Introduction NCOF Fundamentals of Inventory Management For Direct Marketers. Prepared by: George Mollo, 2011, All Rights Reserved

Transcription

1 Fundamentals of Inventory Management for Marketers Presented By: George Mollo Introduction is a consulting firm that focuses on all aspects of merchandising operations for direct marketing companies. Our primary focus is supplyside processes, that start with merchandise analysis and planning, includes inventory management strategies and the critical coordination of merchandising, marketing, finance, creative and operations through all elements of the business to the ultimate and profitable fulfillment to a customer. George is also Senior Partner of The Turnaround Specialists, the premier source for rapid, effective and efficient turnaround of multi-channel direct response catalog and retail businesses years Retail 3 years Wholesale 15 years Catalog 10 years Consultant Served as Chair of the DMA s Catalog & Multichannel Marketing Council Speak at conferences (User Groups, NCOF, ACCM, Retail Marketing Conference, European Catalog Mail Order Days)** Contributes articles for trade publications** (**PDF copies available on ) 2

2 Overview 3 Agenda 4

3 Agenda 5 Agenda 6

4 Inventory Impact Why is Inventory Management so Important? 7 Inventory Impact Properly controlled inventory can move substantial profit $$ to (or from) bottom line Examples: $50m business - every 1% increase in final fill increases $500k to net sales (which also reduces potential overstock; most other costs except variable have already been spent.) Assuming a 5% EBITDA --- a 1% increase in final fill could increase profit by 10% 8

5 Why is this Important? 9 Inventory Management Hub 10

6 Key Performance Indicators 11 Defining KPI Performance Indicators (KPI): Separate the winners from the try agains; and knowing not only what to measure, but also how to measure it and what it all means, is what separates and defines levels of success. You can t fix what you don t measure!!! 12

7 Defining KPI a quantifiable measurement that can be tracked and evaluated, and that is harmonious with what you want to achieve a metric that an organization measures to help determine its progress towards a goal a reflection of the tactical performance of an organization; and, is used to substantiate an organization s objectives can be quantitative or qualitative, objective or subjective, although preferably quantitative, unambiguous, and reliable a critical measurement of the performance of essential tasks, operations, or processes. A KPI will usually unambiguously reveal conditions or performance that is outside the norm and that signals a need for managerial intervention 13 What are the Key Measures? 14

8 Key Measures 15 Key Measures 16

9 Other Measures 17 Key Measures & Definitions 18

10 Backorders Is there an acceptable rate? Relationship to Final Fill Rates? Cause of Backorders? 30-40% of backorders are caused by bad timing, not bad forecasts Internal communications Call center Distribution center Management 19 Backorders: Improving Communication Weekly Top 10/20 Backorder list to: DC (Receiving) Call Center Management Include Item, description, units & dollars on BO, expected delivery date, expected quantity, comments 20

11 Key Measures & Definitions 21 Returns 22

12 Reducing Return Rates Communication to DC expedites processing to fill backorders Quarterly Review Committee with Call Center/Customer Service & others Address Top 10/20 returns Instituting this approach, I have experienced 25% reductions in overall return rates 23 Inventory Turns Inventory Turns = Annual Cost of Goods Sold / Average Inventory (at cost)** **Average includes 13 periods Example: $10.0mil COGS / $ 3.1mil Avg. Inv = 3.23 annual turns 24

13 Setting Benchmark Goals 25 Benchmarks Apparel Hard Goods Returns 16-18% 5-8% Cancels 7-9% 3-5% Initial Fill-item 78-83% 87-89% Initial Fill-order 77-80% 83-85% Final Fill-item 91-94% 95-97% Final Fill-order 90-93% 95-97% Cost of a back order $8-13 $

14 Key Measures & Definitions Demand Why is it Important to Capture all Demand? Shadow/Lost Demand (web considerations) Are there limits? Not sure? Test Order w/ mixed BO & in stock Could add 10-20% to existing sales 27 Hidden Costs Capturing all Demand Lost Demand Are there limits? False conclusions dropping wrong items/colors Buying wrong items (overstock) Hidden Impacts Increased list rental costs Name acquisition costs List analysis Overstated fill rates Lower fill rates and increased overstock across the board (example: Disney art cell) greater risk with wide variation in price points offered 28

