How to lose your inventory management game in 7 ways. Part 2

Inventory is the main asset of any retail business. Efficient inventory management and continuous monitoring make it possible for the business to multiply profits and avoid excess inventory and financial losses. Read in our material in two parts what factors affect the success of the chain and what mistakes in inventory management should be avoided. 

4. Not having a process of ongoing improvements with the help of analytics and not tracking important inventory management KPIs

Without understanding and promptly tracking current inventory management KPIs, it is difficult to achieve system growth and improvements. But with advanced analytics, you can keep abreast of your business activities, quickly identify fluctuations, and if key indicators change in the wrong direction, you will have time to react.

Inventory management in a retail chain comes down to finding a balance between the turnover of goods and the maximum satisfaction of demand.

Let's see why you have to evaluate inventory management efficiency. What problems can we solve?

1) Through evaluation of the dynamics and analysis of the inventory management efficiency, you can understand where the money is concentrated in the supply chain and how soon it will return in the form of profit. The inventory is a constantly changing indicator, so in order to see how things are now compared to past periods, it is monitored in dynamics.

Besides tracking changes in inventory levels, you also have to evaluate their structure. This approach makes you see where the money is invested and how to avoid unexpected expenses and losses.

Weekly stocks dynamics report in Leafio Inventory Optimization System

The retail inventory structure is divided into three basic categories:

• Money invested in inventory for sales;
• Money invested in stocks for display on shelves and in insurance stocks;
• Excess inventory.

In the practice of our clients, we were faced with a situation where there was an unsatisfactory turnover of goods in the absence of surplus. A large number of inventories in the display and reserve stocks were the point, which significantly increased the turnover.

Analytics clearly show the inventory in terms of money and in the number of goods so you can promptly respond to such imbalances in inventory and take measures to eliminate them.

2) Comparison of POSs. Very often, in practice, we are faced with a situation where two absolutely identical stores, with the same area and formats, have completely different turnover, inventory and sales indicators. A report with an analysis of POSs and their main KPIs allows you to identify the best and worst of them, and on this basis, decide which ones are to be closed or formatted.

3) With regular analysis of the product range, you can find problematic product groups and find out what happened. Knowledge of these groups makes it possible to adjust the processes of their purchases and avoid excess stocks and shortages.

• On the one hand, these are the groups of goods for which there are slow movers and surplus stocks. In some cases, it makes sense to remove these products from the product matrix. So, in one of our clients’ POSs, after conducting an ABC(D) analysis, the product range was systematically cleared of category D goods. This decision resulted in an increase in sales by 56% without a significant increase in inventory.
• On the other hand, there are those for which there are constantly lost profits and shortages. Another real-life example: with one of our clients, we managed to improve turnover by 14% in 3 weeks without increasing logistics costs, thanks, which shows the imbalance of surplus in some stores and the absence of residuals in others, for the same product.

ABC(D) report in Leafio Inventory Optimization System

4) Tracking the objectives. Analysis of inventory management efficiency over a certain period makes it possible to see whether we have achieved our goals or not. And it's only when you notice that you are consistently meeting or exceeding targets that you can raise the bar.

We advise you to always build analytics using the drill-down method, which allows you to quickly evaluate the whole picture, identify aberrations, and then delve into the reasons for their occurrence in more detail. The implementation of a quality analytics system makes the most important information quickly and easily available, which simplifies the work of managers and lets them focus on problem points and solutions, all in real time.

We don’t just offer a set of reports. Our analytics module is the culmination of our many years of experience in the supply chain.
We know for sure:

• It is bad when the goods’ shelf life is less than the number of days for the sale of one package by the supplier;
• It is bad when there are goods in the excess inventory, especially with a high purchase price, which have no sales at all;
• It is bad when there is an imbalance in surplus in some stores and a lack of shelf stock in other stores for the same product;
• It is bad when there is no way to see the key indicators of the success of the supplier’s work without analysis by half a day or hundreds of megabytes;
• It's bad when availability and turnover deteriorate at the same time.

These and many other facets of specific problems in inventory management are deeply and visually analyzed in the BI analytics module.

