Regardless of what tools you use to manage inventory in your retail chain (a specialized system, ERP, or even Excel), sooner or later, you may need to make changes. The shortcomings of the existing system invariably lead to "dead" stock, supply disruptions, unsatisfactory results of promotional campaigns, and other problems. It is crucial to record these issues as soon as they arise, identify the causes, and find effective solutions that will stimulate the company's progress and profit growth.
Let’s take a look at eight critical signs that a company needs to transform its inventory management system. We will also consider the critical changes in business processes that help solve these problems.
1. Unsatisfactory inventory turnover rate
Do goods stay in stock too long? A low turnover rate is usually caused by a combination of factors: low demand for certain SKUs, inefficient procurement planning, failing to account for seasonal demand fluctuations, etc. Besides slowing down cash flow, low turnover also leads to additional costs for inventory storage and losses due to product damage, markdowns, and write-offs.
If you notice this problem in your stores, it might mean that the existing inventory management system does not ensure effective coordination between planning, procurement, and fulfillment. In that case, the accuracy of orders needs to be improved by upgrading the processes of demand forecasting and collecting reliable analytics because the accumulation of overstock usually occurs when the level of demand is not assessed correctly. Both local and macroeconomic reasons can be the cause of that.
According to analysts at DA Davidson, most retailers faced an unprecedented overstocking in 2022 due to the sharp spike in demand during the pandemic, which weighed on their operations. Large chains that sell household goods, clothing, and electronics are now actively reducing inventory levels. Walmart, for example, has already reduced inventory in its US stores by 9%, freeing up hundreds of millions of dollars from its balance sheet and expanding the available space in its supply chain.
Specialized software can help you balance your inventory turnover rate. For example, LEAFIO Inventory Optimization, an AI-powered solution, has all the tools you need to do this:
- In-depth analytics of the inventory performance, supplier considerations, specifics of each SKU, and demand variations.
- A forecasting module that allows you to accurately assess current and future demand for goods while considering both internal and external factors of demand changes.
- Supply chain planning based on seasonality and market conditions.
2. Your shelves often lack certain products
Are customers complaining that their favorite products are constantly out of stock? The lack of popular SKUs inevitably leads to a loss of potential sales. Customers may be forced to choose alternative products or refuse to buy anything. This may result in a negative impression of the store and lead to a loss of customer loyalty.
Ineffective inventory control, unbalanced supply planning, and poor quality demand analysis and forecasting are often to blame for low availability levels. This can happen, for example, in the case of slow-moving goods when executives plan replenishment based on average sales in the given period. Then, when a slight increase in demand occurs, the probability of ending up in stockout is high. Particularly in the fresh produce category, which must be constantly updated, the purchasing specialist buys less to avoid overstocking and accumulating expired goods. Low availability might also result from mistakes made by specialists who forgot to plan increased stocks for a promotion or to meet a new trend.
If you are facing this problem, it may be time to switch to intelligent software with the necessary functionality to control the availability of goods regardless of the specific reasons and the category of products in your stores. For instance, LEAFIO Inventory Optimization provides:
- Automatic identification of sales drivers and products that must be removed from the assortment.
- An inventory management system that considers expiration dates, supplier agreements, packaging types, delivery slots, etc.
- Automatic ordering system that creates and sends requests to suppliers or warehouses without manual intervention.
As a result of the implementation of the LEAFIO inventory management system, the Divocin chain saw a 10.8% increase in the availability of products connected to the system in the first months, with a 23.08% increase in turnover.
3. An increase in "dead" stocks
If you observe a large number of dead inventory, it is probably time to change your existing management system. "Dead" stocks create significant problems for businesses because they not only take up space in the warehouse but also tie up funds. Moreover, such goods often have to be sold at discounts in forced sales or even thrown away.
If you use a specialized system, it should prevent the occurrence of dead stock. For example, the LEAFIO Inventory Optimization solution helps you find unsold items, stop orders, remove them from the assortment, and look for better alternatives. The software can also help to solve the problem with existing "dead" stock and organize the sale process.
