One method is to purchase an inventory management package and either modify it to meet your needs or adjust your needs to conform to the package.  While this can be effective, without a complete understanding of your product flow and inventory processing costs, choosing the best package for your needs is impossible.  Another method is to develop an inventory management system in-house.  This can be as complicated as hiring a team of programmers or as simple as utilizing a spreadsheet.  The best method is the one that fits your corporate structure and objectives.  Either way, an understanding of the product flow and processing costs are required to determine the most effective solution.

    Simple inventory management techniques can be applied to purchasing decisions without the implementation of high-ticket software or the hiring of a team of statisticians.  It is as simple as analyzing historical data, developing an initial sales forecast, converting the forecast into a buy plan and executing the plan.  While the implementation of a sophisticated inventory system can maximize the benefits, a simple plan will generate benefits and help define the requirements for the best system.

     Inventory management begins with historical analysis of sales and costs.  Begin the sales analysis by determining the sales curves for each product class and by campaign.  Individual items within the product class may follow a different curve, but the product class curve is usually representative of all items.  The steps for sales analysis are:

• Group similar curves together to reduce the number of curves within a campaign. 

• Identify specific product class curves that follow the circulation sales curve

• Determine if sales curves vary from campaign to campaign.

• Identify any item that varies greatly from the product class curve.

This analysis determines the curve(s) that products follow throughout a campaign.  Standard stock items can be expected to follow seasonal curves comparable to previous seasonal campaigns.  New items can be expected to follow curves for similar items.

     Most companies consider only product costs when analyzing inventory.  If the hidden costs of inventory purchasing decisions are ignored, unprofitable products may be retained with an adverse impact on the future of the company.  The hidden purchasing costs include purchasing staff, quality control, inventory carrying costs, backorder costs, training, incoming freight, and related administrative costs.  When these costs are calculated into the overall product cost, a previously profitable product can become very unprofitable.  For example, a best selling item requires extensive haggling with the vendor for each order.  Then, twenty-five percent of the shipment is either damaged or inferior.  Backorders are constant, because of poor service from the vendor, quality issues, and a lack of accurate forecasting.  Once all of the related costs are added to the product cost, this item is unprofitable.  The next step is to determine whether to replace the item or resolve the issues.  If the item is replaced, training is required to educate customer service and fulfillment personnel about the new item.  Whatever the final outcome, replacement or resolution, the decision will be made based on realistic analysis if an inventory management system is utilized.

     The next step of inventory management is to develop an initial sales forecast.  The sales forecast is a dollar based forecast that must balance with the circulation projected sales dollars.  The steps of initial sales forecast development are:

• Determine the total projected sales by week.

• Develop an initial forecast by product class group utilizing historical analysis and projected sales.

• Balance the product class group forecast with the total projected sales dollars.

• Review with merchandising to see if any product classes are expected to change in performance.

• Adjust projections accordingly.

• Develop an initial forecast by specific product class.

• Balance the specific product class forecast with the grouped product class and the total projected sales dollars.

• Develop an initial forecast for each inventory item.

• Reconcile item forecast with product class, grouped product class, and the total projected sales dollars.

     The initial sales forecast is a forecast based on historical analysis and the presumption that an item will perform as previously indicated.  The weighting of item by placement in catalog, trends, or intuition is part of the next step.

     Developing and executing a buy plan is the final step of implementation.  The buy plan includes weighting of items, planning specific order quantities, and management of incoming orders.  Specifically, the steps for this stage are:

• Convert item forecast from dollars to units.

• Review item projections with merchandising to determine variance in performance (weight items accordingly for placement, trends, etc.)

• Reconcile item forecast with product class, grouped product class, and the total projected sales dollars (if one item is increased because it is the cover shot, other items must be decreased so the forecast will balance with the sales).

• Plan specific purchase orders based on projections, current inventory, lead times, risk, economic order quantity, and vendor reliability.

• Place orders with vendors.

• Monitor incoming sales for variances from projections.

• Adjust projections accordingly, always balancing forecast with the total sales projections.

• Place re-buy orders to accommodate actual and projected demand.

• Continuously monitor merchandise delivery, overstocks and backorders.

Implementation of these steps will generate the benefits of an inventory management system.  While on the surface the steps are simple they are extremely time consuming and can be overwhelming.  If your company needs an inventory management system, but does not have the resources to begin a full scale implementation, begin with the top twenty percent of the items. 

     The reliable 80-20 rule (80% of the sales are generated by 20% of the customers) is also applicable to inventory management.  While focusing on only 20% of the products will not maximize the efficiencies and benefits, it will serve to substantially reduce costs and improve service.  In addition to the overall management of products and costs there are some key trends that must be monitored:

Backorders - The percentage of items unshippable because of inventory outages.

Shipments per Order - The average number of shipments per order.  Customers pay for one shipment per order; lost profits pay for all other shipments.

Average Length of Time to Fill Backorders - The higher the number the greater the adverse impact on future sales.

Inventory Turns per Year - The total number of units sold divided by the average on hand quantity.  The higher the turns, the less cash is tied up by slow moving inventory.  It is important to make sure that backorders are not increased by the higher turnover.

Gross Margin - Staple products can have gradual increases in costs that merchandising may want to delay passing on to customers.  Monitoring the overall gross margin will provide early warning that selling prices may need to be increased.

     Controlling costs associated with purchasing will strengthen your competitive edge and increase profits.  Here are ten ideas for reducing the purchasing overhead:

1. Eliminate unprofitable products unless they have intangible benefits such as generating publicity or upsales and cross sales.

2. Reduce the number of vendors.  This with reduce the administrative costs and increase your bargaining power with the remaining vendors.

3. Concentrate on the high volume items (top 20%).  There should be a portion of your inventory that are considered “never-outs” and the appropriate attention should be focused on these items.

4. Bundle orders together to gain vendor discounts and free freight.  Analyze these decisions carefully.  Sometimes the carrying costs and financial risk exceed the savings.

5. Re-negotiate with vendors on a regular basis.  Often a small or mid-size catalog will not realize that their purchasing volume with a specific vendor has substantially increased.  They may have become the largest customer with that specific vendor and have the opportunity for reduced costs and/or increased service.

6. Ask your vendors to provide training materials and/or training for operations personnel on new or updated products.

7. Negotiate advertising dollars.  One caution:  if the product required extensive merchandising to locate or develop, do not disclose vendor information in exchange for advertising dollars.

8. Treat your vendors as partners and build long term relationships.  Vendor turnover is expensive and a vendor/partner has a vested interest in helping you to increase sales and reduce costs.  Ask your vendors to refer their retail requests to your catalog. 

9. Keep it simple.  The more sophisticated a system or procedure the higher the costs in implementation.

10. Negotiate for cash discounts.  They can reduce costs and increase service.  Small vendors are constantly facing critical cash flow issues.  In addition to providing a cash discount, they will probably fill your order before the companies that take 30 - 90 days to pay them.

     Now is the time to take the inventory management basics and apply them to your business.  They will improve cash flow, streamline order fulfillment, and provide a competitive edge.  Hurry, orders are standing by. . . .

 

If you haven't done so already...

 

	Subscribe

 

It is free and guaranteed

to help you grow your business.

 

 

 

Articles

 

 

Home • New Rules • Free Articles • Consulting • Contact Us • Search Site