To excel requires more than simply having inventory to hand; knowing each step of the product journey and its value at any given time is vital to maximising your inventory's potential.

The process can appear daunting, as there are often conflicting factors that can initially seem counterintuitive. Still, with the right partner to navigate maturity and implement data-driven solutions, you can release your business’ most significant assets to increase profit, improve efficiency, and gain deep insights into your company and customer base.

Overlooking your inventory management creates a significant risk

In their most fundamental form, many businesses buy, make, move and sell stock – so a firm’s inventory management (IM) will directly impact employees and customers daily. Simply put, IM is the entire product journey and needs to maximise efficiency, service and profitability.  

IM capabilities – and crises – can often define a company’s brand perception. In 2018, #chickencrisis was trending across the UK when KFC changed its delivery partner to DHL, unprepared for the complex challenge of providing fresh chicken to over 900 stores across the UK. Over 750 stores had to close or work off limited menus left without stock, with an estimated sales loss of £1M per day.

In 2019, a British online fashion and cosmetic retailer saw its pre-tax profits fall by nearly 70% due to IT problems in its warehouses, which held more than 80,000 stock-keeping units (SKUs). The system was incorrectly managing return orders, resulting in understated stock levels, missed sales and increased IM costs. This year, an American department store chain announced it was going to ‘right size’ its inventory position in response to shifting demand. Right-sizing meant markdowns on overstocked products, removal of items, and supplier order cancellations which all impacted profitability, resulting in a 90% drop in profits in its Q2 performance. 

In contrast to these examples, Amazon stocks over 350 million SKUs directly or through their marketplace across multiple international distribution centres. With real-time order updates along the fulfilment journey, customers can expect next-day delivery as a minimum for most countries. Fulfilment centres are continually improving with efficient product placement for reduced journey times. Optimising ‘buy, move, sell’ has translated into an excellent customer experience, lower prices, and a significant competitive advantage. 

 It doesn’t take an army of engineers or an ecosystem of expensive initiatives to transform how a business manages its inventory. Excellent inventory management is achievable for any business. Prudent IM allows companies to balance availability and stock levels for each product consciously and will be an enabler for associated services to maximise customer and employee value.  

Achieving impactful outcomes through good inventory management

Cost reduction   

IM is often synonymous with reducing stock levels; this makes sense, as stock is often a firm’s most significant asset, though visible and bulky. Reducing stock frees up capital and reduces storage requirements and the risk of any inventory discounting or write-offs while lowering operational costs and increasing the speed of service. Although an overstocked position could be a strategic decision to take advantage of a discount or meet a minimum order quantity, businesses should add the total cost of this decision to the purchase price, including storage costs.  
 
Based on Metyis’ past projects, the stock reduction opportunity could be as much as 25% for businesses with less mature IM capabilities.   

Calculation of ‘days of supply’ (i.e., the time needed to sell the inventory for each product given the rate of sale) will quickly assess the stock position; products that take a long time to sell result in an overstocked position. Figure 1 shows the stock position of a wholesaling business using the ‘days of supply’ analysis.  

For one client, an IM exercise highlighted an overstocked position, which avoided a costly move to a larger warehouse. 

Availability 

While a low stock position is an important outcome of good IM, availability is arguably more important as a benefit driver and should be complementary to any cost reduction action. Without the right product at the right place and time, a company will experience lost sales and potential customer churn. While reducing stock and increasing availability might sound like competing aims, a managed approach to meet customer demand will likely reduce the stock holding position overall.    

A days of supply analysis will flag up stock levels and the risk of being out of stock. Any stock level below the re-order cycle following a days of supply analysis is likely to risk being out of stock regularly, resulting in a high chance of lost sales. 

A study of more than 600 retail outlets demonstrated that 31% of customers would buy an item at another store if a retailer is out of stock, losing sales to a competitor, while 9% will not buy the item at all rather than delaying their purchase. Using a new on-shelf-availability barometer, NielsenIQ calculated that retailers lost 7.4% of sales due to out-of-stock items.  

In a recent project for a multi-store retailer, Metyis identified and supported a 10% sales increase by ensuring better product availability across the store network while reducing overall stock levels.  

