F.

Curtis Barry & Company

14 BEST PRACTICES:
INVENTORY MANAGEMENT
TECHNIQUES

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“Inventory management and forecasting are strategic issues. Companies that recognize this
fact can typically provide higher levels of service to their customers and post higher profits.”
Developing a comprehensive inventory strategy involves a number of departments — including fulfillment, marketing,
and merchandising — as well as inventory control. It also involves implementing best practices for your inventory
management techniques.

These 14 best practices will most likely benefit your business the greatest.
1 Synchronize promotions
Successful strategic inventory management relies on tying creative and marketing plans to merchandising
plans. Marketers and merchants need to develop companywide planning calendars and projections for all
promotions in all channels — catalog, online, e-mail, stores, space ads. Merchants and the inventory control
group then plan product purchasing, availability, and receipts to support these events.

There are three aspects to this planning. First, the marketing department compiles and continually updates
the marketing calendar. Second, the marketing team plans the expected orders by week for the promotions.
Third, the inventory control and merchandising teams plan the demand in units for the promotions.

Often it's e-mail campaigns that trip up multichannel merchants. The campaigns may appear on the marketing
calendar, but all too frequently no one decides which items will be promoted until four to eight weeks before
the actual date of the promotion. By then product has been ordered and may already have arrived in the
distribution center. This lack of planning can cause contention between channels for best-sellers, leading to
customer frustration and backorders.

2 Revamp the organizational structure

To implement more-streamlined inventory practices, many companies have adopted a new organizational
structure: The merchandising department handles product selection, sourcing, and development and works
with the creative department on promotions. The inventory control group is primarily responsible for
overseeing the prior season's category and item history, working with the merchants on assortment planning,
managing the inventory, forecasting, reordering, receipt planning, post-mortem evaluation of item
performance, and vendor communication and compliance. Merchandising may still place initial purchase
orders, but in most cases inventory control will pick up
relationships with vendors and do the necessary reordering
and stock balancing.

3 Take a longer view of item planning

Rather than planning items one promotion at a time, plan an
item across promotions. Doing so enables you to plan receipts
in line with promotions, reduce backorders, make minimum
order requirements, and significantly reduce planning time.

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4 Enforce vendor compliance
The inventory control team is generally responsible for administrating vendor compliance policies because
they communicate most frequently with the vendors. One of the basic goals of a compliance program is to push
inspection up the supply chain. Problems can be more readily corrected if they are identified before product
ships to the distribution center rather than after arrival at the DC. Compliance policies should include routing
guides, item specification sheets, retail and direct packaging, accounting and paperwork standards, company
contact lists, chargeback policies and schedules, and advance shipment notice (ASN) and systems standards.

5 Track key inventory metrics

An industrial engineering axiom states, “What hasn’t been measured, can't be improved”. From an inventory
perspective, the metrics are the same for online sales as for catalogs, although the forecasting systems
requirements for Internet promotions may be different from those for catalog inventory. The metrics include

The metrics include

 Top-Line and Bottom-Line Growth
 Maintained Gross Margin
 Initial Customer Order Fill Rate (See
 Turnover
Chart)  Cost of Backorders
 Final Fill Rate/Returns/Cancellations  Age of Inventory
 Gross Margin Return on Investment  Measures of Overstock
(GMROI)  Write-Downs as a Percentage of Costs.

Key metrics for stores would include

 Top-Line and Bottom-Line Growth  Weeks of Supply

 Comparable-Store Sales (Year Over Year)  Markdowns/Margin Loss from Write-
 Maintained Gross Margin Downs
 Turnover  Age of Inventory
 GMROI  Sell-Through Percent
 Stock-To-Sales Ratios.

See some of the direct metrics at the end of this article.

6 Select the right systems

At the heart of capturing these metrics are the retail and direct systems. Keep in mind that metrics produced
by systems will be used for dashboard reporting to top management and that management will need drill-down
capability to see details at lower levels of reporting such as merchandise divisions.

Ideally a multichannel merchant wants to implement channel-appropriate merchandise planning, forecasting,

trending, and performance systems now. In the real world, many multichannel companies are still working
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 through what their requirements are specifically for e-mail and Internet forecasting functions. Analyze your
Internet demand and determine how different it is from catalog demand, and develop systems functions
accordingly.

7 Master the art of master scheduling

A system with master-scheduling capability takes into account all promotional plans by item. It will also add
demand projections by week, subtract returns and cancellations, add in the expected receipts and plot delivery
dates for purchase orders (POS), and then calculate whether an item is running short or overstocked across
channels. Because the calculations are by week, you can see where more on order is needed or the effect of
delaying POS on the net requirements.

To acquire a system with this capability, management needs to make a significant investment. In a recent client
study the costs ranged from $400,000 to $1.5 million. Software companies are looking to develop full-fledged
retail, Internet, and catalog planning and inventory management functionality; no one vendor has all the
functions needed today.

8 Adhere to exception reporting

A natural outgrowth of systems with master scheduling, exception reporting helps re-buyers and inventory
managers know where to take action without their having to review every item every week in detail. Retail and
direct inventory systems both use exception reporting.

Types of exception reports include:

 management reports (for instance, top 50/bottom 50 in demand)
 product characteristic reports (e.g., all items in a certain fabric across departments)
 POS needed based on stock-out calculations, on hand and on order, and projected demand with
item/vendor lead time
 ranking reports for returns, cancellations, gross margin, and liquidation
 forecast variance plan to actual
 slow sellers and candidates for liquidation
 new vs. repeat performance
 imported vs. domestic product.

