Today’s blog post comes from inventory planning expert and Perkins Consulting ally John Rusnak. With more than 30 years’ experience developing demand forecasting methodologies and inventory planning strategies in multi-channel retail industry,
John’s insights and expertise are invaluable resources in the evolving retail climate.
In this post, you’ll learn John’s unique framework for avoiding the common pitfalls of generic, sweeping inventory decisions, and for improving your business through data-driven inventory planning. We hope you enjoy the read!
- The Perkins Consulting Team
The 3 R’s of Inventory Planning
By Guest Contributor, John Rusnak
Going to school as a child, you were probably taught the importance of the three R’s: reading, writing, and arithmetic. Today, the rising tide of environmental awareness has made us all familiar with the three R’s of recycling – reduce, reuse, and recycle.
But chances are you haven’t heard of the three R’s of inventory planning: the right item, in the right place, at the right time.
Why such an emphasis on inventory?
In the retail world, inventory is often the largest asset on your balance sheet. But it’s not just the size that’s formidable – your inventory is constantly changing, and can be incredibly challenging to manage.
Which is precisely why inventory planning has a place at the heart of your business strategy.
At its core, the goal of your retail business strategy is to convert inventory into sales, profits and ultimately satisfied customers. Ensuring you have the right item, in the right place, at the right time will benefit your income statement by:
- Optimizing your gross margin;
- Reducing storage costs;
- Increasing cash flow;
- Reducing finance charges;
- And increasing customer satisfaction.
Want some proof?
Let’s walk through a few examples of how the three R’s of inventory planning can benefit your bottom line.
1) The Right Item
Consider a retailer that has multiple locations in the same city. Variables like demographic characteristics or local competitive environments can largely affect the sales potential of a given retail item, even though the stores may otherwise be identical. That means any single item can have a different sales potential at each location.
While it makes sense for retailers to stock similar inventory across locations, quantitative analysis offers greater level of depth into optimal inventory assortments, and how to ensure that each store stocks the right items.
For example, you may find that the optimal inventory assortment mix across two stores includes 85% - 90% common items, and 10% - 15% of unique items that reflect the different attributes of each location.
Figure 1: Example of an optimal inventory assortment mix across two stores.
2) In the Right Place
How often have you visited a retail clothing store looking for a specific item, only to discover that your size is nowhere to be found? Turns out, another location has your size – but it’s halfway across town!
This is the perfect example of a retailer who has the right item, but it’s not in the right place. In this example, each clothing retail location will have a unique size profile based on the demand in their given market. As you saw in our first example, this demand is driven by the demographics, ethnicity, and certain competitive characteristics of that market.
Figure 2: Example of size profiles across two clothing retail locations.
As you can see in Figure 2, the size profile for Store A is skewed towards smaller sizes. That means proper inventory planning can ensure that customers are able find what they are looking for. It makes little sense for Store A to carry large and extra-large items that will be left unsold on the clearance rack, while their customers are frustrated that their smaller sizes sell out so quickly.
3) At the Right Time
If you work in the retail world, you’re probably familiar with the term “sales lift.” What we’re talking about here a model that predicts the “lift” in sales that you can expect to see when you lower the price of a given item.
The fact is that when an item is advertised with a discounted sales price, the sales lift realized for that item will often vary by store and/or region due to customer demographics and their sensitivity to price.
Figure 3: Example of the sales pattern for a single item in two different stores.
As shown in the example in Figure 3, weekly sales of a single item in Store B are systematically lower than in Store A. However, when that item is advertised with a discount, the sales lift is much greater for the item in Store B than it is in Store A.
These findings should shape the way the retailer prepares for inventory of that item. It shows that less inventory is needed in Store B prior to (as well as after) the sale, but that the inventory planner must anticipate the greater sales that will occur during the week of the discount, and stock accordingly.
So, how do you get a passing grade in the three R’s?
The three R’s of inventory planning all have a common, under-riding theme – they’re based on attention to (and analysis of) inventory and sales data.
In order to leverage these concepts to benefit your inventory planning initiative, your retail business must develop a culture of using data-driven analytics to make decisions and develop strategies for growth. The good news is there’s a clear framework for those companies ready to take the next step towards improving their business through optimized inventory planning.
Figure 4: Framework for establishing an analytics-driven inventory culture.
- Develop the Database – This means proper documentation and storage of accurate, timely, integrated data at the enterprise level, and helps ensure that all teams are using the same numbers and definitions to measure success.
- Establish Descriptive Analytics – Leverage your database to answer the question “What has happened?” Descriptive analytics may include basic formatted reporting, some exception reporting and simple trend analysis.
- Conduct Statistical and Predictive Analytics – Leverage your database and descriptive analytics to answer the question “Why did it happen and how/when will it happen again?” Predictive analytics will drive insights into how the behavior of your products and customers will impact your business.
About the Author: John Rusnak specializes in working with retail teams to optimize performance improvement through demand forecasting and inventory planning. John’s analytical skills and 30 years of experience in the field inform his approach to helping organizations gain insight into business drivers, identifying risks and opportunities to drive business performance.
Want to learn how your retail organization can leverage data for optimized inventory planning and improved business performance? Give Perkins Consulting a call at 503.221.7582.