Supply chain inventory: Who’s counting?

Now is the perfect time to reduce, or at least review, inventory, say supply chain experts. Achieving optimum stock levels means less cash is tied up in the supply chain and there is less risk of product not selling at full price or going out of date.

“The recession is undoubtedly a catalyst for making supply chain divisions more diligent about their inventory control,” says Homebase commercial planning director Richard Morgan. “Cash is king and there’s no room to allow for wastage right now. But it’s something we should all be doing anyway.”

At Homebase there has been a concerted effort to take stock out of stores, stock rooms and depots in the past three years, with the aim of reducing total stock by a quarter in that time,
net of inflation and new space, says Morgan. But that is not to say its range has diminished.

“Our breadth of range is the same. What we are doing is focusing very hard on the tail of slow-selling SKUs in the business,” he explains. “We have to stock this door handle and that unusual type of nail, but with these slow-sellers there is room to improve the way they are deployed across the stores estate.”

Morgan acknowledges that IT allows for more visibility and collaboration between retailers and suppliers, but firmly believes that common sense and taking practical measures – such as analysing information you already have – can deliver tangible results in inventory management without requiring huge investment in new systems.

One area to tackle is analysing the rate at which items sell in each store. “We might sell 20 of a certain type of light bulb in one store every week, but only three in another,” says Morgan. “Now, rather than put through a ‘one size fits all’ replenishment order, we replenish in line with demand in each store.” In instances where one store needs items and another has plenty in stock, a courier speeds the excess to its “buddy store”, he explains. “It’s a small cost to ensure you get those sales, and keeps stock flowing efficiently through the business.”

Rewrite the rules

Homebase has also been negotiating with suppliers for more appropriate pack sizes and to do away with minimum order quantities that have historically been accepted, even if fewer items are required.

“Often pack sizes are based on historical order figures that no longer have much logic behind them,” says Morgan. “We are saying to suppliers: ‘We don’t need that many’, or ‘We would prefer five rather than the pack of 10’. Suppliers in this climate are happy to be more flexible because they know service levels are so important and
they don’t want waste in the form of excess stock.”

One big challenge for Homebase has been to make sure inventory isn’t reduced at the expense of availability. “There’s always a tension in retailing between the traders who want plenty of stuff to sell and the logistics and finance departments watching like hawks for waste,” says Morgan. “So inventory reduction programmes need to be handled carefully.”

He insists that Homebase’s availability levels are as high today as they were a year ago and sales have not been lost. “When store managers see stock levels reducing it’s a concern to them, but we have held training days for store managers and buyers and merchandisers to explain why this initiative is so important to the business, and we’ve won their full support,” he says. “It’s something that everyone understands. Because it’s one of Homebase’s six key initiatives for success, inventory control has been given a high profile from the top down and a step change improvement has been achieved.”

Practical measures can take you so far, but to fine-tune inventory management, IT is often increasingly important. Anthony Payne, marketing director of Wesupply, a provider of supply chain collaboration solutions for retailers and manufacturers, says: “Visibility is the key issue in reducing inventory. We’re working with retailers to help them give suppliers a lot more visibility. With deeper insights into what’s happening in the retail business, suppliers can react more directly, and ultimately more stock is going to get sold, while less is wasted.” Equally, those retailers will have more trust in their suppliers so there will be less need for ‘safety’ or ‘buffer’ stock.

For multichannel retailers and home shopping specialists, ‘direct ship’ or ‘direct dispatch’ is another means of reducing cash tied up in inventory, as goods are sent to customers straight from suppliers, cutting out the need to buy stock up-front and store it in a retail distribution centre.

At fashion home shopping retailer JD Williams, part of the N Brown Group, between 10% and 13% of stock reaches customers in this way, depending on the time of year. Robust systems are in place to allow both JD Williams and its supply partners to track orders and control the flow
of stock.

JD Williams direct dispatch manager David Schofield says: “Our online business is growing very fast. We’re moving into new product categories such as
younger fashion, footwear, menswear and lingerie, using the website to give customers far greater choice than the catalogues could ever offer, but we didn’t want to flood our warehouse with thousands of new lines, or take on more storage space.”

The answer was to invest in Kewill Trade, an order management software system that has built on JD Williams’ existing IT and ecommerce systems, integrating with enterprise applications and trading partners’ back office applications. “We now have a better understanding of what is happening at any moment because we are sharing the same information as our suppliers,” says Schofield.

Simple set-up

Suppliers need only a PC and a few days’ training to be set up on the Kewill Trade system, and costs are minimal compared with a traditional electronic data interchange installation. There are now 275 suppliers using the system, and a team of four trainers on the road helping more suppliers set up on it. JD Williams wants to build its direct dispatch business to at least 20% of the business and use the visibility the system allows to keep improving speed of delivery and reducing the number of returns.

The downside of direct dispatch is that the retailer has less control of stock because it is not physically in their possession. Nor can the retailer collate orders and minimise delivery costs if each item in a multiple order is coming from different supplier depots. However, Kewill Europe vice-president marketing Rob Smith says interest of direct ship is growing as even high street retailers look for cost effective ways of extending their range, while simultaneously paring down capital investment in stock.

“For direct dispatch to work, all parties involved need one version of the truth,” says Smith. “Once an order is placed everyone needs to be clear on how that order is progressing.” He predicts that as responsibility for inventory management slides back along the supply chain to the suppliers themselves, retailers will have to switch their focus away from managing warehouses to managing their suppliers.

Greater discipline in inventory management could help retailers survive this recession. When normal trading conditions resume, it is clear that many players will have vastly improved supply chain efficiency, cutting out cost and risk, and adopting new business models altogether.