5. Not tracking the inventory turnover compared to the payment delay

An effective business model for many retailers is a negative cash conversion cycle (CCC). CCC measures the number of days that elapses between paying a supplier and receiving payment from customers – the lower the indicator, the better. Retailers strive for its negative value. Essentially, retailers have free credit money to use, funded by the suppliers. With this business model, the chain can develop, new stores can be opened, technology introduced, and so on.

Influencing the CCC level, in fact, can be done in two ways:

• Reducing the turnover of goods;
• Increasing the time it takes to pay the suppliers.

If you want to efficiently use this business model, we recommend always comparing the turnover and delay for a particular supplier. The greater the difference between deferred payments and turnover, the better. Evaluating the turnover of goods of a particular supplier makes it possible to agree on different payment terms in order to get more favorable conditions.

6. Not having all supply chain departments engaged

Inventory management is a cross-functional process that involves a lot of departments: purchasing, logistics, demand planning, commercial, operations, marketing, and others. These departments may seem like independent functions, but in an efficient supply chain, they must interact to a great extent and work together in a synchronized and coordinated way to quickly identify bottlenecks in inventory management. In practice, unfortunately, these departments are often in opposition to each other.

Departments' interaction issues lead to a decrease in the employees and the entire system's efficiency, hinder the development of innovations, slow down the response to changes, and, as a rule, such an interaction conflict remains in the system for a long time and escalates.

Why does this usually happen?

Usually, the problems lie in an incorrectly built organizational structure and a conflicting, inconsistent KPI system. Let's take a closer look at the reasons for the problems of interaction between departments in the supply chain and options for solving them:

1) Incorrect organizational structure, the Procurement Manager is interested in other things.

To ensure the efficiency and consistency of work, it is important to correctly build the organizational structure of the supply chain. A common mistake is choosing the wrong head of inventory management. For example, often the purchasing department is actually subordinate to the logistics department, although there are competing interests:

• After all, logistics specialists are interested in reducing transportation costs and the cost of receiving and storing goods, which implies an increase in the size of orders and a decrease in the frequency of orders;
• For the procurer, such goals give rise to major pains: the accumulation of surplus or lost sales that can occur due to infrequent orders and large batches.

Based on our many years of experience, it is best to appoint a supply chain director as the head of inventory/procurements. What kind of specialist should this be?

• Focused on benefits for the entire company, instead of their own KPIs;
• Works in synergy with the CEO and facilitates communication between the various departments that form the supply chain;
• Manages conflicts of interest between these departments, including the formation of the correct KPI system;
• Sets a course of action that will help managers to move steadily towards the goals of the company, instead of getting confused with many different operational tasks.

There are occasions where the commercial department plays the role of procurers or these departments are combined. This is also not good because  orders lose transparency due to personal bonuses from suppliers for category managers. The motivation for a category manager is focused on margin and sales, while turnover plays an equally important role in purchasing efficiency. Consequently, this alignment will generate a conflict of interest, since the procurer’s task is to ensure the optimal inventory level, and the category manager’s task is to get more money – this is a contradiction on the part of procurement management. It is best to have the purchasing and category management blocks work in parallel. These are completely different areas with their own tasks and KPIs.

2) Gray areas of responsibility

Another mistake that’s not so obvious, but capable of slowing down the process, is the lack of responsibility allocation. Every specialist should stick to their area of responsibility, understand their KPIs and collaborate with colleagues.

Responsibility can be divided according to different criteria:

• By product category or specific suppliers.

The advantage is that such a person is well-versed in the category or the specifics of working with a supplier. Although there is a downside – it takes a lot of time to train such a specialists, and it will be difficult to replace them if they leave.

• By specific stores.

This approach is efficient for retail chains with POSs in different regions. The regional manager is well-versed in the specifics of the market and the intricacies of working with local suppliers.

• You can also divide managers by their functions:

Those who are engaged in analytics, those who are responsible for promotions, special offers and seasonality, those who work with stores or distribution centers,

managers for regular orders or those working with distribution, and

those who work with risky suppliers and order volumes.

3) Contradictory KPI system that cannot be influenced

Try to build a system of cross-functional performance indicators in such a way that each department sees its contribution to the overall performance of the supply chain.

