F. Curtis Barry & Company » Forecasting & Inventory Management

Managing Your Inventory Through Status, Communication, and Age

Curt Barry — Mon, 09 Aug 2010 15:58:09 +0000

Inventory is the largest balance sheet asset in your business: If your margin is 50%, that means your cost of goods is 50%. In other words, 50% of your net sales are spent on inventory and inbound freight.

So why aren’t merchants more aggressive in dealing with inventory? In particular, marketers need to do more to liquidate aging inventory, and look closer at how to achieve the optimal balance point between high order fill rate and increased inventory.

Most multichannel companies have plenty of room for improvement in how they manage inventory. These first 3 steps will allow you to deal with inventory more aggressively and make more profit.

Look for future blog posts within this series on Managing Your Inventory.

1. Get A Handle On Inventory Status And Condition

Most direct companies use their order management system for inventory control. But top management does not use these systems: What they use to monitor inventory status may be a summarized or Excel-based report. Companies need to have a “single version of the truth” for all data: sales, inventory, purchases, stock on hand, etc., including plans and actuals.

What’s more, there can be dozens of system codes describing inventory status and condition. The inventory application needs to have status codes used in reporting that can accurately and helpfully describe inventory status to management — such as active product, inactive product, assigned to liquidation, discontinued, return to vendor, and so on.

Sound basic? Sadly, it’s not in practice at many companies. In fact, it’s the root of a lot of inventory management issues and attempts to gain useful reports.

2. Get Senior Management, The Chief Financial Officer And Inventory Manager On The Same Page

Inventory management is not a clerical activity, but a strategic function. Come to agreement about which key inventory metrics you can do something about, and how to measure them. Then review this on a frequent, scheduled basis.

There are lots of things you can measure, but many are meaningless. Just by focusing on these inventory metrics, you will see improvement if you can put in place the tactics to improve performance.

3. Analyze The Age Of Inventory

Many companies either cannot report age of inventory, or they are less than proactive in dealing with it. What is old inventory to you? For some companies, the answer may be 12 to 15 weeks on average; for others, 25 weeks. There are two key points here:

1. Are you as active as you need to be to liquidate slow sellers? One of our clients said its goal was to turn the inventory at least four times a year, up from the current 3.15 turns. But when we talked about how long the company carried inventory before it deemed the stock as old, the response was 20 weeks. This is a classic example of where most small- to mid-size companies are from an inventory management perspective, and in using key performance indicators. By choosing to focus on inventory as it hits 20 weeks and older, they may end up doing only 2.6 turns annually. For this client to get four turns annually, the company needs to be concerned with inventory as it hits 11 to 13 weeks on average. Develop a strategy to liquidate inventory when it’s obvious it’s a slow seller rather than waiting. You need to develop long-term strategies and follow up with the actions or tactics needed to achieve them. You must also understand the goals, agree to how they will be measured, and report on them regularly.

2. Are you assigning inventory carrying costs? As with the managers who didn’t think there were such costs because they “owned” the inventory, you must realize that there are costs you incur, including occupancy cost (space and utilities), cost of money or lost opportunity, taxes and insurance, and labor to maintain the inventory.

If you need to talk with one of our inventory consultants about improving the management of your inventory or would like to discuss your overall inventory strategy, don’t hesitate to contact us at any time. Jeff Barry, our marketing manager, can be reached via email or call directly 804-264-8040.

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Using Initial Customer Order Fill Rate to Measure Customer Service

Curt Barry — Thu, 24 Jun 2010 17:48:56 +0000

When you look at all the metrics multichannel companies can use to measure customer service, initial customer order fill rate (ICOFR) is the one that I think is best.

ICOFR is the percentage of orders that are shipped complete—all items that were on the customer order—within your company’s shipping standard. For in-stock product the shipping standard of most well-run operations is 24 hours from receipt of an order.

Many consider ICOFR to be just an inventory measure, but its usefulness goes far beyond that. To understand this metric’s value better, let’s look at some results from three clients that had not previously measured ICOFR.

The first example is a $25 million apparel Website that has 3.0 lines per order. Seventy-five percent of the product is reorderable. This company has always used the backorder rate to gauge its in-stock position and customer service; the backorder rate is 10%, day in and day out, so the client inferred a 90% service rate. The company’s first ICOFR report showed a rate of 76.5% for an entire season—hardly the world-class customer service it is striving to achieve! But the ICOFR is generally 10-15 full percentage points below the item fill rate or the backorder rate.

