Managing stock is always challenging. And nowhere more so than in retail. Changing fashions, unpredictable weather and erratic economic conditions that have us coming out of recession one minute and going back in the next, all serve to make getting stock levels right a real headache. And these are just the factors that are outside of our control. Other drivers of stock – unrealistic sales targets, buying for quantity discounts, trying to fill containers to reduce transport costs and straight forward human error are all within our control, so you would think that high stock levels would result from the unpredictable factors rather than the latter group. But you would be wrong – at least in many cases you would.
The experience drawn from many retail logistics strategy projects carried out over a number of years, combined with other anecdotal information, leads us to the view that most cases of excess stockholding are self-inflicted and therefore preventable. There are of course many reasons why companies end up with excess stock, but how do you go about preventing the problem from getting worse?
The first step is to make sure your method of measuring overall stock is not hiding the truth. Most businesses measure total stock by dividing the annual sales by the stock value, or variants on this theme, which gives a number of days stock cover. A view is then taken on whether or not this compares well with others. If it does, the presumption is often made that stock is under control. But that can be very misleading. If the calculation says you have 10 weeks stock, it makes no distinction between 10 weeks stock of product that is live and selling well and the same value of stock that is not selling or is even redundant. A more accurate way of measuring overall stock is to calculate the number of weeks stock of each SKU and then average it. This will often give a much bigger number. Better still you could use a weighted (for instance by sales value) average.
The next step is to look at the individual SKU stock levels. The first SKUs to focus on are those with very low stock levels. Are they too low? It may seem an odd thing to do if you are trying to reduce stock, but the easiest way of reducing stock is to buy less of what you are about to order (which is likely to be stock that is selling). Many retailers have fallen foul of this – trying to reduce stock by buying less and then losing sales when stock runs dry. Most retailers don’t know the cost of a lost sale (it can be higher than you think) and therefore don’t have the information to make informed judgements about the risk of running out.
The next thing to do is look at the very high stock levels. If this is redundant stock then you need to be realistic about what it’s costing you to keep it. It’s very tempting to hang on to it in the hope that promotions or other activity will help to clear it, but again most retailers don’t know the cost of keeping obsolete stock. The good news is that eBay and other expanding channels provide a number of new ways of disposing of unwanted stock.
Finally, your attention should turn to stock of current SKUs where levels are too high. There are a variety of actions to take here. Much of it should focus on making sure you understand all of the supply chain costs and reaction times from supplier to store so that purchasing can be optimised. By working closely with suppliers you can build a retail supply chain strategy that makes best use of both your and their capabilities, looking for opportunities to reduce reaction times (so that you don’t have to buy so far ahead) and reduce supply chain costs by buying in efficient quantities and using the most appropriate transport option. This is by far the hardest part, but the one that will reduce the chance of those excess stocks building again in the future.
None of this is rocket science but it is an area where it is very easy for inappropriate supply chain measures to create a false sense of security. With the right measurements being made, and a close cooperation throughout the supply chain, all of the self-inflicted causes of excess stock can be eliminated. Now we just have to get the weather properly organised!
If you need help with your stock strategy, or with setting up appropriate supply chain measures, please contact The Logistics Business.