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	Liquidating overstocks

Inventory that doesn't sell and liquidation are two dreaded aspects to merchandising. Because you have to take in larger imported orders and distribute to more channels, you need a cost effective strategy for in-season liquidation and clearance.

In a cost-based system it's hard to determine how much gross margin is lost in marking down retail prices. Our experience is that it may represent 2% to 4% of net sales at least.

What to do about it?

• Develop a liquidation strategy. Options include clearance catalogs, Web specials, bind-in or package inserts, sales pages, and telephone offers.
• Develop a report showing candidates for liquidation based on rate of sale.
• Develop an age of inventory report that will age products in time brackets (30 days, etc.) to stay on top of inventory.

	Vendor compliance and supply chain

In most multichannel businesses the size of the product assortment and vendor base have grown dramatically. Supply chains have become increasingly complex with modes of transportation, importing, retail versus direct packaging, technology used in the supply chain and DCs, etc. All this necessitates setting standards with vendors so that you aren't working on an exception basis with every one.

Vendor compliance is at the heart of efficient supply chain management. Routing inbound shipments to reduce costs and scheduling inbound appointments can help speed product flow through the DC, significantly helping in turn to reduce inventory levels. Automating the supply chain through advanced shipping notifications (ASNs), RFID, and cross-docking to stores can go a long way toward reducing costs, but these cannot be implemented without a comprehensive vendor compliance policy.

Start small by communicating your company vision, the need for on-time delivery, routing guides, inbound dock standards like carton labeling, product specifications, accounting and paperwork requirements, contact list, and the costs of back orders. Begin a charge-back policy and implement it with your largest vendors. Later, you can add other items that are typically included, such as service level standards, packaging, labeling, case labeling, valued and value-added services, logistical requirements, scheduling appointments, cross-docking and direct-to-store requirements, charge back for non-compliance, etc.

The trend is to push compliance back up the supply chain. This means as many value-added services as possible — packaging, marking, quality inspections — performed by vendors or merchant reps in factories. Catching errors at the source and using source-based services speeds inventory flow, and any such issues are cheaper to deal with in the vendor's environment.

	Organization overview

In larger retail specialty stores, merchandising is a separate organization from distributors or allocators who plan, manage and liquidate inventory. Merchants select and source product. Distributors or allocators determine the quantity of product that goes to which stores, generally the quantity to purchase and reorder and when to take markdowns.

In department stores, buyers may still do the selection, vendor sourcing, and inventory control as a team divided into categories or departments. But larger retail businesses have adopted the distributor/allocator model.

While the same group of merchants may select product for a multichannel business, store inventories and direct channels may be managed by separate inventory control groups.

Ten years ago, many companies had separate merchants for e-commerce. Today, there are positions called Internet merchandising, but they're more about how to depict product on the Website. Merchants and inventory control source, purchase, and manage most assortments.

In direct companies, inventory control is also split from merchandising (product selection and sourcing). The concept is that a separate group will have more time to manage and analyze inventory and place rebuys. Inventory control is where much of the everyday vendor communication on purchases, deliveries and compliance resides. The reality is that inventory control may be more attuned to working with advanced systems and analysis.

Many multichannel merchants today are hiring a forecaster rather than have each control buyer do the forecasting. An evolving business model has inventory control reviewing marketing's projections, getting their input and adjusting their projection systems to what they feel the plan is — if they feel that the catalog is faster or slower — to calculate more accurate inventory rebuy requirements.

	Accountability for inventory

There are many inventory metrics that retail and multichannel businesses measure. Because the channels are different, the metrics vary. Here are a few of the major ones.

Retail: sales and stock plans; weeks of supply; store service levels (stock outs); turnover; gross margin return on investment (GMROI); returns; markdowns or write down plans; age of inventory; new store inventory coverage.

Catalog and e-commerce: sales and stock plans; turnover; gross margin return on investment (GMROI); cancellations; returns; markdowns or write downs; age of inventory; initial customer order fill rates; final order fill rates; coverage percentage when catalog mails.

The overall accountability of merchants, buyers and inventory managers for sales and inventory is important, since inventory is the largest single balance sheet asset, and how it's planned, managed and deployed largely determines customer service and profitability. Building some of the key measures into individual performance evaluations of buyers and inventory control personnel is essential.

This is old hat for large retailers, but direct marketers are implementing more metrics each year. Inventory management and its business models must evolve to meet multichannel growth.

Curt Barry is president of F. Curtis Barry & Co., a multichannel operations and fulfillment consultancy based in Richmond, VA.

	WHY IMPORTING RAISES IRE

Most merchants couldn't stay in business without the margins that imported goods provide. But importing creates hardships in higher inventory and carrying costs. Imports also contribute to slower turnover, according to one vice president of inventory control for a large home decor merchant: “I don't have exact figures, but there is absolutely a relationship between increased importing and decreased turns. I know several other direct marketers who have experienced this,” the VP says.

The decor marketer, which is about 40% imported, has also seen a significant increase of importing tax. What's more, “the past several years during peak spring receipts, we experienced backlogs at the receiving docks of several weeks,” he adds. “The merchandise is especially bulky furniture and outdoor products, and very little could be done to flow goods in to prevent this.” This cost the company thousands in surcharges for delays and backorders.

“It is often a difficult sell to the merchants, but I am a proponent of bringing a percentage of spring/summer merchandise in beginning January 1 to help alleviate some of the surge,” the VP notes. Importing spring goods is often compounded by Chinese New Year (in late January or sometime in February), as many people in China take weeks off from work to prepare for and celebrate the holiday.

Importing heavily can certainly hit cash and backorder hard as well. When calculating/considering the retail price, merchants need to use a larger markdown percent for imported goods to accommodate for these extra expenses. “Five percent off the retail price is a good starting point,” according to the VP.
— CB

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© 2008 Penton Media, Inc.