The second example comes from a $30 million food merchant that averages 2.25 lines per order. This business is characterized by high repeat-customer purchases and a low percentage of new product. It has a 1.5% backorder rate daily—wow! But its first ICOFR report showed a 88.5% rate—another big surprise for the owners.

The third example (see figure 1) is a $90 million apparel business with catalog and Internet channels. Fifty percent of the styles are reorderable. The attached graphic shows the pattern for ICOFR when charted weekly for a year. The numbers are highly variable, with the ICOFR as low as 52% one week and up to 80% another, depending on when item receipts are heaviest.

During the past 20 years of working with multichannel companies, we have observed the results in figure 2, which shows several major categories of businesses and their initial customer orders, cancellations, inventory turnover, and customer returns. These are results for companies that are performing well and have capitalization for inventory purchases. It’s difficult for companies in the fashion apparel industry to perform above 70%, because 50%-75% of product is new in each major edition of their catalogs. A higher reorderability rate of product, an accurate history of item selling, shorter item lead time to restock, and higher inventory levels all potentially improve the ICOFR.

So let’s look at a few customer service nuances of this calculation. I like it as a measure of customer service because I believe it truly reflects what the customer expects. If he gives you an order for 3.0 items, he expects 3.0 items shipped. It’s a measure of inventory availability when the customer orders.

Also, if there are three lines on an order and you ship two, the calculation credits your ICOFR with 0% complete, which is why the ICOFR falls so dramatically. New products that really sell well with no history from which to accurately project demand strip the inventory and create the low customer service rate. This is shown in the figure 2 statistics comparing fashion apparel and reorderable/weekend apparel.

But we all know that there is a balance point between ICOFR and turnover. No business can service 100% of all orders daily and have an acceptable turnover or take the risk of overstocks. So the challenge is to find the optimal inventory point and determine how much risk you want to take.

The merchant also needs to take into account the cost of backordered merchandise. Our studies with hundreds of multichannel companies show that it costs $7 -$12 for each backordered unit of merchandise. This includes the shipping cost of the backordered unit, shipping material, additional labor, and the “Where is my order?” calls to the contact center. It does not include loss of shipping and handling revenue, potential loss of a customer from poor service, the merchandise buyer’s labor for expediting backorders, or the cost of air freight to expedite.

Measuring ICOFR does not mean you should stop measuring backorder rates or item rates. You should report all three. But the ICOFR is the only one that looks at customer service and inventory availability by order—as the individual customer experiences service.

If your management team doesn’t measure initial customer order fill rate, make it a priority to measure and report it by class and category as well as the total business weekly rate. Add it to your key performance indicator (KPI) dashboards and maybe your management objectives. Hopefully you will gain a new perspective on how well you’re serving your customer and in turn will manage the inventory optimally.

If you are needing some assistance in what and how to measure certain metrics in your inventory department or would like to discuss how we can help your inventory department be more efficient through an inventory assessment, don’t hesitate to contact us at any time. Call Jeff Barry at 804-264-8040 or email him at jbarry@fcbco.com.

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Registration Has Begun for Online Inventory ShareGroup

Jeff Barry — Thu, 10 Sep 2009 20:25:02 +0000

With the economy where it is most travel budgets have been cut to a bare bones minimum at most catalog and eCommerce companies. That means that most industry conferences have had a substantial reduction in the number of registrants – even when they give away free VIP passes to attend. We know all too well how tough it is to sell a conference; as most of you know we offer a series of warehouse, call center and inventory ShareGroups for catalog and eCommerce companies. With such a tough sell we decided to offer a ShareGroup that everyone can join no matter the size of their budget.

We have started our first online ShareGroup – the Inventory Management ShareGroup. Businesses that have a limited travel budget or can’t take the time to be out of the office can join and receive annual benchmarking data and have the tools to discuss strategies and issues that they are encountering in their business.

The Inventory Management ShareGroup registration and data collection has started and goes through October 9th, 2009. We will then have an indepth conference call discussion regarding the data once all of the output reports are distributed back to the members. After the data discussions we kick-off our series of monthly 1 hour conference calls to discuss hot topics identified by members prior to the call. Lastly, in between the calls we have an online discussion forum that is always available to all members to post and respond to questions regarding strategies and hot topics.

Please take a second to visit our website and read the ShareGroup overview and schedule as well as review the type of data we are collecting and analyzing. We hope to see you register for this great ShareGroup.

Contact Jeff Barry with any questions about the ShareGroup or our consulting services.