9 Identify lost demand

To capture and plan for phantom, or shadow, demand, catalogers must record order information in the contact
center. For Web sales, analytics systems are starting to have the capability to report when items move in and
out of a customer's order process and shopping cart. Once you've captured the metrics, you need to report to
the merchants the consequences of being out of stock in cases when customers substituted items for those
that were sold out. Then the numbers need to get into merchandise planning for the next season. Catalogs

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 have found that best-sellers that were out of
stock might have been able to sell an additional
10%-30% based on phantom demand.

10 Plan by assortment
Preseason assortment planning of categories and
products relies on the past sales performance of
items or, for items not sold in the past, similar
product, along with item availability. For catalog
assortment planning also space utilized by
product and category. Retail assortment planning
is top down by category and bottom up by item.

11 Track inbound receipts

Inbound tracking of receipts not only benefits the fulfillment operation but also helps inventory management.
Smaller companies often lack this capability, and it can really hurt their DC planning and their customer service.
But many freight consolidators and carriers, including United Parcel Service and FedEx, offer tracking services
as do freight consolidators like DM Transportation. Or you can implement inbound systems so that vendors
send ASNs when purchase orders have shipped. UPS and FedEx both provide this service.

12 Create coverage reports

Coverage is defined as having sufficient quantities of products already in the DC when a promotion is in-home.
Companies need to develop coverage reports to show how much is in DC vs. the initial demand projected.
There are always some games played in this area with management. Because 50% to 70% of orders related to
a catalog drop take place in the first four weeks after the drop, if you don't have sufficient quantities of a
product by the time the catalogs hit mailboxes, you're going to create backorders early in the promotion.

Merchandising and inventory control need to follow up closely with vendors a couple of weeks in advance of
the ship date to ensure higher initial coverage by the time first orders arrive. As for the initial coverage rate,
defined as the quantity of units in stock by product and SKU before a catalog mails or an e-mail promotion is
sent, you should have sufficient coverage for the first two to three weeks in all SKUs, but most businesses are
well below these levels.

See the actual initial customer order fill rate graph for an apparel company at the end of this article.

13 Balance understock/overstock
What is the balance point between the cost of being out of stock on an item ($7-$12 per unit on backorder,
according to our proprietary studies) and the cost of overstock (margin loss you experience from liquidating
categories of product)? Chief financial officers often try to identify this at a top level. Merchants and inventory
control experts need to identify how much risk lies in being under- or overstocked as they do the merchandise

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 planning. New items, exclusives, and imports obviously have much more risk. Exclusives and imported
merchandise may also have higher minimum quantities.

14 Optimize your SKUs

SKU optimization crosses finance, DC, and inventory lines. In the past decade, many catalogs expanded the
range of color and size SKUs for individual items, and sales increased accordingly. Merchandise with high SKU
counts (bedding, shoes, apparel) creates the biggest challenges. Now companies recognize that the cost of
fulfillment (labor, space) and liquidation for slow-moving items can be high compared with their actual sales.
SKU profitability or optimization needs to be determined with fully loaded costs (advertising costs, fulfillment
costs, overhead, etc.

BEST PRACTICES IN INVENTORY METRICS

Unless a company has a proprietary credit program, inventory will generally be its largest balance-sheet asset -
and knowing standard inventory metrics is the key to protecting that asset. Here are some best-practice
standards:

Initial Order Fill Rate Customer orders shipped complete

 Advanced fashion: 70-80%

 Reorderable, basic apparel: 80-90%
 Gifts/housewares: 85-95%
 Business products: 98-100%

Final Order Fill Rate: Of the orders taken over the life of a catalog, the percentage of customer orders ultimately
shipped 100% complete.

 Advanced fashion: 90-95%

 Reorderable, basic apparel: 95-99%
 Gifts/housewares: 96-100%
 Business products: 100%

Return Rates: Percentage of gross demand that is returned by the customer regardless of the reason

 Advanced fashion: 20-40%

 Reorderable, basic apparel: 10-20%
 Gift/housewares: 2-4%
 Business Products: 1-3%

Cancellation Rate: The percentage of customer demand that is canceled by either the customer (from backorders)
or the company (permanently out of stock)
 Apparel: 2%-5%
 Gifts/housewares: 2%-4%
 Business products: 1%

Inventory Turnover Rate: The annual cost of goods sold divided by the average inventory, at cost
 Apparel: 3-5%
 Gifts/housewares: 4-6% F. Curtis Barry & Company | 6
 Business products: 6-8%
 Gross Margin Return on Investment (GMROI)
You’ll need to know the turnover to measure your gross margin return on investment: maintained margin (decimal)
x turnover = GMROI. Our studies indicate that good performance is over 2.00. To see how even small
improvements in either gross margin or turnover can improve results, plug in your stats. Improve one or the other
by a moderate amount and see how the GMROI improves. –CB

Percentage of Orders Shipped Complete Within 1 Week

Most catalogs don’t measure and report a weekly order fill rate; instead they only measure initial item fill rate or
backorders. Initial order fill represents what percentage of the orders shipped complete (all items on an order) in the
DC’s order turnaround time standard. This is an excellent measure of customer service.

Need Help?
If you’d like an expert assessment of your multichannel business to identify ways to reduce costs and improve
productivity, we’re here to help. I’d invite you to use the link below to request a time for us to have an introductory
phone conversation where we can explore your questions and situation.

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