About that other “I” word! Is anyone happy with Inventory?

By Transport Intelligence

There is no gainsaying the fact that Inventory is a double-edged sword. Too little leads to irate customers, and too much of it has margins shrinking along with market capitalisation, as evidenced by the selloff in Walmart and Target shares over the past month. 

In a whitepaper written for this publication in January, it was suggested that this year’s Supply Chain challenges in the US would ease because the inventory was already here! 

Two things prompted me to come to this conclusion:

1. Retailers such as Walmart, Amazon, and Home Depot were chartering ships to circumvent the LA/Long Beach port challenges and ensure product availability and plenty of ships at the port with goods for other retailers well past the sell-by date!
2. Demand had moved from products to services in the second half of 2021. 

Though the logistical challenges persist, they are not because demand is outpacing supply. Large retailers collect reams of data and know exactly the location and how many of each SKU they have in stock. What was disturbing, and I don’t know this for a fact, is that they seemed to have relied on the purchases during a pandemic year to forecast and order goods. Perhaps they were using the textbook models on forecasting and missed calibrating for changes in consumer behaviour, such as: 

• purchasing trends changing perceptibly in 2021 and during the holidays
• sentiment towards inflation
• demand transitioning from pandemic online shopping to experiences. 

“Our job is to figure out what they’re going to want before they do”, is a quote attributed to Steve Jobs on the customer. Perhaps there should be a corollary to that – “to understand what the customer needs and does not want more of” – as well. 

To be fair, Walmart & Home Depot, to mention a couple of large US retailers, know precisely when and what is needed in disaster (storms and hurricanes) areas and are the first to assist with their products and services. This pandemic, along with stimulus checks, created unpredictable buying patterns that would surely not be replicated. 

Several briefs and whitepapers have been written about the challenges just in time and the ills of excess inventory. But is there a goldilocks model of inventory that exists? 

The short answer is probably No, but it is inevitable that either the consumer does not get the product at the time they want, or the firm ends up with too much more on shelves/storage than they need. But the objective has always been to achieve an optimal balance between the buyer and seller, minimising frustration and inventory. Unfortunately, the pendulum that swung the way just in time is back the other way. 

If it is delighting the customer and expecting profits to follow, then it is imperative we don’t cede our ability to discern consumer buying trends entirely to data and automation. Yes, they changed the past two years, but perhaps it is returning to mean. 

The “other I – Inflation” word has reared its head, and perhaps knowledge of what transpired 40 years ago may offer lessons – granted, they were entirely different technological, political, and social times. But consumers, during these times, look for key necessities more than discretionary spending. Perhaps we have blurred the areas of forecasting vs decision making? 

We all know diluting your premium brand through discount sales is not healthy for margins or earnings. However, stocking the wrong or significantly larger numbers of items in inventory highlights both a busted forecasting model and a lack of customer buying knowledge.

Two crazy examples of the recent inventory challenges include:

• During the early days of the pandemic, bikes of any kind were unavailable. Currently, there is a huge surplus!
• Toilet paper hoarded during the pandemic’s early days, and now Christmas-themed ones not delivered on time are being sold at a discount in Singapore!

Three things to consider:

1. Clear customer expectations. Steve Jobs apparently said: “You can’t just ask customers what they want and then try to give that to them. By the time you get that built, they will want something new”. Surely getting goods instantly or in an hour/ day has exacerbated the inventory challenges. 
2. Heuristics and Scenario Planning. It is more than critical that any forecasting model incorporates a heuristic methodology to augment the data and information analysed. Along with planning different scenarios, they offer a far more sophisticated outlook on demand than mere numbers.
3. Sustainability. As a cohort, we perhaps consume more than we reuse. However, some consumers will gladly purchase mismatched inventory for a discounted price and save for future use. To several retailers’ liquidation is the only solution rather than storing for the next season, but is it? Consider Halloween costumes, except for a couple of trendy ones; for the most part, it is the same few that sell consistently every year. Could these not be stored for the following year? When a cost/benefit analysis is done to decide, let us not forget the sustainability angle.

Yes, Inventory Management is both a science and an art. It is not to misquote the evil queen in Snow White. 

“Mirror, Mirror, on the wall. Who has the lowest and leanest inventory of them all”?

We have the technology, tools and experience to optimise and manage inventory better. 

This is a guest post from Raghu Ramachandran of 13 Colony Global LLC. you can contact Raghu at [email protected]

Source: Transport Intelligence, 16th August 2022

Author: Raghu Ramachandran