Mastering the hard goods Retail Inventory Management

Retail businesses have no choice , they have to hold huge inventory . In fact , that is considered as one of the core competencies of them. The manufactures and distributors who supply goods to these retailers rely on them because of their capability to hold large inventory.

Of course if the inventory is not managed well , the retailer runs in to many troubles like tying up a huge working capital in the inventory , wasting a lot of spaces which otherwise could have put to good use , huge maintenance cost of warehouses etc. This is a very known problem that retailers are trying to solve by carefully choosing their product portfolio and the quantity they purchase at a time.

However , when it comes to hard goods which has a comparatively longer shelf life , people tend to hold more of them in expectation of selling it later as it does not perish. I have written about how this costs these organisation in ways that they do not see explicitly . You can read it here

https://www.dhirubhai.net/pulse/problem-liquidating-dead-inventories-munavver-fairooze-mxwcf/

Today I will go deeper in to the real problems of traditional inventory management in hard goods retailing.

How its managed

If you look at the inventory as a whole for a hard good retailer and breakdown to different categories it will almost look like this.

You can see that only 60% of the stock is actually in the fast moving category , meaning that those are the stocks that really sells. The rest of the inventory is either slowly moving or not saleable stocks such as damages , not moving stock or dead stocks ( products which are of no longer in demand ) and small quantities of unpacked stocked.

(* The unpacked materials are those which are returned after sales in quantities that cannot be sold later )

Why does this happen ?

There are many reasons for this. Here are the major ones

1. Lack of tracking the Inventory : To understand the real movement of items , inventories must be closely monitored . Almost all goods go through a life cycle of selling like a hot cake when it is introduced to declining later due to low demand over time. If these are not carefully tracked down , it will be difficult to prevent the accumulation of inventories which have stopped selling faster. As most people purchase in bulk , a single re order of any item which will not be selling as expected will create huge inventory that will have to be liquidated later with a lower price.
2. Supplier Pressure : Many big brands force the small retailers to purchase in bulk by giving them annual targets and nudge them in to buying a lot more than they can sell by offering turn over discounts (TOD). Some even threaten the small players to cancel their exclusive dealerships if they do not purchase a minimum quantity. This can be a big factor in deciding for the retailers to buy and hold inventories which can be later a bigger problem.
3. Tolerance setting : Another issue is when the retailer sets certain tolerance limits to holding poor inventory , considering the total inventory holding cost does not shoot up too much. For example , If a damaged goods of 4% of the total inventory is considered as "acceptable", why will you bother about it ? In fact , the damages can happened due to various reasons such as in transit damages from the suppliers, In house handling of goods from the warehouse , transit damages from a reverse logistics from a customer , etc. If you can understand how much damages can be controlled from your end , probably you can save a lot of money by going and finding the root cause of it !
4. Bulk Buying : Economies of scale calculations can lead the retailer to purchase in bulk in hope of reduced costs, but some times this can lead them to holding the inventory for too long to an extend where they will lose the cost advantage. Even worse, in many cases, they will liquidate the stocks at a price lower than their cost. This happens due to the mismatch of product demands in the market they and their supplier operates. I have discussed this problem in detail before, you can read it here (https://www.dhirubhai.net/pulse/small-retail-stock-liquidation-problem-how-avoid-munavver-fairooze/ ).

What can be done ?

If buying in bulk can be reduced to frequent and small deliveries or if a single delivery can be of a mix of small quantities of many products that are fast moving , the problem of accumulation of inventories over a period of time can be solved by a great extend. However, you still have to be careful in predicting the movement of the items. This makes the tracking and classifiying your inventory based on its sales movement a very critical factor ! The above figure is a possible method on how to track , classify and take different actions to various types of inventories so as to keep the total holding cost of inventory at minimum without losing potential sales!

For those brands or products that are not in the control of the retailer, there is nothing much to do to avoid the stock piling. However , avoiding it completely to track will create many issues like purchasing and holding the wrong items. The only thing that you can do here is to market the products that are only slowly moving and hold maximum inventory of fast moving products to make the potential sales. This has to be done very carefully because the product movements can keep on changing based on the market scenarios and trends.

That's it for today , Hope you have enjoyed it . Also, please feel free to comment or suggest anything that could be worth discussing or writing in the future, Thank You !