Inventory is necessary to generate retail sales—but more inventory does not automatically produce more sales.
The objective is to have the right inventory, in the right products, in the right locations, at the right time.
Measure productivity, not just inventory dollars
Retailers should evaluate measures including:
- Inventory turns
- GMROI
- Weeks of supply
- Sell-through
- In-stock rates
- Aged inventory
- SKU productivity
The goal isn’t necessarily to minimize inventory. It is to maximize the return generated by that investment.
Protect your winners
Inventory reductions made indiscriminately can create damaging out-of-stocks on high-volume items.
Retailers should distinguish between productive inventory and excess inventory.
Reducing $1 million of inventory means little if the reduction disproportionately affects the products customers want most.
Attack the tail
Most retail assortments contain a group of highly productive items and a much larger tail of slower-moving products.
Some slow sellers are necessary for assortment credibility or project completion. Others simply consume working capital.
Understanding the difference is critical.
Address the root cause
Excess inventory can result from:
- Poor forecasting
- Excessive SKU proliferation
- Vendor minimums
- Overbuying
- Seasonal misses
- Weak replenishment parameters
- Poor promotional performance
- Delayed markdown decisions
Liquidating inventory without fixing the underlying process means the problem will eventually return.
Inventory productivity is a merchandising discipline
Inventory should not be viewed solely as a financial problem.
Assortment decisions, vendors, pricing, promotions, replenishment, and merchandising strategy all influence inventory productivity.
