inventory is low (price, shelf space, shelf life) and cost of customer ire is high.

Conversely, in some categories we may choose the positioning of “Customer Walkout”, ironic though it may seem. This may happen when cost of carrying inventory, space occupied by the item, the benefits of substituting with other items outweighs the benefits of satisfying shoppers.