Taking Stock of Inventory Controls
Inventory and distribution management aren’t sexy. But behind-the-scenes systems that help retailers track pillows, televisions and skateboards as they move from manufacturers to store shelves and through checkout stands are essential to profits.
That’s why Kmart Corp. is spending more than $1 billion on inventory controls and new distribution centers. The struggling retailer hopes to catch up with Wal-Mart Stores Inc., which has redefined efficient inventory controls.
But retailers also are experimenting with sophisticated new software that promises to fatten profit margins by using historical sales data to help identify the best time to put merchandise on sale.
Time clearly is money in the retail arena, and profits are elusive enough without merchandise remaining stacked on store shelves or in distribution centers. Retailers gaze into murky crystal balls to determine the right amount of toys, apparel and other merchandise that will be landing on store shelves in coming months.
“It’s like Goldilocks,” one inventory expert said. “You want just right, but usually it’s too hot or too cold.”
When inventory is flowing smoothly through channels, shoppers find what they want on store shelves, and retail chains have a better chance of turning a profit. But, on average, 8% of products aren’t on shelves when consumers walk into the store, said Doug Bade, the Chicago-based leader of Deloitte Consulting’s supply chain strategy division.
Wal-Mart is credited with using its retail might and sophisticated inventory systems to dramatically shape how retailers handle inventory.
“They’ve done things that were just verboten in years past, like sharing sales data from their stores with vendors,” said Harve Light Sr., president of Troy, Mich.-based Churchill Software Inc. “And they’ve done a lot of things to get inventory out of the supply chain, say, by moving it from the [manufacturer] directly to the store.”
Wal-Mart’s goal is a constant flow of goods that’s designed to minimize time spent on trucks, at distribution centers or in storerooms. Crews use hand-held scanners to record data on pallets of merchandise as they’re unloaded from incoming trucks and sorted for shipment to stores.
Wal-Mart often requires vendors to bypass its distribution centers and ship directly to stores. The company shares sales data, normally a closely guarded secret, so vendors can adjust shipping schedules.
Kmart has been a sharp contrast to Wal-Mart.
Kmart clearly has many issues to deal with--crowded stores that border on being messy, employee indifference and a frayed image among shoppers. Kmart also shot itself in the foot early this holiday season by dramatically slashing advertising, which caused a dramatic drop in business as Kmart fell off of consumers’ radar screens.
But Kmart’s inventory control system also has been broken for years, so simply increasing the voltage on blue-light specials won’t do the trick. The nation’s second-largest discount chain is spending more than $1 billion to build new distribution centers in California and New Jersey and replacing antiquated inventory control systems that keep it from catching up with Wal-Mart.
Inventory control is all about getting what consumers want onto store shelves. By any measure, though, Kmart has performed poorly. Customers had just a 75% chance of finding what they wanted at Kmart last holiday season. Shelves often were empty because the chain’s distribution centers were gridlocked.
The 30-year-old distribution centers in Carson and New Jersey were in such disarray that the chain’s buyers were forced to choose between shipping such staples as toothbrushes or moving seasonal holiday merchandise. The overworked system was unable to handle both.
Kmart’s product buyers also erected storage bins at distribution centers to house merchandise that was out of style or out of season. It wasn’t unusual for gardening equipment and other products to sit gathering dust--and pushing Kmart’s inventory costs sky-high.
Stocking Holiday Shelves
Chairman Charles C. Conaway is telling anyone who will listen that Kmart is heading in the right direction. Analysts, including Lehman Bros.’ Jeffrey M. Feiner, say Kmart is making progress. “We expect improvements in inventory turnover and expense management to aid in results in 2002,” Feiner said.
This holiday season, Kmart shoppers stand a better chance of finding merchandise on shelves. Kmart’s percentage of goods in stock has risen to 87%, and the chain hopes to soon push it beyond 90%, well on its way toward the industry average of 92%.
Kmart also has a long way to go according to another key yardstick--how many times a retailer turns over inventory. Wal-Mart turned its inventory over 7.3 times during 2000. Target Corp. registered a 6.3 turnover rate. Kmart has shown improvement in the last year, but it still lags noticeably at 4.3.
The Troy, Mich.-based company had installed some of the same inventory control software used by Wal-Mart. But the systems sat largely idle because other antiquated systems were unable to produce sufficient real-time data.
Kmart executives know that they must do more than catch up with Wal-Mart, Target and other competitors that are better at inventory control. Predictive systems being developed promise to take some of the guesswork out of what to put on shelves, how merchandise is advertised and displayed, and, possibly, when to cut prices.
Wal-Mart moved beyond traditional inventory controls a decade ago when it began using census data to build demographic pictures of neighborhoods surrounding its stores. Rather than ordering huge volumes of merchandise and shipping it to stores, Wal-Mart instead stocked its stores with merchandise most likely to sell in a given neighborhood.
Wal-Mart now hopes to take another step by forecasting demand. To do that, Wal-Mart will gather intelligence on what different demographic groups, say, young Latino males, will want to buy in four months. The retailer will share that information with select vendors who will rush to get the right merchandise onto store shelves at the right price.
Retailers also are trying to leverage mountains of data generated when cashiers scan price tags. Such data help retailers determine when store shelves need to be restocked. Their hope is that past sales data, coupled with real-time information gleaned from daily sales, will improve their ability to decide when products should be put on sale.
If they’re right, swimsuits will be gone well before Labor Day sales erupt and holiday merchandise will end up under Christmas trees rather than being sold to liquidators at cents on the dollar.
“The key is reacting quickly when you realize there might be a problem with your seasonal plan,” said Stephen A. Smith, an information management professor at Santa Clara University.
Sophisticated Software
It sounds easy, but no two stores are alike and data gathered across a huge chain such as Kmart isn’t of much use to an individual store manager. Smith said the sophisticated software now being developed could allow chains to craft sales plans for individual stores.
Retailers also are paying more attention to what their best customers purchase. Apparel department managers know that they’ll sell lots of full-priced ties if they put dress shirts on sale. Put ties on sale, they add, and you’ll rarely sell more full-priced shirts. So buyers are studying point-of-sale data to determine which combinations of full-priced and on-sale merchandise drive overall sales.
Electronics retailers have used sales data to determine that consumers are more likely to buy television sets, DVD players and DVDs when the products are advertised together. Along with retailers in other categories, they’re poring over sales data to find other products that can be clustered together.
Retailers are studying sales data to understand what happens to profit margins when select products go on sale. Customers love it when a $200 computer printer is marked down to $150. But Smith says retailers who are concentrating on overall profit margins need to know what happens to sales of, say, a $125 printer that remains at full price. “Inventory systems ignore that issue,” Smith said.
