A.T. Kearney, Strategy & Operations

Fulfilling the Availability Promise

Inventory managementEnabling an Omnichannel Inventory Management Strategy

While today’s consumer has dramatically changed, most retailers are still relying on inventory management tactics that are stuck in the past.

Some of the world’s best-known retailers have learned this lesson the hard way and are now leading the way toward truly omnichannel inventory management.

For example, in 2013, Walmart lost $3 billion in sales due to out-of-stock issues, even though its inventory grew faster than its sales. The culprit? Infrequent collaboration with supply chain partners, who were not nimble enough to react to quick changes in demand. To address this problem, Walmart gave key vendors access to its backroom inventory data, leading to significant improvements in replenishment capabilities and on-shelf availability.

Meanwhile, Macy’s leans heavily on technology to optimize its inventory. The retailer now has full visibility into every SKU across the chain’s 800+ stores and distribution points. This unprecedented visibility has helped Macy’s reduce unplanned markdowns and inventory write-offs by redirecting inventory to stores or locations that sell instead of keeping them in the same location—where they take up precious shelf space and reduce profitability.

Why are some of retail’s biggest names—scratch that, all retailers—having to drastically rethink their inventory management strategies?

It’s no secret that consumers want the flexibility to research, purchase and return product across multiple channels. In fact, 68% of shoppers1 want instant gratification and 1 in 3 consumers walk away from a purchase if the product they want is not available.

Unfortunately for specialty retailers, their inventory management strategies have not evolved along with their consumers and most are still struggling to effectively and profitably allocate inventory across channels and within a channel.

The stakes are high: effective inventory management can maximize sales and reduce unplanned markdowns while mitigating merchandise overstocking and understocking issues that negatively impact profitability and working capital.

Plus, inventory management isn’t just about near-term dollars and cents, it’s about long-term impacts on customer experience and loyalty. Here’s how to fulfill consumers’ expectations—and keep the product availability promise.

Take a Data Deep Dive

Today, many specialty retailers and wholesalers have rich point-of-sale data at their disposal, and the technological barriers to analyzing it are gone. However, many retailers don’t use this data at the deepest level of detail—down to style, color, size and store—in their demand planning cycle.

Though it takes more effort upfront to gather this data, it’s well worth it. That’s because this data represents the purest form of demand and can help generate rich insights that inform inventory placement and buys. Only at this level of detail can retailers best identify patterns of product performance within and across channels and build an omnichannel view of product demand that serves as an input to more effective inventory allocation.

Define the Rules of Inventory Engagement

Many companies use outdated, brick-and-mortar centric allocation methods that pale in comparison to their dynamic, rule-based cousins. In many instances, either one channel gets explicit preference over others or in the case of a single channel, certain accounts get bumped over others without any clear rationale.

Companies need to review their demand requirements holistically and balance three factors as inputs into dynamic inventory allocation: revenue, which is an important measure of channel and customer priority today but not potential going forward; profitability, which can account for customer ‘cost to serve’ and help shift inventory to more profitable channels and customers; and strategy, which can allow the brand to make investments in channels and customers that help build penetration, brand equity and future growth. Additional factors such as type of product and seasonality can be woven into the demand allocation engine to further fine tune inventory deployment.

It is not that retailers don’t appreciate these criteria; they do. But in today’s fast-moving, fast-changing omnichannel environment, static rules that were perhaps once true very quickly become insufficient and inaccurate. Plus, whenever functional and organizational hierarchies supersede channel and customer hierarchies, suboptimal inventory deployments invariably ensue. Dynamic inventory allocation requires frequent redefinition of the rules of inventory engagement to maximize sales and margins.

Setting clear inventory allocation rules paid off for one leading electronics retailer with over $2B in global revenues. The retailer was able to effectively address service issues at its large accounts by creating tiered service-level criteria to ensure that top customers always got highest priority in inventory allocation. This led to double-digit improvements in service levels at key accounts, which impact over 80% of sales.

Not All Out-of-Stocks are Created Equally

Most out-of-stocks are handled on a first-in, first-out basis, meaning stores that run out of inventory first get priority over those that run out of product later, larger stores outgun smaller stores and some channels outrank others.

Instead, retailers need to replenish stores and channels with the highest probability of making a sale. Using sophisticated trailing rate of sale calculations, retailers can predict which shelves are most valuable and should ideally never be out of stock and use this information to guide real-time, weekly inventory allocation decisions at the store, style, color and size level.

The case of a global omnichannel apparel company demonstrates the benefits of this approach. The retailer was able to realize a 5% to 7% lift in sales by leveraging a tailored lost demand methodology to guide allocation decisions, enabling inventory with higher turns to be deployed more effectively across all channels.

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