Added value services 

Sound IM can improve all business areas, enabling new or improved services to benefit the company and its customers – making things better, cheaper, and more straightforward. Good IM facilitates real-time stock levels and order tracking, self-service customer account management, accurate ETAs for delivery, a more straightforward returns process, and faster speed of service.  

Same-day delivery is becoming more common in some sectors, but it is only possible at scale with an efficient IM process. Figure 2 shows a firm’s IM capabilities needed to provide an efficient same-day delivery service.   

Employees can benefit from having deeper reporting and insights, planning, forecasting and collaboration tools, real-time visibility on inventory, and prescriptive warehouse management recommendations.  

With transformation at the heart of the business, ensuring an IM system is an enabler and not a bottleneck is vital. Metyis is partnering with several multinationals to step-change their eCommerce performance by utilising IM data.  

Setting your aspirations for inventory management   

A firm’s strategy will drive which IM capabilities are needed – which customer, operational and technology offerings will result in a competitive advantage in your industry?  

For some, having an effective forecast by product will be sufficient. Still, businesses with highly complex operations might need several tools that use machine learning to automatically intervene in real-time and manage a direct link between supplier and customer ordering systems.  

We have provided an IM maturity model that can help businesses assess where they are now and what they aspire to achieve with their IM capabilities.  

People-driven maturity 

At the earliest stage of IM maturity, businesses rely heavily on the processes and experience of key individuals and their commitment to the company and its customers. The loss of these staff members represents a severe commercial risk.  

Multiple data silos prevent a single shared source of truth between stores or major teams. The data itself is often limited, out of date or untrustworthy, with central functions relying on educated guesses for crucial daily business decisions.  

The opportunity to manage cost is limited, requiring considerable efforts to keep business as usual. Product availability is difficult to track and often relies on over-stocking core products to combat this problem. Customer experience and business systems, such as delivery or quoting tools, are not connected, requiring much-duplicated data entry and processes.  

Connected maturity 

A ‘connected’ ecosystem provides employees with access to the correct data, supporting data-led decision-making. One live source of truth across the business and systems removes data silos and allows the company to develop. Staff can rely on their tools, making it easier and faster to do their jobs and serve customers.    

Customers will also benefit from a smoother experience. They will feel more connected to the business through self-management accounts, access to live stock levels, or the ability to track orders and returns.  

The move from ‘people-driven’ to ‘connected’ maturity often requires a change in mindset across the business. At a ‘people-driven’ maturity, companies may not be used to change and can resist if they fear knowledge commodification or redundancies. Instead, to ensure engagement, it is essential to renew a shared purpose and demonstrate quick wins before agreeing on new targets made possible by alternative methods and collaborative development of tools.  

Intelligent maturity 

At this stage of maturity, IM is now fully embedded in a firm’s strategy, with capabilities and execution supporting employees and customer value-added services. IM tools now underpin the firm’s entire ‘buy, move, sell’ processes, providing insights for the right person at the right time rather than simply focusing on the correct data.  

Employees will transition from pulling data when needed to being proactively supported by the tools when they are required. Product ordering is a pertinent example here. The system uses sales data, inventory positioning, supplier and product information, and external data sources to recommend the right stock, holding position by location while adapting to changing situations in real time.  

Automated maturity 

Automated IM is not only embedded in the firm but is now conducting core and supporting functions with or without limited employee touchpoints, freeing up staff time, reducing human error and increasing speed. The system can personalise its recommendations based on user behaviours and roles. In addition, the system will pick up on business risks and either mitigate them or provide the correct information to be actioned by those responsible.   

The next steps with the right partner  

Once a company’s IM maturity is established, the next step is to translate ambition into action, define the required capabilities, and develop a delivery roadmap. These capabilities will include data and analytics, people and processes, systems, and governance to support the firm’s inventory lifecycle: plan, buy, move, make and sell.   

Excellent IM allows firms to increase profitability and improve the customer experience while better supporting employees and enabling new transformational services.    

At Metyis, we work with our clients to help set the right IM aspiration and its implementation, which supports and enables your business strategy. We typically find a ~20% stock reduction opportunity and a further ~10% sales opportunity through improved product availability.