4. Disappointing results of your promotional campaigns
Several factors, such as insufficient planning, incorrect demand forecasting, overlapping promotions, or delivery deficiencies, can cause failures of promotional campaigns. Let's take a closer look at these factors:
- Insufficient preparation for the promotional campaign: This can lead to unsatisfactory availability of promotional products or the inability to implement all the necessary measures during the campaign period. It is essential to accurately calculate the time for planning and deploying a campaign, as well as to handle routine tasks automatically and thus reduce the workload of managers. For example, the functional block LEAFIO Promotion Intelligence will automatically calculate the required inventory level for the promotion and alert you to errors that could negatively affect the result.
- Overlapping and competing promotions: It is difficult for managers to manage several stocks simultaneously, so they may often make mistakes, causing some promotions to interfere with other campaigns. To prevent this from happening, you should use a convenient promotions calendar. In the LEAFIO system, all promotions are collected in one place. You can easily view the results of past, current, and planned campaigns and track their progress.
- Inaccurate demand forecast: If the expected sales during the promotion campaign are incorrectly assessed, it leads to excess stock or, conversely, an insufficient quantity of goods on the shelves. It is vital to make inventory calculations based on demand analysis, product sales history, and sales data for analogs or similar products – all of which can be done using specialized software.
If your promotions aren't delivering the expected results, it could be time to reconsider your inventory management approach. An adequate system should allow you to carefully plan activities, analyze influencing factors, and develop strategies to help avoid future failures.
5. Your employees spend much time on placing orders
Automated routine order processing is the answer to this problem. It allows managers to focus on more critical tasks and prevent manual errors that lead to overstocks and shortages.
Using the LEAFIO Inventory Optimization ordering system, you can automatically create and send orders to external suppliers or warehouses without employee intervention. Such automation, as shown by the experience of LEAFIO customers, allows you to reorganize the department, reduce the number of employees, and free up a significant part of resources for marketing or investment.
6. Insufficient data to analyze inventory management metrics in depth
The lack of reliable and in-depth analytics leads to unnecessary waste of resources. It puts you in a situation where you do not have a clear view of the effectiveness of inventory management. If your system is not providing the information you need to improve your chain's business processes, it is time to consider upgrading.
The new system should provide detailed reporting for making informed decisions. For example, the LEAFIO Inventory Optimization analytical module offers analytical tools for tracking sales dynamics, inventory planning, and performance. It is not just a set of convenient reports but a complete diagnosis of your business processes and a powerful driver of business productivity.
7. Unsatisfactory quality of interaction with suppliers
Experienced retailers know that dealing with suppliers is a minefield of challenges. Therefore, an existing inventory management system will not be enough if you cannot ensure that suppliers deliver on time and correctly. You may face the following problems:
- late deliveries;
- goods often arrive in the wrong quantity;
- errors in orders, you receive faulty products;
- goods arrive damaged, improperly packaged, etc.
All these situations should be recorded and analyzed. If you can't influence the supplier's actions, analyzing previous deliveries can help you make a more informed decision. For example, you can reject suppliers or negotiate better terms with them based on clear statistics of past deliveries.
To manage cooperation with suppliers, you can use the LEAFIO system, which allows you to assess the reliability of each partner transparently. Graphs of the analytical module display information about orders by quantity and value, the supplier's share in purchases, and sales of the store or the entire network. The software tools also include:
- Calculation of the supplier reliability index (SRI) and its consideration when placing orders.
- Optimization of the order taking into account the supplier's conditions.
- Checking the correctness of the order to prevent unwanted errors.
- Automatic order dispatch depending on the settings selected for a particular supplier.
8. The deferred payment period is shorter than the sales period
It should be noted that this does not apply to the premium segment, where high margins make turnover a secondary concern. However, in a standard business model, if you don't sell merchandise provided by a supplier by the end of the deferral period, you typically have to pay money before you collect your earnings from the sale. Such situations are highly undesirable for retailers who want to improve their capital turnover, reduce risks, and ensure more reliable profits.
Specialized software will help you determine the optimal stock quantity in the warehouse, as well as develop a strategy for promoting goods to reduce the sales period. This way, you can reduce the risk of insufficient liquidity and ensure better turnover and a quick return on sales.
According to the results of LEAFIO projects, implementing the Inventory Optimization system improves inventory turnover by an average of 30%.
In a nutshell…
If you regularly encounter any problems on the list above, you might need to think about reorganizing your inventory management system. It is also possible that your current system is not performing optimally if you are already using one. The system you put into practice should always provide flexibility and the ability to develop and adapt to changes in the market or the network – the success of any business depends on it.