After all, KPIs should eliminate conflicts of interest between specialists and help them work together to achieve the company's overall goal.

The procurer's KPI works perfectly in a combination of inventory availability and turnover. These metrics reinforce each other and provide a measure of inventory health. Such a balance will eliminate the following risks:

• Quick turnover imbalance, which means provoking shortages;
• Focus on availability imbalance, leading to overstocking.

It would be a mistake to add sales to KPIs, because in practice the procurer has no direct influence on sales.

As far as category managers are concerned, their most common KPIs are turnover and margin. You can add a turnover indicator to them, which will balance and connect with the procurer's KPI.

4) Workflow complexity

Some of the factors that affect staff involvement are not so obvious. One significant, but relatively easy to overcome obstacle is inefficient or overly complex workflows. If employees find it difficult to understand what they should be doing, or when doing so they face numerous obstacles, it will be difficult for them to stay involved. The solution to this problem includes two main directions: training and workflow adjustment.

• More comprehensive, participatory training will help employees better understand their assignments, removing the psychological barriers to involvement. There are many systems where it is quite easy to set up training for any function, with feedback from a mentor.
• Eliminating unnecessary complexity or inefficiency in the workflow will prevent employees from drowning in operational work so they can focus on important, value-adding tasks that keep them involved.

A properly built organizational structure and KPI system, taking into account the specialists’ motivation, will help to improve the company's financial performance. Many business owners underestimate this perspective and fail to see the direct relationship between inventory management structure and retail chain profits.

7. Not having transparent relationships with the suppliers

Developing collaborative relationships with your business’s key suppliers is important to ensure reliable supplies, competitive prices, and an understanding of new trends that may affect your business. For the retailer, the reliability of the supplier is one of the important factors that influence the entire business's success. Therefore, for effective supply chain management, there must be tools and procedures for assessing suppliers and their reliability. At the same time, a small percentage of companies conduct this kind of analytics, because you need to process more than one hundred megabytes and spend a lot of time on this.

Can you relate to this situation? The day before the delivery date, the supplier informs you of some sudden issues, like an insufficient quantity of the right product. If such situations with a partner are frequent, management often thinks about changing suppliers and reconsiders its confidence in the partner’s reliability.

Everyone has their own interpretation of the "reliability" concept, but it is primarily this: 

• how timely suppliers deliver goods,
• how full is the delivery (compared to what was ordered)?

Below, using the Leafio supplier reporting block as an example, let’s analyze how useful this analytics is for a retailer.

1. Supplier reliability and orders are a block of two reports built on the drill-down principle: first, the aggregated report provides information on the reliability of all suppliers and their share in the company. If you’ve found a problem or unsatisfactory indicators in it, you can go to the second report and study the execution of orders by a specific partner in more depth, up to positions.

Here the procurer will find answers to questions about the accuracy and timeliness of execution of orders and will be able to decide on the need for safety stock if there is a trend of constant under deliveries.

Supplier`s report in Leafio Inventory Optimization System

2. Data statistics contain visualized information (charts and graphs) on the supplier’s main KPIs:

• With shares of the supplier in the company’s purchases and sales dynamics, you can understand whether the supplier becomes more significant over time and whether the share of sales of the supplier's goods increases or decreases.
• The report helps you draw a conclusion about the particular supplier’s significance for the company and their reliability dynamically.
• The main KPIs of the supplier's goods inventory management are inventory, surplus, sales, lost sales, turnover for the supplier's goods; their dynamics. This makes you see what is happening with the supplier’s goods. An increase in surplus and turnover period is a sign that cooperation with this supplier causes the accumulation of goods, making it necessary to reduce the volume and/or frequency of orders. The opposite is true if inventories are declining and lost sales are increasing.

For managers, this analysis may come in handy in finding a negotiating position in dialogue with a supplier, because you can get detailed visual analytics on key supplier performance indicators in two clicks.

Comparing the supplier's share in the company's purchases and sales, the timeliness of orders delivery, and the supplier's reliability will help you make a decision on the advisability of further cooperation with this partner, or you can send a message that the working conditions have to be revised.

Continue reading in Part 1.