15 Planning & Forecasting 29 Merchandising Strategy 30

16 Merchandising Strategy Product Categories should be main focus of business Target categories * Sub-categories define further Don t over assort, e.g. Shirts > 40% of total Avoid Paradox of Choice ** Consistent with Brand Provide a merchandising statement to the customer * Define categories based on product offerings and end use. Be careful of themes as comparison. ** Paradox of Choice: Why More is Less, Professor Barry Schwartz, Univ. of Pennsylvania 31 Merchandising Strategy Assumptions: Products fatigue if not reinvented or renewed (especially as house mailings comprise 60-80% of the mix; repeat web customers) Best customers need more newness because of their interest in the book/website and rate of purchasing activity The cost of paper and postage will continue to increase Competition will continue to increase in all distribution channels. (MO/E-commerce). No more than 1/3 of new products are winners Perform above book average Are profitable Repeat items planned at breakeven margin - will do worse Repeats can suffer 25-35% attrition rates with each additional insertion 32

17 Merchandising Strategy Axiom 1: Sales in a typical offering, regardless of product category, are distributed across items as follows. Best selling 1/3 2.00x book average Middle 1/3.80x book average Bottom 1/3.26x book average 33 Merchandising Strategy Axiom 2 As the space given to an item * is increased or decreased the impact on sales is equal to between 1/3 to 1/2 of the change. (aka Rule of 50 ) e.g. If we increase the space devoted to an item by 60% we would expect the sales of the item to increase by 20 to 30%. * Same is true of circulation, pages, item counts, etc. etc. 34

18 Merchandise Assortment Planning (MAP) 35 Merchandise Assortment Planning Adopting a well grounded merchandising plan is far and away the single most important thing a company must do for success. The key to growing sales and profits, providing better direction to the merchants invariably results in better product selection. More and better products lead to increased response rates, which in turn expand the universe of names that can be mailed/ ed profitably, increasing circulation and sales. 36

19 Start at the Beginning Establish a Pre-Season Kick-Off meeting Representatives from all departments Each Department should Discuss: Review of post season results What worked, what didn t Direction for new season Potential issues that might arise 37 Merchandise Assortment Planning Based on History, Analysis & Gut When?: months in advance Take A Simple & General Approach Improve majority of items - Don t try for 100% accuracy on all items ALMOST Right NOW is better than EXACTLY Right Later! Start at Category Level (Top Down then Bottom Up) Why a Detailed Plan? Sum of the parts will always be greater than the whole! 38

20 Planning Factors What do we need to get started? (12+ months in advance?) Timing of Book/Offering (comparability) Size of book (pages excluding sale grids ) Density based on historical Estimated Demand Merchandisers complaints The MAP is not written in stone and can be changed Anything else required? No Planning Factors (Category) Four Key Factors: Item Counts (based on pages/density) Web: low cost to add products but consider inventory investments (warehouse costs, etc.) Demand Space Allocations Page Space Costs (not necessary but ) 40

21 Planning Factors Item Counts Question: How can we determine item counts months in advance? Function of pages & density which are relatively constant ** Web item counts can also get out of control 41 Planning/Forecasting Factors 42

22 Category/Sub-Category Plan 43 Additional Metrics (Category) Level 44

23 Creating Indices 45 Category (MAPS) View Description Items % Dmd % Avg Itm P I Mrgn Space % S I SR raii Net Mgn TOTAL DROP: % % 19, % % % 14.8% GIFTS % % 15, % % % 14.9% HOME % % 20, % % % 8.1% APPAREL % % 35, % % % 28.0% ACCESSORIES % % 12, % % % 2.9% 46

24 Additional Measures 47 AVERAGES Overview Analysis: Page Average Spread Average Item Average If calculated as an index --- provides directional information and highlights anomalies. Remember: Almost Right NOW 48

