An Introduction To Inventory Planning
For The 21’st Century Retailer
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Why inventory planning?
Retailers have two major investments in their business. Those are in inventory and people. Success depends on maximizing the return on those two assets every day. This module deals with maximizing the return on investment in inventory through proper inventory planning.
Retail has changed dramatically over the past 10 years. In the past the process started with the manufacturers who sold to wholesalers and distributors. The retailer went to market and bought goods that he brought to the store to sell to customers.
The manufacturers drove the system. From the customer’s viewpoint, she had one or two local retailers offering the merchandise sos he was limited in choices, scope, offerings and price. Shopping took time and effort. Information was scarce and normally obtained from the store and the salesperson.
Then the Internet changed that. Now a customer has unlimited choices. She can shop the product the world over instantly. A new product or concept for a retailer becomes a commodity in weeks rather than years. The customer can buy from a local retailer; have the product shipped from a competitor the retailer doesn’t even know exists in any part of the world and in many cases buy directly from the factory.
Information is obtained quickly and easily without the help of a salesperson.(Often the customer has more information than the salesperson!) With low interest rates, available capital, the Internet, faxes, and phones your competitor might even be a person operating out of his basement or a garage.
Edward Yardeni, chief economist with Deutsche Bank, talked about perfect competition on the Internet. “There are no barriers to entry, no protection from failure for unprofitable firms and everyone has easy and free access to all information. The Internet lowers the cost of comparison-shopping to zero. Increasingly the consumer can easily and quickly find the lowest price for any product or service. …The low-cost producer will offer the lowest price and provide this information at no cost to any and all potential customers anywhere on the planet.”
Now the new system starts with the customer. With unlimited choices, a retailer must have what the customer is looking for at a competitive price. Manufacturers must produce what the customers want. Merchandising has become more important to a retailer than selling. Selling is getting rid of the merchandise that you bought. Merchandising is buying the merchandise that you can get rid of.
The bottom line is that the success of your business depends more today on your inventory planning and your analysis of customer’s needs and wants than ever before. A successful retailer must find new and effective ways to listen to customers!
When we at The Hallman Company work with retailers we start by analyzing the needs of customers and grouping those needs into classifications. Those classifications allow us to analyze and control each classification individually rather than trying to look at the business as whole.
Once we have identified the classification structure that makes the most sense for the customer, we begin to look at the history of each classification and analyze the data. It is important to figure out what the customer is telling the retailer he wants. The retail sales floor and raw data is still the best point in the process to gather that information.
We find that marketing studies are often very misleading because people will tell you how they think they would behave. They tell you how they would like to behave. Problem is that when it comes time to opening their wallet, the convictions change.
The retailers themselves have a warped view of customer demands. The last sale looms much larger in their mind than the total picture for the season.
We have learned that you must look at the information on how people are actually spending money and, through sophisticated trending analysis and statistical analysis, develop sales forecasts for each classification many months into the future.
These sales forecasts are the beginning to planning for inventory levels and cash flows for the business. Critical information is wrapped up in turn rates, gross margin return on investment (GMROI), performance factors, inventory levels and much more. Not only is the amount of inventory important but also the quality of the underlying inventory must be analyzed. All of this information points to the OTB (open to buy) number or the amount of money that should be spent in each classification.
This analysis must be performed every month and carried forward through the season and at least through the season for which you are buying merchandise. That will then allow you to plan your cash flows and needs and be sure you can pay your bills in a timely manner. It assures you are buying enough merchandise to meet the needs of customers in each need classification. It prevents you from buying too much merchandise so that it must be marked down at the end of the season, reducing profit.
Many retailers are capable of doing this analysis themselves. Large retailers have a staff that does this analysis in-house. We deal with many independent retailers that hire us to do this analysis each month and help them turn the information into action.
Regardless of how you get the information, it is critical for every retailer, big or small, to know what the customer will buy and have it ready for him.
Buy too much and you will give away all the profits in markdowns. Don’t buy enough and you will introduce potential customers to the competition as they look elsewhere for the merchandise.
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