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Looking for capital? You may be sitting on it … and I mean that literally.
For most retailers, store level inventories are significantly above the levels necessary to meet current demand across all categories. The fact is, with so much invested in inventory, we are more likely to lose an item to shrink than to sell it. Sadly, this overage does not mean we are in stock of the best-selling items -- an overage in inventory usually leads to out-of-stocks of the top selling items as it becomes more difficult to focus on the in-stock position of those items.
It is a vicious cycle that can be all but eliminated by "simply" implementing retail technologies as they were designed and leveraging the data to manage inventory electronically. But if it's so "simple," why can't we seem to get there? Take Quiz A and Quiz B to see why.
Quiz A - Are You:
-- Managing an item level pricebook
-- Sending orders electronically
-- Receiving inventory in at item level
-- Scanning at POS
-- Counting inventory by item
Quiz B - Are You:
-- Managing an item level pricebook, with process integrity
-- Processing electronic ordering based on purchases AND sales, with process integrity
-- Receiving at item level, with process integrity
-- Scanning at POS, with process integrity
-- Posting adjustments to inventory at item level, with process integrity
If you checked off more items under Quiz A than Quiz B, you will not be able to efficiently manage your inventory, or maximize your sales or profits. If you checked off more items under Quiz B, you should already have an efficient inventory model with the right balance of inventory to sales by SKU. Either way, let's explore how to make the best of limited space and basic technologies to put your capital back to work for your business.
Item level inventory management moves retailer's into an environment that allows for the evaluation of customer demand (sales), on hand inventory and inventory turns that results in reduced cost of capital through controlled inventory levels. This process supports computer assisted ordering (CAO) to automate ongoing maintenance of inventory stock. This automated method for ordering reduces time spent to prepare weekly orders and takes the guesswork out of balancing inventory needs to consumer demand. The result is improved accuracy and completeness of orders, which is the key to keeping inventory stock at appropriate levels.
While CAO produces a recommended order, retailers still must review the order to adjust for specific factors that may impact consumer demand for specific SKU's. If recommended orders are blindly accepted, this could lead to overstock and/or out-of-stock situations. When retailers are receiving and scanning with integrity, CAO suggested orders have been observed to be much more precise by estimating the needed item quantity accurately, based on its replenishment algorithm.
Although CAO may be viewed as a complex process, the concept of it is fairly basic. CAO is used to further streamline ordering processes and control shrink with perpetual inventory management. You must first establish a process to manage the following with process integrity:
-- Managing exceptions to the item-level pricebook
-- Ordering authorized items from authorized suppliers
-- Receiving inventory at item level
-- Scanning each SKU at POS
-- Posting adjustments to inventory at item level
The greatest return for moving into CAO is found when true perpetual inventory is achieved. Perpetual inventory has data integrity when it includes timely purchases, sale, and inventory adjustments at item level. This process ensures that store-level inventories by SKU are aligned with consumer demand minimizing inventory investment while maximizing sales and profits. In addition, full store audits are required much less frequently if there is integrity in these process. This reduction in counting inventory and conducting audits is another area of return on the investment for CAO through a reduction of labor costs related to these counts.
Many retailers have found implementing an interim step before moving to perpetual inventory will reduce store inventory levels and free up working capital. This level of automated ordering involves counting of items and populating item-level inventories before each order to feed a CAO system the on-hand inventory. This approach is recommended when transitioning to perpetual item-level inventories before process integrity is achieved. It is the least you should do. Focusing on aligning inventory levels with consumer demand through CAO will reduce capital requirements and improve sales and profits for your organization.
So if you are looking for capital, start by looking on the shelf.