25 Additional Tips & Tricks Price Point Analysis Ensures you have covered key ranges Guides price point selections 49 Positive Profit Impacts Horizon Planning - Benefits to Other Areas Creative costs can be substantially reduced Factor creative lead times to add/drop items to match inventory availability DC supplied forecasts for bin profiling and setup Last minute exceptions - handled more efficiently 50

26 Positive Profit Impacts Inventory Buying can be Scheduled on a Horizon (and allow for less costly changes) Dramatic positive impacts to cash flow Reduced backorders & reduced overstock Higher fill rates (both initial and final) Increased Bottom Line 51 It s All in RELATIONSHIPS! Use Multiple Measures Referenced to Each Other Category Share Item Count (density) Page Space Demand (Book & Item) Page or Spread Average Etc... 52

27 Item Forecast Considerations 53 Item Selections Techniques to Improve Item Selection Use Assortment Plan as control Finance can create an Open to Buy control Consider competition Do not over-sku Consider extra costs (e.g. creative, packaging, shipping, etc.) 54

28 Item Forecasting Factors Presentation (Size) Creative Factors Location in Catalog (key positions) Demand History Price Points Circulation (Qty/Target) Item Counts (Density) Competition (Int/Ext; also pricing) Space Space Costs (Sell Ratio) Item Relationships (Ranking A - B - C) Seasonality Indices Customer perceptions (item relationships or creative perception) 55 Methods of Forecasting Forecasts tied out Top Down AND Bottoms Up 56

29 Percent Done What percent done is statistically sound? Using book percent done. Are all items equal? How many trend curves? When using trend curves generally 3 to 5 will suffice (Keep it simple!) 57 Percent Done Advantage: Items can be forecasted quickly Excellent benchmark Disadvantage: Not all items perform the same to book Results can create overstocks and out of stocks 58

30 AII (Average Item Index) Advantages: Consistent Item Comparison Base within same drop/catalog Consistent Item Comparison Base between/across drops/catalogs When forecast changes Index doesn t change, only value does Demonstrates Relationships (To Overall Average & Other Items) 59 AII (Average Item Index) Disadvantages: Space must be factored (full page, cover vs. average) Seasonality must be factored *However, Space and Seasonality changes are easy to identify 60

31 Average Item Index Item # Description drop 1 drop 2 drop 3 drop 4 drop 5 drop 6 Item A l/s shirt Item B s/s shirt Item C plaid shirt Item D henley shirt Item E pique polo Item F interlock polo Average Item Index Item # Description drop 1 drop 2 drop 3 drop 4 drop 5 drop 6 Item A l/s shirt Item B s/s shirt Item C plaid shirt Item D henley shirt Item E pique polo Item F interlock polo

32 Forecasting Repeat Items What % of items are Repeat vs. New Items Review History Identify Similar Items Consider Wear Out factors Review Relationships to other product (especially competing new product) Profit Projections (Is the item still justified?) Suggestion: Add inventory carrying cost to margin calculation 63 Forecasting New Items Identify Similar Items Varying Rules -- New Items should be > 20% of average Review Relationships to other product Consider competition (Internal & External) Profit Projections (Is the item justified?) 64

33 Other Forecasting Factors Final Item Forecasts should NEVER be done in isolation Sum of the parts will ALWAYS be Greater than the Whole = OVERSTOCK Forecasts should be done by drop/offer AND revise balance of season (use of Aii makes this relatively easy) 65 Other Forecasting Factors Life of Item (> 1 Campaign/Offer) Review impact of creative changes Size of picture Page sequence change Relationships to other items Seasonality changes 66

34 Item Selection Tips Set Thresholds Margins (within category targets) Sell Ratio Return Rates Factor any Additional Costs Carrying Costs Special Prep or Shipping Costs 67 Item Selections Relationships Price Points (within Category) Competition (External & Internal) Ranking (A-B-C) Establish a Pro-Forma Item P&L (Sample included later in this presentation) 68

35 Item Selections Consider Item Profitability Weigh Cost of Overstock vs. placements and minimums (e.g. Would it be worth to pay an up-charge to reduce minimums?) NEVER run an item based solely on inventory Use sale grids only as a way to liquidate overstock 69 Additional Advice Mollo s Rule of Forecasting Negotiate lowest base price Have all merchandise costs been considered? Additional prep charges Margin check Have all factors included? Set trigger thresholds 70

