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Inventory Management 101

Your inventory is your central nervous system - treat it early and often

What Inventory Management System (IMS) should we use?

We are routinely faced with this question, in fact it's one of the biggest problem areas for clients that come to us in need of a centralised solution that can communicate to all areas of a retailers business; only retailer inventory will be discussed here as most suppliers and distributors are reliant more heavily on warehouse management systems and transport management systems.

Yes, some retailers have their own warehouse(s) but in most cases the appropriate Inventory solution can accommodate the demands of the business when it comes to;

  1. Knowing where stock is located (either store or warehouse)
  2. Knowing its respective bin location at the warehouse
  3. Knowing what volume of stock you have on your books

There are roughly 10 applicable inventory solutions that we would recommend to clients dependent on your volume of SKUs and variants, number of locations, size of operation, territories you sell into and a few other domestic variables that can become influencing factors.

What's important to measure?

Too often the initial thought process for Independents gearing up for inventory management is to assess the following criteria;

  • What eCommerce plugins are facilitated 
  • Does it have shipping integrations (or inclusive)
  • Does it include ePOS sales data
  • Drop Shipping and supply from external sources
  • Batch ordering 
  • Manual telephone ordering entry 
  • Automation of purchasing orders
  • Multi-channel and marketplace selling integrations
  • Helpdesk integrations for total customer journey 
  • Sales velocity
  • Demand forecasting 
  • Set rules of seasonal spikes
  • Order scheduling and fulfilment duration

These are vital characteristics for any inventory management system, nonetheless they are status-quo metrics that come as a requisite for any retailer that's serious about getting on top of inventory management to streamline backend and frontend order management.

However, at Aulter we're looking to marry you up to a partner solution that can deliver results on metrics that we believe are vital to the success of your product rotation, size of operations and the capabilities of your teams.

What are some of these metrics;

  • Base stock availability 

It's imperative to ensure that you can utilise data from your solution to understand your order scheduling, how long does it take your stock to arrive following purchase orders, estimate customer buying cycles and returns data to decipher what stock is being sold and returned (and the applicable delay in availability). It is not uncommon for customers in apparel to purchase multiple sizes and return variants they don't need, use your solution to discover trends and capitalise on them.

Relentless availability is also imperative for marketplaces to ensure high rankings, as well as installing confidence in your customers when shopping via your eCommerce space; yes it can also be smart to incorporate limited availability for specific product categories and flash sales to drive up exclusive access and demand but on the whole, perfect availability is most often a necessity.  

  • Minimum credible display & Safety stock

This is perhaps more applicable to grocery stores, food hall outlets and speciality convenience stores but fully stocked, merchandised shelfs will always convert more attractively into in-store sales. This is where sales based ordering (SBO) or 'automated demand forecasting' can be applied, dependent on the scale of your business will depict what solution is required. If you have some 3000+ SKUs and approximately 1000+ sq ft of space in-store then you're going to want an inventory solution that comes pre-built with planogram allocations, macro space planning, sub-category performance and compliance analysis for your merchandising operations.

Safety stock ensures you are prepared to handle seasonal or promotional spikes, this can be attributed to demand forecasting and automated if you have historical trend data that can be applied, contingency stock is a little different and has arisen given the influence social and celebrity endorsements can have in various product categories at high velocity.

  • First in first out (FIFO)

This doesn't only apply to perishable goods or goods with relatable out of codes (OOC); apparel will become visibly used and worn in-store if left on rails and being tried on, with electronics or hardware goods the boxes or packaging can become damaged, models may become outdated too and if your products are not purchased on a sale or return basis then you're losing margin to needless discounts.

  • Days inventory outstanding (DIO) or days of inventory on-hand

This is essentially how long it takes you to shift your goods, the faster the better (even better to remain fully stocked during this period on the shop floor on online). If you can nail this then you're operating at a premium and can begin investing in new product categories to capitalise on the free cash you have on hand.

  • Shrink

Shrink can be described in many ways, essentially it's a loss incurred on your goods from a multitude of ways; customer or employee theft, vendor errors/fraud, reconciliation or admin and pricing errors, ePOS errors and online organised crime or chargebacks.

An effective IMS is just one tool of many that should be deployed collaboratively to reduce shrink, ensuring that your employees are well trained on an intuitive and easy to use IMS that correlates with their skill set and the demands of your business will do a great deal to reduce shrink.  

Circling back

We're not going to discuss key accounting and business analyst reasons and ratios that you can apply for each of these metrics to understand the importance of lean, rotating inventory but we focus on the importance of outcomes at Aulter when electing what inventory management system to recommend or adopt for our clients.

We do this while keeping in mind the importance of assessing your costs of goods sold (COGS), weighted average cost of capital (WACC) and your sales and operation planning (S&OP) and how these financial traits relate back to your technology planning and features of your inventory management solutions.

Some solutions come with key accounting packages pre-built into them, some have direct integrations to tools such as Sage, Xero or Quickbooks and for more sophisticated retailers we would suggest you consider an external ERP suite for handling your financial planning with inventory management as a separate division.

We take inventory seriously, check out our page on products for inventory or reach out to us for a capacity consultation or to discuss how better to use inventory management in your eCommerce channels.

 

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