PROFIT IDEAS

The balance between inventory management and customer demands is sometimes so delicate it can require Cirque du Soleil performers to achieve. Too much inventory and the return on inventory investment heads into a tailspin. Too little and disgruntled customers take their business elsewhere. So, how can inventory managers establish a balance that meets customer expectations without sending the whole trapeze act crashing to the warehouse floor?

It’s All in the Numbers

Let’s look at a typical health-and-beauty care (HBC) category and examine the numbers, based upon aggregate warehouse movement data and Hamacher Resource Group category analysis.

■ Total number of items available within the gastrointestinal category: 1,186

■ Number of items required to meet 80 percent sales satisfaction: 337

■ Number of items required to meet 56 percent sales satisfaction (Never Outs®): 75

Warehouse managers might breathe a sigh of relief at the reduced number of products required for profitability, but the challenge is convincing retail storefronts that they don’t need to carry every item available within the category. They need to understand that too much choice leads to shopper confusion, and the economic model leads to financial disaster.

New and Improved

The lifeblood of the retail pharmacy industry is the success of new items. It is well documented that new introductions not only result in sales activity for the products, but also for the category in general.

Consider again the gastrointestinal category. During the previous twelve months, 46 new items were introduced to the category. Of those, Hamacher recommended placement of 15 into core merchandising sets.

What happened to the other items? Certainly in some markets or very large assortments, they may have found their way to the shelves. In other instances, guerrilla marketing tactics may have bolstered acceptance of the new items, thus increasing demand. Still others may have met the sad fate of so many new items — simple failure to launch. Research from Information Resources Inc. (IRI) reveals that more than six out of ten items will fail within their first year of distribution. The other 40 percent need room on the retail shelf and promotional support to fuel their trip to success.

Truth and Costly Consequences

Inventory ties up cash. It is estimated that every dollar of inventory costs at least 25 cents per year for financing, handling, storage, and insurance. Managing inventory — transparently, using technology, process and people — makes the difference between profits and losses.

Technology deals with how purchase orders are placed with the supplier — via the Internet, EDI or other means — basic supply chain execution. Technology controls purchase orders and suppliers with event management and exception management. Technology makes visible the directing and controlling of supplier performance. It also makes visible what is in the supply chain, including what is happening with transportation and other logistics.

Process takes purchase orders from mere transaction status to points on a path that flows through the organization. Process ensures the linking of all parts of the supply chain, within the company and between trading partners. It is the dynamic means of controlling product flow and inventory positioning. That control is key to carrying the right inventory, in the right quantity, at the right location, at the right time.

Without people, process and technology could not work together. In an ever-expanding global supply chain, inventory cannot be managed by a computer alone. Managing supplier relationships and resulting inventory levels takes people. And measuring the success and survivability of any product newly introduced or previously stocked is dependent on consumer demand.

Tough Decisions

I have often contended that the purchasing function within a wholesale or retail setting is one of the most difficult jobs in our industry. This role requires the precision of an acrobat and the flexibility of a contortionist. Balancing each stocking decision based on the product’s likelihood for success with organizational inventory management demands is enough to put butterflies in the stomach of even the most seasoned Cirque du Soleil performer.

Each day, buyers are asked to make tough decisions. Good decision making requires experience, trustworthy information and a strong gut feel – sans butterflies. We could all take a lesson from former General Electric CEO Jack Welch’s book, Straight from the Gut, which extols the virtue of leadership based on good planning and even better instincts.

My instinct tells me that our industry is not finished confronting the challenging balancing act between too much, too little and too late inventory. However, with a little practice and some careful forethought, we can improve our performance.