Understanding the Importance of Inventory Management
The importance of inventory management has never been lost on retail business owners. However, a recently released report puts a dollar figure on how costly inventory mismanagement can be: $300 billion in 2018 alone. Ouch! That figure shows that retailers need to work on their management skills and possibly invest in technology that can help them.
Inventory management goes by many names today. Stock management, supply chain management, resource management, and enterprise resource planning are some of the popular synonyms.
The Coresight Research survey of more than 200 retail companies determined that by discounting merchandise, U.S retailers left billions on the table last year, and that money could have been saved if better inventory decisions had been made. Those businesses surveyed estimated that only about 60% of their merchandise sold at full price.
The survey showed that 46% of respondents said overbuying and buying the wrong products were the top reasons that led to price markdowns.
Another study by Wakefield Research and Bossa Nova Robotics shows that 73% of retail professionals say that inaccurate forecasting is a constant issue at their store. Other key findings include:
- 66% say inaccurate pricing is a constant problem.
- 65% struggle with inventory tracking.
- 87% think inaccurate inventory is a larger contributor to revenue loss than theft.
These numbers demonstrate the importance of inventory management and how it can make or break a retail business.
Markdowns Don’t Discriminate
It doesn’t matter how merchandise is sold, online or in stores, retail businesses are struggling to get the prices they want for their products. While only about half of all nongrocery retailers sold most of their products at full price, less than a third of multi-channel retailers managed to get top dollar.
The factors leading to these discounted sales are slightly different for online retailers. The hypercompetitive online retail market, where the largest beasts in e-commerce routinely match or undercut price quotes of competitors, is the biggest problem for most businesses. Direct-to-consumer brands, custom retailers, off-brands, shopping events like Prime Day, Black Friday and Cyber Monday, along with the sheer number of options available to shoppers also lead to price chopping.
The New Retail World
It doesn’t take a genius to know that retail today is not what it was even five years ago. The amount of information – data collected through a variety of sources including sales transactions – available to retailers today is staggering.
Former Intel CEO Brian Krzanich equates data to crude oil as the fuel of the modern retail industry. “Oil changed the world in the 1900s. It drove cars, it drove the whole chemical industry,” Krzanich explains. “Data, I look at it as the new oil. It’s going to change most industries across the board.”
So, having the means to mine it, manage it and put it to work is critical for businesses of all kinds. Retail business owners might know they have inventory management issues, but they might not know they have the data and the tools available to fix them. Gathering the right data is the first step in dealing with inventory mismanagement. Modern retail platforms, which start with a sophisticated point of sale system that touches all aspects of a business, are the tool business owners use to mine and manage their data and inventory.
“Putting data to work. What does that mean? It’s important that independent businesses shift their thinking about data. Businesses need to become more aware of the data they have at their disposal and how to use it to their advantage,” says Jeff Rogers, marketing, sales and partnerships director at Paladin Data Corporation.
Common Missed Steps
Poor performance measurements, industry experts agree, are the leading cause of inventory management mistakes. Not having accurate inventory data or a way to gather it leads to outs and overstock.
Brian Harej, a former controller and inventory analyst for Top Golf, described to Entrepreneur.com how Top Golf learned the importance of inventory management. The company seemed to be flourishing during his time there, but it had no handle on its inventory.
“We didn’t know when orders were coming in, and we had difficulty tracking what we were sending out,” Harej said. “If a facility was running low on a part, sometimes we weren’t notified until a day or two before it was needed. It would be impossible to get the requested parts to the facility on time.”
He fixed the problem by adopting inventory management software to track stock at all the company’s sites.
An inability to meet customer demands is another telltale sign a business doesn’t grasp the importance of inventory management. If the in-demand items aren’t on the shelves, customer service drops followed promptly by sales.
Automated inventory management software does a better job of tracking inventory in real time and forecasting consumer demand than people.
Lack of planning is the result of not being able to forecast demand for products. A BRP study, ”Keeping Customers Happy,” shows that for 63% of shoppers it only takes one unsatisfactory experience for them to stop shopping at a store. Not having the correct items on the shelf is at the heart of that experience.
The core function of a retail platform is to streamline operations and make businesses more profitable. To do that, they utilize sophisticated algorithms that analyze sales data and automate processes like inventory management which allows retailers to properly forecast customer and product demand.
Putting Data to Work
Not too many years ago, John and Chris Henkle, who own Henkle’s Ace Hardware in Webb City, Missouri, decided to upgrade their business. John was an old school, “nobody can manage inventory better than me” kind of guy. Tired of seeing him spending too much time on the process, his wife, Chris, convinced him to let her manage one aisle of the store with the new retail platform they adopted.
After seeing how easy it was for Chris to manage her stock and how much better her items sold, it didn’t take John long to realize the importance of inventory management and give Chris the rest of the store. With more time on his hands, John focused his efforts on business-to-business marketing, which increased their business without any added investment.
The technology upgrade, a brick-and-mortar facelift, and an expansion of services contributed to Henkle’s being honored as one of Ace Hardware’s Coolest Hardware Stores in 2015.
“You have to let technology work for you rather than you working for it,” says Dan Nesmith, owner, president and chief technical officer of Paladin Data Corporation. “Allow technology’s use of sophisticated forecasting models to automatically tailor your inventory to meet your customers’ expectations.”
Although it is probably one of the least glamorous parts of running a retail business, understanding the importance of inventory management and using it to stock the right products at the right times for the right prices is the correct formula for success.