Parker Avery recently published a new point of view titled, “Getting to Global: Managing Inventory in a Unified Commerce World,” where inventory expert Rob Oglesby discusses the imperatives, implications, and challenges that consumer brands face when migrating from channel-based inventory management to a global or ‘pooled’ approach. This week, we provide an excerpt of this publication.
The Root of the Issue
More often than not, we see inventory issues arise with brands that began their operations exclusively operating physical retail or ‘brick-and-mortar’ stores. In this situation, a company employs typical retail models to manage the business, using key tools like open-to-buy (OTB) and initial markup (IMU). In this traditional retail model, store sales are seen as the primary measure of success—and usually drives all other operations within the business.
In addition to the traditional retail mindset, the technologies used to support the business are often architected using a ‘closed loop’ approach. This means the core merchandising systems support a buy (from vendor) with a single path: get product into the DC and ultimately the stores. Each buy normally has a component of allocations to the stores with a portion held back in the DC for reserve (to support store replenishment). However, this model frequently does not give enough consideration to external customers like other retailers or franchise operations that hang the banner and sell the brand. Including these other operators (or channels) is important because unless the systems are configured to support a true multi-channel business, design compromises and process work arounds must be made, which often lead to fragmentation of the business—along with the key inventory required as its lifeblood revenue source.
This fragmentation is even more pronounced in retailers where different channels historically managed their own inventories (with the advent of online shopping, mobile shopping, and so on). Only with the onset of the ‘omnichannel’ or ‘unified commerce’ mindset have brands realized they were investing resources and duplicating efforts in managing their inventory—most of which was comprised of identical products and similar assortments.
These fragmentation challenges can be categorized as the following:
- Unique stock keeping units (SKUs) by channel or geography. This approach ensures inventory is isolated by channel or business unit because they all have their own (different) SKU for every product. If the product is identical, using unique SKUs essentially guarantees segregation from ordering all the way through to fulfillment.
- Fragmented procurement. Even if a common SKU is used, when product is purchased separately across channels, a likely result is segregated inventory—with respect to both quantities received and timing. Further, this approach almost assuredly leads to excess reserve, as each channel accounts for their own reserve separately.
- Different allocation and fulfillment models. Different channels require different processes to distribute the goods to the customer (or end consumer). In the brick-and-mortar channel, extra inventory quantities are almost always bought so product can be used to replenish initial sales. Existing ‘staple’ or ‘basic’ items may be on a pure replenishment model, since the initial allocation. For wholesale, fulfillment is usually to the customers’ DCs, and the order comes in and goes out together. This works only if demand is captured at the same time as procurement and sales are not beyond what was purchased (as in a custom or ‘make to order’ business).
Why Inventory is Broken
Keeping the business siloed as we just described leads to significant operational inefficiencies. Let’s start with the inventory itself. The more fragmented the inventory, the more investment is required to cover the overall needs of the business. A common pool of inventory is shared amongst all channels, meaning it can be leveraged easily by the business to support sales and ultimately drive profits.
In addition, siloed inventory requires considerable hand-offs and duplicate business processes, which are commonly misaligned. With a common inventory pool, key operational activities like procurement, inventory management, and distribution can be streamlined. Rather than multiple purchase orders (POs) being managed—a single PO may be used. This single PO is of course larger, but much more straightforward for the factory and all downstream teams to manage. And because single POs are written for the common pool, the overall quantity required is likely less if a common reserve is purchased—which translates to lower inventory investment.
If the organization has multiple DCs, they will need to ensure the POs target the right locations. The objective is to get the product as close to the customer as possible (the ‘last mile’). While this makes sense, it will fragment the inventory to a certain extent. While inventory has to physically go somewhere in the supply chain, the intent is to still ensure visibility to it, regardless of location. This enables ultimate flexibility in the event the most profitable utilization of it moves it to a secondary region.
To read the full point of view, please click here. To read more insights about inventory management, we invite you to read the following Parker Avery publications: