Change in the retail industry is occurring at such a breakneck pace that few retailers have the opportunity to take a moment to consider how emerging and disruptive trends are fundamentally transforming the business — potentially making historical best practices outdated and irrelevant.
In fact, a business concept that increasingly is becoming a focal point for many retailers is omnichannel, an initiative designed to provide customers with a seamless brand experience across all engagement channels — digital, store, mobile, social and perhaps many others to come.
However, as omnichannel goes beyond the theoretical phase and becomes an essential strategy for retailers, there are significant operational implications for one of the most important assets on a retailer’s balance sheet: inventory.
Smart and effective inventory management is a complex task requiring large teams of planners and allocators for various engagement channels. In my prior career, I managed a team overseeing hundreds of millions in annual inventory for a large multichannel apparel retailer, and I can attest to the diligent and careful balancing act required. Too little inventory can lead to unsatisfied consumer demand and missed sales opportunities, whereas too much can reduce margins, as deep markdowns become necessary to clear obsolete products.
Retailers closely monitor their inventory turnover rates — calculated as sales divided by average inventory — to find a healthy equilibrium that satisfies both customer demand and the company’s bottom line. Yet the management of inventory turnover traditionally has been segmented, with each business unit maintaining a separate team of planners who manage their respective inventories autonomously and without much interaction.
Today, managing inventory has become further complicated as more retailers adopt omnichannel strategies and optimize their inventory across channels to improve fulfillment, customer engagement and inventory productivity.
Inventory management and evaluating the health of inventory turn are becoming increasingly complex as channels converge.
“Turn can be a very fuzzy number,” said Paula Rosenblum, managing partner at RSR Research.
“If a company calculates turn solely based on average inventory available in a specific channel, they may be making business decisions on distorted information,” she pointed out.
“In addition, turn does not do a good job of quantifying opportunity cost. A company can be overstocked in some product, and be completely out of stock on the more desirable product,” noted Rosenblum, “but turn, as an average, will look OK. Needless to say, focusing on turnover rates without factoring in certain business practices directly impacting it is probably not a best practice in modern retailing.”
In today’s omnichannel environment, evaluating inventory turnover in isolation will lead retailers down a path of confusion and prompt unintended actions. The following two examples highlight some of the causes and implications one should consider to avoid making misguided decisions.
The Impact of Fulfillment Across Channels
One of the key mantras of an omnichannel strategy is the “buy anywhere, fulfill anywhere” value proposition. It’s a boon for consumers and retailers alike. While still in a fairly nascent stage, leading retailers are enhancing their ability to provide visibility into inventory across the supply network to efficiently fulfill orders and meet consumer demand.
One manifestation is by enabling consumers shopping in a brick-and-mortar location to make a purchase even if the products are not physically available in the store, and to give e-commerce shoppers the choice of having their purchases delivered or picking them up from a local retail outlet.
This is a game-changer as it positively impacts sales, but it can be a potential nightmare for inventory managers who must account for the following variables:
- If a customer makes a purchase online, should the shipment come from the Distribution Center or the nearest store?
- Potential implication: Store inventory will be reduced and store turnover will go up if the item is shipped from store, despite the fact that the sale originated online.
- Potential implication: If considered an e-commerce sale, store inventory will be reduced with no corresponding sale for that channel, unless the inventory becomes reclassified retroactively.
- Potential implication: Even if the sale originated from an e-commerce customer, the store may need to replenish the picked up item to remain stocked.
- Potential implication: If an item is purchased online but returned at the store, inventory ownership can become confusing since the returned item is planned for resale.
Retailers ultimately will be the ones to decide how to answer these questions based on the policies they set. However, the impact on inventory turnover — and how it’s measured — can vary greatly based on their decision.
Proper Performance Evaluation
If a category manager is able to grow revenue with the same or marginal increase in inventory, turnover has improved and the manager’s P&L performance is considered a success. However, the shift toward omnichannel will change the traditional metrics behind inventory productivity and what is considered “healthy turnover.”
As inventory becomes more integrated and channel-agnostic, control over who gets what, when and from which vendor becomes less about specific P&L performance and more about enhancing overall customer satisfaction.
As a consequence, retail managers may not be able to use traditional methods to gauge improvement in inventory turnover since customers increasingly engage with and purchase from any channel — much of it beyond any single manager’s control. Though the decision lies with retailers to determine how performance should be evaluated, following are some options to consider.
- Inventory turnover likely will change for stores as an increasing amount of fulfillment occurs there. Turnover for stores may go up or down based on how the sale is classified and whether the inventory will be replenished. Merchandise Planning executives should assess the impact of the policy they set and evaluate turnover improvements based on new operational practices.
- As digital continues to influence, support and supplement store sales, divisional merchandising leads and CFOs should evaluate business performance from a cross-channel perspective. Store sales may go down as e-commerce sales go up, so performance should be evaluated from a total company perspective to accommodate this inevitable trend.
Furthermore, both store and e-commerce employees may require new training to handle the merging of channels. For example, store employees should know how to serve and upsell customers sourced from e-commerce, and merchandisers in the e-commerce channels should factor in specific store assortment and inventory levels to ensure customer satisfaction. As a consequence, the compensation and incentives may have to change to keep employees happy and engaged.
Disruptive technologies and innovative trends generate a sense of opportunity, as well as a great deal of anxiety, for those situated on the front lines. The impact is compounded for a particularly large industry like retail, which generates trillions of dollars and employs millions of people.
Rather than frantically searching for the right answers, retailers should take a moment to embrace the confusion — not be afraid to fail early and often, and adapt as much as possible. Why? Because change is not coming — it’s already here. It’s not business as usual anymore.