Is Inventory Management REALLY an Issue?

“For every retailer, the largest asset on the balance sheet is inventory; the same if not managed astutely can lead to an unhealthy bottom line and serious cash flow concerns.”

When we talk about retailing, inventory is bound to have a skewed curve. Some articles sell more than others and stock out too therefore lost sales revenue. Similarly, there are others having poor rate of sale and are supposed to get cleared through discounts. No matter how well you plan, every retailer is going to end up with some inventory being dead that would require massive mark downs for clearance. Even if state of the art merchandise planning systems are put in place, forecast error is sure to go down but it can never be close to zero because customer trends and retail dynamics are continually changing. So, then the actual question is that what level of skewness in inventory is considered normal and beyond what point does inventory management really becomes an issue? There is no single answer to it; it varies from product to product and industry to industry.

The probable reasons that lead to inventory mismanagement can be any or all of the following

1.       Lack of skilled human resource to plan sales and inventories at the start of the season. Re-plan, replenish and re-order the hot sellers during the season and eventually mark down the left overs (slow movers or dead articles) before the season ends.

2.       Unavailability of a good assortment/merchandise planning system. In such cases, generally excel sheets are used for historical data analysis and next season’s planning. But in large networks (40+) with huge number of SKUs (1,000+), data management in excel becomes difficult. Analysis is usually summarized at style level and lots of exceptions at shop and SKU level get compromised.

3.       Unnecessary merchandise breadth; that is offering too much (lot of SKUs) to the customer. This no doubt adds complexity to inventory management equation. Industry research shows that 32% of customers do not make a substitute purchase if their preferred product is not available, so keeping excessively huge breadth of SKUs, assuming service levels to go up, is not a wise decision.

4.       Unrealistic targets in the form of inventory turnover, on-shelf availability and service level.

Inventory mismanagement leads to many costs for the retailer, e.g.  carrying cost, liquidation cost, logistic cost and obsolescence cost other than the procurement cost. But why is it that every time I meet retailers, I find them worried about inventory management being the biggest issue in their company, yet I often find the same retailers end up investing in systems/services related to customer intelligence, customer footfall, online selling or something else.

What do you think? Is this a major issue? If its not why not (Take our Poll Below) ? Looking forward to your comments