36 Internet Forecasting Shopping online is like shopping in a department store with blinders on. Phil Terry, CEO, Creative Good 71 Internet Forecasting 72

37 Placing Buys 73 Placing Item Buys Buy only AFTER item plans complete** **Certain exceptions Consider the horizon of placements Financial considerations for planned overstock (caused by minimums) Consider a catalog walk-thru to adjust buys (+ / -) Allows everyone last chance for changes or adjustments (fine-tuning) 74

38 Open to Buy Plan The Master s degree in Inventory Management Process will require: Possible change in internal processes Require effort to gather and regularly (e.g. weekly) report on information Willingness to be the messenger Someone must be the inventory budget controller/banker 75 Open to Buy Plan OTB Provides: A budget for inventory spending An overstock budget Benefits: Both coincide with marketing adjustments Projections allow advance warning Decisions can be made in advance, during season Avoid spending budget twice Management has the control tools 76

39 Improving Inventory Coverage Better Planning & Forecasting allows increased Just in Time Buying Longer Range Planning - Identifies Horizon of Need Plan by Horizon/Season rather than Drop (especially with web) Inherent Creative Merchant hurdle overcome with 80/20 rule Planning Reduces hidden costs Impact on Creative Schedules Some DC issues 77 Improving Inventory Coverage Buys can be Scheduled Based on Horizons and Lead Times allows greater flexibility for change Allows forecasts to be modified to improve fill rates (lower backorder costs, lower overstock, increased turns) Allows flexibility of removing items from future books where fill rates are at risk Allows early identification of potential overstock Risk/Rewards of Overbuying Can be Considered - In Advance 78

40 Forecasting Summary 79 Channels of Liquidation Note: Sale vehicles: the objective is sell-thru NOTFill Rates 80

41 Item Profitability Reviewing Item P&L 81 Contribution Levels 82

42 Item Profitability Model: Item Summary Item # ABC123 Description Sample Item Cost Inbound freight 3.0% Retail Unit Estimate Extended Cost (k) Extended Retail (k) Cost % 39.9% Mark-Up % 60.1% % of tot dmd $ -you might expect to cxl 9.0% 40.5 Total Returns as % of ships/ $(k) 11.8% 48.3 Net Sales ($k) Item Profitability Model: COGS Cost of Goods Sold standard cost overstock (inv not sold) 10.0% Cost of overstock 3.0% 1.1 returns 3.0% 1.4 other 0% 0.0 Gross Margin ($k)

43 Item Profitability Model: Variable Expenses Variable Cost Promotion 0.00 OR promotion (% of demand) 27.0% Cost of pick-pack-ship 10.0% 36.1 Miscellaneous Costs Cost of Money/Borrowing 0.0% 0.0 Addn'l Overhead, warehouse space, etc. 0.0% 0.0 Contribution after Variable ($k) 56.8 % net 15.7% 85 Item Profitability Model: Fixed Expenses Variable Cost Promotion 0.00 OR promotion (% of demand) 27.0% Cost of pick-pack-ship 10.0% 36.1 Miscellaneous Costs Cost of Money/Borrowing 0.0% 0.0 Addn'l Overhead, warehouse space, etc. 0.0% 0.0 Contribution after Variable ($k) 56.8 % net 15.7% Contribution after Fixed Fixed Exp 10.0% 36.1 Profit 20.7 % net 5.7% 86

44 Communications 87 Communication with Suppliers 88

45 Communication with Suppliers 89 Six Tips for Culture/Team Building Be Our Guest Perfecting the art of Customer Service by Disney Institute,

46 Six Tips for Culture/Team Building Be Our Guest Perfecting the art of Customer Service by Disney Institute, Six Tips for Culture/Team Building Be Our Guest Perfecting the art of Customer Service by Disney Institute,

47 Several Rules of Business 93 Questions? Thank You!! 94

48 George Mollo (**PDF copies are available on website)