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Four Steps to Mastering Inventory

With inventory being one of a dozen areas to attend to, retailers often have no choice but to spend more time putting out daily "fires" than on refining their inventory mix. What's more, many are still relying on gut instinct instead of system data to get them through the day, in spite of the time-consuming nature of manual processes.

Our work with retailers has shown us that on average, those not relying on system data often have 65 percent of their inventory value invested in the bottom 15 percent of sales. For every $500,000 in inventory, it's a good possibility that retailers could take 10 percent of the inventory value out (at least $50,000) without losing customers or profitability. Moreover, carrying $50,000 worth of unprofitable inventory is costing you more than you think. Actual carrying costs are far greater than the value of shelf space and the cost of the item.

Here are four strategic steps a company can take to help reduce hidden inventory costs, and to make sure the right items end up on the shelves:

1. Clear out the cobwebs: say goodbye to dead inventory

An important first step to better inventory management is to identify and eliminate unprofitable items. It's time to dust off the cobwebs, put those unprofitable, dead items on clearance, and free up prime retail space (and reduce those hidden carrying costs).

  • Determine the value of your inventory and whether you have dollars invested in the wrong items. Look at department and item gross margin return on investment (GMROI).
    GMROI is a key financial indicator that measures movement against margin. Did your items achieve or fail to meet expectations for generating profit?
  • Identify underperforming items or those that have outlived their popularity by running a product performance report. What are your top 20 to 25 dead items per department?
  • Free up capital; put underperformers on promotion! Require each department to put a plan together to move inventory out and not repurchase it. Donate them and take the tax breaks. It will free up cash and prime retail space.

If you have a lot of dead items, the rule of thumb is this: for every one new product in, three items should be targeted for close out. Put a plan into action so that your items generate more profit. For every SKU, ask: is the item not performing because there are too many similar products? Is it overpriced? Is it outdated? Consider remerchandising the store so customers can discover items that have always been there. 

2. Leverage the right suppliers and technology to order the right products in the right quantity

Purchasing directs the flow of goods in a company. To manage it well, you've got to have these two elements: one, high quality, accurate, and reliable suppliers; and two, accurate inventory data and fine-tuned forecasting capabilities. These components are crucial for making smarter buying decisions that reflect seasonal changes, trends in the market, and products your customers want to purchase.

  • Source reliable suppliers that can deliver quality merchandise at a reasonable price on time. Maintaining an accurate inventory has as much to do with the quality of your suppliers (and the accuracy of their shipments) as it does with the quality of your own inventory processes. 
  • Don't immediately jump at supplier incentives. Review suggested orders before meeting with a product sales representative so you get the product and quantity you want and need, not what the rep wants to sell. 
  • Optimize order cycles to prevent stock-outs and drive down shipping costs.
  • Use vendor EDI to reduce ordering mistakes, receiving errors, and to possibly gain discounts on orders.

Use technology to streamline purchasing and fine-tune forecasting. Leverage your ERP system for calculated and weighted order points to reduce seasonal spikes, stock outs and overstock, and trim inventory costs. Use smartphones at buying markets to instantly access your inventory and determine the quantities you have in inventory and what you need to purchase. Set safety stock high for popular items, and use your ERP system to keep better track of order multiples so that you're not only ordering correctly but selling those items at the right price and quantity. 

3. Refine the receiving process

An accurate, trustworthy receiving process paves the way for better accuracy in other areas of the business.

  • End the practice of putting out merchandise before it has been received into inventory. 
  • Move from blind receiving to receiving against a PO, which holds your vendors more accountable and increases accuracy of counts. 
  • Receive new products into inventory the same day as they arrive to improve customer service.
  • Use RF scanners to check each SKU against the PO.
  • Allow enough physical space in the receiving area for your team to complete the job more easily.
    Manage supplier relationships to improve receiving. Vendors impact both your purchasing and receiving departments, and can make or break your attempts to control inventory. Be proactive. Insist on confirmations for all drop-ship material. Track their performance, and use EDI to streamline and ensure the accuracy of communications.

4. Count what is important.

Use smartphone at buying markets

Choose the inventory counting method that provides the most efficient and accurate inventory control for your business. While most are still practicing cycle counting or year-end counts, another alternative is to sign up for managed inventory accuracy services that analyze your data and send you monthly customized count sheets and inventory reports to better assist you in inventory control. Managed inventory accuracy is a new strategy focused on counting a selection of important inventory in order to better control inventory, monitor accuracy, identify potential theft, reduce dead items, and recover frozen SKUs. It is an alternative to traditional cycle counting. Consider these inventory accuracy management tips:

  • Practice cycle counting daily with the goal to completely eliminate year-end inventories and to count each item three times a year or try a managed inventory accuracy service.
  • Regularly remind staff of your goals to improve accuracy; get the staff involved and invested in the process. Assign staff to be accountable for specific aisles or departments as well as any back stock for those aisles; include incentives for tidiness and product knowledge, improvements in margin, etc. Train clerks to audit products at POS. Aim for accuracy everywhere.

When you have an environment that encourages accuracy, you can expect more accurate and timely counts; finely tuned inventory control; better, more reliable numbers; and better customer service, as what is in the system will be on the shelves.

For further information on how Epicor can help you master inventory management, go here.

Posted by Epicor Social Media Team


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