«Effective inventory management allows you to meet or even exceed customer expectations by creating stocks of each product that maximize net profit».
Sana Giles, ABM Cloud Expert
In retail, one can see accurate stock calculation only in 63% of cases. Considering the fact that stocks are the main asset of a trading company, measures should be taken to make the percentage higher. Continuous supply of demand at minimal cost is the main challenge for the retailer. This allows you to release part of the funds in order to invest them in other assets.
So what if inventory management is not established or completely absent? Then your goods turn into losses, which in retail means surplus, illiquid assets, etc. As a result - chaos in business and a complete misunderstanding of where the money goes.
What Causes Surplus Stocks?
1. Human factor
When placing orders manually, without a comprehensive system of auto-order, the manager relies on his own calculations and often intuition. But often the expected demand is much higher than the actual one.
Most often, such a situation arises when planning a promotion\sale. After the marketing event, stores are often left with a stock of goods for two more promotions. It can also be a manager who always makes orders above the norm playing it safe, especially when it comes to goods with a long shelf life.
With distribution centers in the network, executives and managers are trying to reduce logistics costs by cutting supplies to stores. As a result, they save on transport. But it turns out that large stocks are stored in stores\retail outlets. But what if there are no utility rooms and the retail space is not large enough?!
When working with suppliers, retailers are often guided by the logic: "The bigger order – the bigger discounts!". They buy goods at a bargain price and are sure they guaranteed themselves a 100% profit. But is that so?
Such stocks require additional maintenance costs. However, they lose their presentation and shelf life. For a distribution network, such actions entail the following results:
- Increased sales regarding certain products and lost ones when it comes to others. Managers working with assortment matrices in stores deal with a large number of positions every day. Understanding that surpluses for some products exist, managers purposefully work with this category of goods, endangering other products sales.
- Low turnover. In the case when the quantity of goods exceeds its demand, the rate of turnover will decrease.
- Inability to expand the range. Imagine a chain of stores near the house. The presence of surplus stocks does not make it possible to place a large number of unique positions due to the small area. At the same time, insufficient funds do not allow to expand the assortment since thee funds are frozen in surplus.
- The threat for "freshness" of the goods. Bought a large batch of goods, but the forecast for sales wasn’t accurate enough? The longer the product lies, the less likely it is that the end consumer will buy it.
- Sales - a necessity rather than a planned campaign. In order to somehow return the money, retailers are forced to arrange promotions and seasonal sales.
How to find a middle ground?
How to avoid stock surplus and not be left with empty shelves? In some warehouses, you have a surplus, and in others - shortage, what to do? In other words, how to make a customer happy without missing a profit?
Getting rid of the surplus is to some extent a creative process; a difficult task that requires an individual approach.
Consider two options for getting rid of numerous surpluses over the network - return to the supplier and network distribution. (some companies refer to it as rotation).
1. Return of goods to the supplier
If the goods lie in a warehouse or store for a long time without any movements, they can be returned to the supplier. In general, it is advisable to return the goods that are no longer in the assortment matrices of the store (old brands, goods with poor turnover). It should no longer be ordered, and if there is a balance left over the network, it is possible to return it to the supplier. This is about the advantages of this method.
▷ The time it takes to negotiate with the supplier about the fact of return since many do not want to take back the goods if it was not agreed at the very beginning of the work.
▷ Time spent on paperwork: category managers compile a list of goods and coordinate it with suppliers, after orders are created for the return of balances from retail outlets to shopping centers, etc. Many networks in the accounting system even have separate warehouses for return goods, what only increases the number of documents.
When the documents are ready, the process of assembling the goods at the stores begins, after, they are sent to the retail center, and only then the goods are ready for shipment. A separate stage is the coordination of the date with the supplier; sometimes the goods stay in a warehouse for about a month, if not longer.
2. Network distribution.
According to the restrictions theory, the distribution center is the regulator of the replenishment system. It is needed to maintain stock availability in the absence of surplus. CBT says that you need to keep stocks where there is the highest degree of accuracy in predicting the consumption of goods. Actually, for retailers, it is DC. It helps you quickly respond to the need of a store. Though, the same product can be in surplus at one store and in lost sales at another in the context of the whole network.
Then why bail out a supplier and increase stocks, even more, when it is possible to cover the demand with your own resources!?
After the retailer conducted an analysis and it became clear where there is a surplus and where he\she has to deal with a shortage of goods, it is possible to come up with options for moving between stores.
Now let’s talk about "BUTs". Not all products should be moved. A representative of a food retail chain will not move five packs of milk unless another chain store is on a nearby street.
Another situation: imagine a chain of household appliance stores. The buyer at the store, guided by the well-known rule "The bigger orders – the bigger discounts!", bought 10 MacBooks at $ 2,000\ a piece. But due to the fact that the store offers different models, including laptops of other brands at a lower price, the purchased goods were not sold. Though, at the same time, in other stores, this model is not in the assortment matrices.
To maximize net profit, the retailer should not forget about logistics. Ideally, the chain of stores should be located within one large metropolitan area with a distribution center nearby. In this case, the movement of the surplus is not a problem. First, the store returns them to DC, and then, DC distributes them to stores as part of regular deliveries. Some difficulties may arise if a chain of stores is located in different regions of the country. Courier services and mail deliveries may be used as an alternative in such cases.
The Yenisei company that not only put the inventory management in order but also automated this process shared its experience. According to the managers of the network, one of the main effects was that they had the opportunity to track the movement of surpluses that arose due to the withdrawal of goods from the assortment, the balance of the goods after the promotion, seasonality or a special order for a client who did not pick up the goods.
This made it possible not only to quickly find such goods in the system at a particular store but also to quickly create a transfer order to the retail center and later decide whether to move the goods to another store or leave it for sale at the retail center.
Only after analyzing the surplus we can understand whether it is advisable for the company to make these movements, whether the retail chain can, thanks to the rotation, or return to the supplier, release cash faster and make a profit.
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