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Escalate Retail Delivers Landed Cost Capabilities

Brian Barry — Thu, 30 Jul 2009 14:33:36 +0000

In a recent press release, Escalate Retail has landed a beta site for its newest release. And it’s the direction the application has taken that will really allow multi channel businesses to reach peak efficiency and profitability. Here is an excerpt and one of the most important pieces of the press release:

San Diego – July 13, 2009 — Escalate Retail today announced that Homemakers, Iowa’s largest furniture store, will launch as the Beta partner for the latest Enterprise1 version 12.1 this July. Additionally, Homemakers will upgrade its customer-facing solution by moving to the latest release of Customer1 version 4.2.

Version 12.1 of Enterprise1 provides Homemakers with functionality they can begin using immediately, including:

True landed cost tracking: Provides a breakout of all costs for freight, customs, and more for every item on a purchase order; also tracks that cost throughout the life of the item within Homemakers’ inventory until the item is sold

True landed cost is one of the most important cost aspects that a company can utilize. What is so significant about landed cost? Landed cost will allow you to understand the following:

1. It will allow you to really understand how much freight, duties, agent commission, etc. you are spending to bring in the product, and its true impact on the margin earned.

2. It also allows you to drive at the true net contribution to profit for that item.

3. A company can also utilize the landed cost to determine their buying strategy by understanding whether they can afford to bring in smaller shipments on a more frequent basis, turning the inventory faster and investing less cash in inventory.

I feel that this type of functionality will greatly improve a company’s understanding of product profitability while assisting with the development of a comprehensive inventory strategy. I encourage you to read the rest of the press release and to visit Escalate Retail online at http://www.escalateretail.com

Need help reviewing your inventory strategy, if so we offer inventory assessments for typically $6,500 – designed to be performed quickly with a high ROI and actionable recommendations – click here to learn more.

Brian Barry is a Senior Consultant with F. Curtis Barry & Company, a multichannel operations and fulfillment consulting firm with expertise in multichannel systems, warehouse, call center, inventory, and benchmarking; Learn more online at: http://www.fcbco.com.

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Understanding Your Demand Winners

Brian Barry — Wed, 22 Jul 2009 14:09:07 +0000

Almost every company that we work with can easily rattle off and name the top 10-20 products with the highest gross sales, or demand winners. But often times these same companies couldn’t tell us which of those items are profit winners. The first guess is usually those core items that they never want to be out of stock on because maybe they are private label or unique products but usually have a nice price point and good margin. But in any case, companies should be able to point out the top demand winners but then also be able to point out the most profitable items as well, or those that contribute the highest net contribution to profit.

What do we mean by net contribution to profit? Net contribution is derived from taking an item’s (or category etc) gross demand dollars and subtracting out the cancel and return dollars. This leaves you with net sales dollars – or most importantly what you put in the bank. Now take the net sales dollars and subtract out that item’s allocated marketing, operational (call center and fulfillment) and lastly its general and administrative (G&A) dollars. This leaves with the true profit or loss earned by that item.

Here is a perfect example of understanding demand winners but not evaluating profit winners. Just the other day we were analyzing a clients merchandising results for spring and early summer 2009. We reviewed the top 25 demand winners with them and then allocated the additional expenses form marketing operations and G&A. The results were very interesting.

Nothing too out of the ordinary in the top 5 or so items – they were the top demand winners and for the most part were all in the top 5 from a net contribution to profit perspective.

But the 9^th highest demand winner happened to be ranked 621 in terms of profitability out of 1630 products.

The 12^th highest demand winner was ranked number 1,630 – making it the least profitable item offer in the spring and summer campaigns.

Numbers 17 and 18 of the top 20 were ranked in the bottom 20 of the all time least profitable products.

In this case these products fell into two categories. The first category was the low retail price and high margin percent. But the problem is that these products were under $10 with a 48% gross margin percent. After allocating marketing, operational and G&A expenses these items lost a tremendous amount of money – especially considering the sheer number that were sold.

The second group were those items that were technical in nature and required a lot of question and answer in the call center but were also fragile. So their allocation of costs were much higher than most other items. Longer to answer customers questions and much more care and packaging in the fulfillment center. This ate up margin dollars, of which the margin was relatively low compared to other items.

It’s important to understand how items are performing, which ones are your “bread and butter” and those that add to the bottom line instead of chewing up the bottom line. When was the last time you did a thorough merchandise analysis and revealed what the numbers are really telling you? How many of your top 20-30 demand winners are also your profit winners? If you can’t answer these questions then maybe it’s time that we talked about assisting you with an in-depth merchandising analysis. Call or email us and see how we can assist you with this process today.

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What Is Your Inventory Strategy For Christmas 2009?

