Departmental silos are a challenge that many growing businesses face, and the retail industry is no different. In fact, according to Retail Wire, one of the top five most common causes of overstocks are “data disconnect/systems.” Yikes.
That’s why it’s important to use tools across your business that sync and integrate with one another, as well as provide automation and customization features to help you save time and keep teams on the same page.
Your inventory management is just one area to examine when analyzing the cause of these disconnects. The IHL Group and OrderDynamics found that 15 percent of inventory distortion issues are because the software can’t talk to each other. We chatted with Neil Abbruzzese, CEO of EDI Options, about why and how you need to address inventory processes to avoid stock issues.
The Importance of Connecting Inventory Processes
We already know that many stock issues are caused by disconnected processes, but how does that affect your business on an operational level? And more importantly, what does this mean for your bottom line?
Let’s have a look at the numbers:
- Retailers lose $1.75 trillion annually because of out-of-stocks, overstocks and returns (Entrepreneur)
- Shrinkage cost retailers $60 billion in 2015 (Forbes)
- Retailers can increase profits 50 percent with careful inventory management (CNBC)
- In 2017, shrink cost retailers nearly $100 billion globally (Tyco Retail Solutions)
Additionally, when inventory processes are broken, this can have a ripple effect on the rest of your business. You might be facing data inaccuracies and not know how much you have on hand, or how quickly it’s selling. Then you can’t map forecasted demand to product lead times effectively. The more you disappoint your customers, the more they’ll turn to your competitors, and the more you order too much stock, the more capital you’ll have tied up.
Why Your Inventory Management Is Out of Sync
For growing retailers in particular, inventory management quickly becomes more complex. “Retailers have several levels of inventory to manage,” says Abbruzzese. “There’s store-level inventory, distribution center inventory, and inventory that they’re managing from third parties.”
As you introduce more channels, locations and team members (both internal and external), processes must grow and evolve as your business does. But knowing what you have in a multi-location, multi-channel business is easier said than done.
“There are a lot of moving parts for retailers to get under control, particularly now, with many moving into direct-to-consumer,” Abbruzzese says. “[Retailers must manage] the inventory of the third party or the vendor, as opposed to managing inventory that they physically have control over.”
Outdated processes and tools
You might be using legacy systems that haven’t been updated in years, or processes that you’ve implemented when you first started your business. If you don’t reevaluate as your business grows (and thus, your needs change), then you’ll risk using software that doesn’t have the automations, integrations or features you need to run your scaling business.
Look for tools that constantly roll out upgrades, updates and new integrations — tools that grow with their customers. They will be most able to accommodate your needs now, a year from now and hopefully into the future.
Abbruzzese recalls a relevant exchange that occurred at a business event he recently attended. “The moderator was asked, ‘We spent $30 million on control systems five years ago, what value can I still get from those systems?’ The moderator responded, ‘Five years is an eternity in processing.’ What that told me is that in this day and age, the software has to change with the times.”
How to Clean Up Your Inventory Management Processes
First thing’s first: You’ll want to find the inventory management software for your retail business. Remember to look for something that will manage inventory across multiple channels and integrate with other tools you use in our business (like accounting or warehouse management software, for example). This will help maintain the integrity of your data. Automations are another key feature for fixing broken inventory management processes.
Once you have your systems in place, you can identify and focus on your problem areas. Here are some tips and resources to help you get started:
- Get a handle on your multi-warehouse management.
- Use two kinds of reporting, snapshot (activity at a particular time, such as shipments last Wednesday) and trend (activity over time, such as Wednesday’s shipments vs. average shipments for a Wednesday), Abbruzzese recommends.
- Institute processes where your operations team proactively communicates to marketing about important updates to stock.
- Adopt a data-driven approach to your inventory management, so you can keep a close eye on your metrics and identify issues and opportunities.
- Understand why your stock levels are inaccurate.
- Leverage automations, Abbruzzese says. “If you don’t have automations where you pull all of the different pieces together, you’re never going to be able to track inventory properly.”
- Calculate sales velocity and work back from product manufacturer lead times to avoid stockouts.
Sales velocity = total dollars of sales / Annual Industry Volume (AIV) in millions where selling
Ultimately, though, Abbruzzese says it comes down to how disciplined your team is in inventory and data management. “If a company is very disciplined and has measurable circumstances that they can look at on a recurring basis to know what their inventory snapshots are, then they’re able to manage inventory far more effectively,” he says.
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