Dan Gilmore over at Supply Chain Digest just wrote a blog piece about how many stock outs he is seeing these days in retail stores. Dan wonders if retailers haven’t gone overboard in their desire to cut inventory and cut costs. Here are my thoughts.
There’s a big difference between intelligently reducing stocks and taking an axe to your inventories. Unfortunately cost-cutting companies will often take the meat cleaver approach, with the kind of impact Dan described, including unhappy customers and lost sales.
Have you noticed that the out-of-stocks are often in the popular items, not the “cats and dogs”? Even in good times, to keep inventory costs in line, companies (manufacturers, retailers and wholesalers) often run too “lean” on many of their better selling items, adversely impacting revenue and gross margin.
Many cost cutting initiatives then exacerbate the problem by reducing inventories across the board or even focusing on the items with the largest inventory value, which may include those items most needed to sustain the business.
The better approach is to “fix the mix” by selectively reducing those items that contribute the least to service levels and incremental profitability. This requires a more intelligent approach to inventory management, one that requires a highly granular understanding of changing demand patterns and demand and supply variability.
This problem is most acute in “the long tail” where much of the fat is often concentrated. Traditional inventory management methods based on simplified models don’t understand the demand requirements in this area very well and can’t properly size the stocking requirements, so much of the excess inventory can be found there.
posted by Jeff Bodenstab at
11:54 AM
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