Paul Sobota — Mon, 20 Jul 2009 18:45:39 +0000

A few years ago I was in Australia in July and saw a lot of retailers advertising specials for “Christmas in July”; a novel idea as it is winter in the southern hemisphere at this time. Well I have started seeing ads for layaways from Kmart and Hallmark debuting their Christmas ornament collection. U.S. retailers are doing this for different reasons than our Aussie friends.

U.S. retailers are trying to stimulate sales now as merchandise is arriving in stores for fall, and back to school. U.S. retailers don’t want to be burned like they were last year, so inventory levels will not be purchased anywhere to the extent that they were last year.

According to The Commerce Department, inventories are down 8% through May from last year at this time.

Here is a sample of what our clients are saying about their Christmas inventory planning:

Hard Goods Catalog

Limited initial buying. Going to read sales forecast after the catalog is in the field and then place larger re-orders. Willing to sacrifice some early backorders to limit over inventory exposure. We can not have excess inventory on hand at the end of December.

Children’s Catalog

Ours is really business as usual, we have ramped up with a few more drop shippers than we have in the past, but we still continue to grow our import business and rely a little bit less each year on domestic shipments.

Hobbyists

Just in time as much as possible and attempt to carry less inventory Holiday 2009 vs Holiday 2008.

Home Catalog

Our plan is flat with Holiday 2008 actual demand. Less decorative and gift items, more focus on functional products which tend to carry over from campaign to campaign so a better exit strategy. In addition, we are ordering within lead-times, thus closer to demand. This has been a shift from the past when the need get your orders into the production cycle was critical. Consequently, our open receipts are significantly down from last year and even budget. We are finding that Chinese vendors, in particular, are turning orders very quickly.Inventory is the biggest balance sheet asset in most businesses. Slow selling, discontinued and obsolete inventory can build up reducing inventory turns, cash flow and space in the distribution center.

Will consumers have the deals they had last year? I don’t think so. Scaled back inventory levels will sell out with fewer sales events leaving some consumers without much of a selection the closer we get to December.

U.S. retailers touting “Christmas in July” are looking for consumers to commit on electronic and large ticket items now while they may have a few extra dollars or through the utilization of layaways to secure there Christmas gifts.

Is your inventory at the right level for this Fall selling season? Have you adopted the best practices for forecasting and managing inventory? Have you implemented vendor compliance policies? Do you need to upgrade your systems?

F. Curtis Barry & Company can assist with evaluating your company’s inventory practices through our proprietary inventory assessment process. Contact us today to learn more about managing inventory profitably.

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Internal Scorecards for Merchants and Inventory Buyers

Brian Barry — Mon, 20 Jul 2009 17:40:07 +0000

Every day, companies evaluate a merchandise vendor’s performance against goals and their worth to the company through a vendor scorecard, such as:

§ How many backorders were caused by the vendor?

§ What are the gross sales for the vendor?

§ How many RTV’s or defective products for the vendor?

§ How many early deliveries and late deliveries for the vendor?

§ What is the overall net contribution to profit for the vendor after all expenses?

But how often do you set the same goals and objectives for your merchants and inventory managers and create an internal scorecard? Often times we find that companies have rigid standards for their vendors and goals in terms of margin and profit, but often times they don’t measure their staff in a similar way. By not doing so, you leave the door open for problems that could erode your margin.

Develop a similar list of metrics that are important to your business. Convey your goals to each person and measure the actual performance against their individual goals. What are some that companies use?

Category sales
Gross margin and percent
Return percent
Cancellation percent
Adherence to vendor compliance
Turnover
Vendor coop
Net contribution to profit
“Markdowns”

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When Should a Good Inventory Buy Be Avoided?

Brian Barry — Mon, 20 Jul 2009 17:24:10 +0000

You might be asking yourself – if it is a good buy, how could it be bad? First, let’s take a look at several aspects. Companies have always been aggressive with squeezing every margin dollar they could, even more so in this economy. And in order to do this many have looked over seas to foreign manufacturers as a way of increasing the potential margin. The downsides to this is typically larger minimums from manufacturers, in addition to cubing out shipping containers for maximum efficiency, and very long lead times.

Let’s take a look at how some of this can make what seems like a good inventory buy a bad buy. A while back we worked with a company that imported a specific merchandise category from an Asian manufacturer. The lead time for these products was 8-9 months. By doing this they were able to go from an average gross margin of 44% to 55% with an average price point of $51.

Recently they made a purchase from the same manufacturer which allowed them to go from a 55% gross margin to 60% gross margin – or go from $28.05 in gross margin dollars to $30.60. The downside was a substantial increase in the vendor minimum and a much shorter set of payment terms. But still it seemed like a good buy, and they felt like they could sell through the extra quantity.

