The goal of any inventory management process is to increase the output of a system while keeping investment and operating expenses under control. In a factory, this translates into increasing production while reducing work in progress. For retailers, it means increasing sales while controlling merchandise on hand.
Here is the dilemma: in order to increase sales, you need enough inventory to beat the sales plan, while increasing the ROI (return on investment) forces merchants to reduce the inventory relative to those expected sales.
This conflict typically leads to shortages and surpluses at the same time , or lost sales and markdowns. The opposite of what you want to achieve. And when rates of sale (the number of units sold per week per retail location) are low and sales are hard to predict, the challenge to make your supply meet retail demand without increasing stock levels is even greater.
Sales or ROI?
One way to resolve any conflict is to find out if two seemingly conflicting goals are indeed the right ones to pursue at the same time. If one of them is wrong or can be achieved by only pursuing the other, then the conflict is resolved.
When the goal is ‘to make money’ and it is achieved by converting merchandise to cash, it is obvious that ‘enough inventory’ is a necessary condition. But what is ‘enough’? And what about the ROI?
The graphic above illustrates that ‘too much’ merchandise leads to markdowns and limits working capital. But this only happens when ‘more inventory’ no longer leads to more sales. To do that, you need ‘enough inventory to support the sales that can reasonably be expected until the next delivery’. Given that retail sales can never be predicted accurately, adding some paranoia against stockouts is healthy. But becoming hysterical and ‘stacking them high’ is typically not, unless the goal is ‘to sell them cheap’.
This answers our question. The goal is not to get the highest return on each unit of currency invested, as decreasing the investment will also get you there and may ultimately lead to losing sales. When the goal is ‘to make money’, increasing sales is the more important goal to pursue.
At Retailisation, we deliver a SaaS solution that continuously matches your supply to projected demand on each shelf in any retail channel, while catering for supply chain constraints (like pack sizes and minimum order quantities) and the uncertainties that typify the industry. Using machine learning algorithms that learn from retail network behavior, the system produces new re-order points to meet expected demand before each next delivery to retail, thereby maximizing the sales potential of each retail location.
We serve the biggest global brands in fashion and sporting goods from our offices in Amsterdam. If you would like to know more about how we add value via our SaaS solutions or Professional Services, please fill out the form below. We will happily explain how we can improve your return on inventory.