The reality of the situation was the quantity purchased turned out to be a 15 month supply of inventory causing several problems that made this a very unprofitable buy. Here’s how:

1. A 15 month supply of inventory equates to less than .8 turns annually.

2. With a 60% gross margin and .8 turns annually, the gross margin return on investment (GMROI) is 0.48; in laymen’s terms this means for every dollar they invested in inventory purchases, the income is less than $0.48. This is devastating to the business. You can calculate GMROI by multiplying the decimal equivalent of your gross margin (50% = .50) times your annual turns.

3. The increase in inventory levels and the length of time the product was warehoused cause several issues. First the warehouse was running close to capacity and this prolonged the pain of running low on warehouse space. Secondly, the gross margin was further eroded by the inventory carrying costs, the longer it sat the longer the margin was eroded.

4. Most importantly, the company tied up much more cash in inventory then they should have, by not turning the inventory quickly a significant portion of the inventory will need to be liquidated in order to free up cash and invest in other items. Fifteen (15) months is a long time when you need to continually refresh the product mix with new products. The liquidation will further erode the gross margin.

5. Not only did this tie up more cash than they should have but they had to pay the vendor even faster than normal.

These factors come into play and can make what seems like a good buy a very bad decision. Having to carry more inventory, invest more cash in inventory and pay the vendor in even shorter terms will lead to several problems. You should stick to a well disciplined buying and inventory strategy and run all the numbers before deciding whether or not it is a good buy. If the numbers work out then consider making the investment in inventory. Just don’t erode the increase in gross margin with higher shipping costs, higher inventory carrying costs, and then end up liquidating a large portion of the inventory.

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Merchandising and cost of backorders

Brian Barry — Fri, 17 Jul 2009 14:46:03 +0000

The other day we worked with a mid-sized gift marketer to have them analyze their Spring book and web campaigns from a price range perspective. They had never done this and were surprised to find that 39% of their SKU’s were $25 and under – the average price point in this group was actually $11.15. This group of SKU’s represented 32% of the gross sales but only had a 44% gross margin which meant that on average they were only earning $4.91 per SKU. After allocating marketing expenses, operational costs and general and administrative costs – each of these SKU’s lost over $10.00 each time they were ordered. What made the situation worse is that this price point also represented around 59% of the total backorders. With their cost of processing a backordered unit being around $12 this made the loss even greater – more like $22.

This company is now working to develop a strategic merchandise plan to improve the average price points over time. Something that cannot be done overnight or you will alienate the existing customer base. In addition they have opted to avoid taking backorders on low dollar and low margin products to avoid the additional costs. You could also decide if the items are essential to customer service to order larger quantities.

It is extremely important for companies to analyze merchandising results, taking in to account not only whether or not an item covered the marketing expense, but also the cost to take and process orders and the general and administrative expenses. By doing this you essentially create a P&L at the item level as well as the sub-category and category level. This allows you to truly understand what your best sellers are and whether or not they are delivering positive dollars to the bottom line. Use this same model of analyzing profitability and sort the products by price ranges and I am sure you will find some interesting trends. Review this on a regular basis and make changes accordingly.

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Inventory turns and age of inventory

Brian Barry — Fri, 17 Jul 2009 14:37:55 +0000

In working with a client the other day, we were analyzing several inventory KPI’s. Their goal was to turn the inventory at least 4 times annually, up from the 3.15 turns they are doing today. We then talked about how long they carried inventory before they deemed it to be “aged” or beginning to get old. Their response to this question was 20 weeks.

This is a classic example of where most small to mid-size companies are from an inventory management perspective and using KPI’s. In the above case, by choosing to focus in on inventory as it hits 20 weeks on the average and older you are really aiming to only do 2.6 turns annually. Take 52 weeks in a year and divide it by the age in weeks that you deem “aged”, in this case 20 weeks and you get 2.6 turns annually.

In order for this client to be hitting 4 turns annually, they need to be concerned with inventory as it hits 11-13 weeks in age and develop a strategy to move the inventory to achieve their goals. It is important for companies to develop the long term strategies followed up by the actions or tactics to achieve those goals. It is also important to understand the goals, agree to how they will be measured and report on them regularly.

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F. Curtis Barry & Company » Forecasting & Inventory Management

Managing Your Inventory Through Status, Communication, and Age

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Using Initial Customer Order Fill Rate to Measure Customer Service

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Escalate Retail Delivers Landed Cost Capabilities

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