Vendor Managed Inventory (VMI): the Holiday Season

September 2 articles in the Wall Street Journal and the Chicago Tribute warn of potentially mild holiday buying driving inventory trends in major retailers across the country. The chief concern cited in both: fear of too much inventory when the season ends and the resulting “frantic price slashing” (Tribune) and “discounting bloodbath” (WSJ). The Journal article cites slow back-to-school shopping as a harbinger of slow holiday sales and the Tribune goes on to quote a supply chain management expert as characterizing many retail locations as “zombie stores” regarding their dropping inventories. “At best,” he says, “a store like that looks boring. At worst, it’s a struggle to get people to come in and buy product." This fear of clearance selling due to slow sales projections has retailers reducing the “breadth and depth of their assortments” going into the holiday season.

For retailers, this trend is actually helping their numbers, keeping investors happy. The Tribune reports that mainstream department stores and large discount chains actually improved their gross margin bottom line in the second quarter over last year (the notable exception being Macy’s). But this trend can be bad for retailers, and the Tribune correctly notes that fickle, unhappy shoppers will just as soon go to another store to get what they want than buy the next best thing on the shelf. Further, Perry Ellis CEO George Feldenkreis says, "Inventories have been very depleted at retail and retailers are going to find themselves in a situation where some of them, if sales just improve a little bit, are really going to be out of inventory and they are going to be chasing inventory."

What this means for vendors is that, among other things, it underscores the need for vendor managed inventory (VMI). Given the current retail inventory trends and the projected trends for the holiday season, it is absurd for any vendor to think that they will be able to sit passively and wait for an order to be placed by their retail partners. Rather, the vendor that supplies the most similar product to the need and can provide it most rapidly will be filling the voids this season, because the last thing that a retailer wants in this environment is to have an order need to be filled the next day and arrive three weeks later, too late to sell most of it, so that the lion’s share of the order ends up on a clearance rack.

So how does a vendor manage their inventory so that they can meet inventory needs at their retailers without too much cost for themselves? Rainmaker has identified four key indicators that should be tracked:

Out of Stock Stores

Stores with no items on the shelf cannot sell those items, and the longer they sit without sales, the less likely the retailer will be to re-order them in light of the industry trends. However, take care not to overstock those stores by checking the sales trends for the last several weeks that the store did have inventory and the same period sales the previous year. It stands to reason that sales will be down slightly over the previous year for most items, so reconcile that against the preceding several weeks and resolve stock outs immediately.

Under Stocked Stores

Current sales trends and same period sales the previous year combine to provide a valuable barometer for sales in the near future. Consider these and identify those stores with too little inventory to meet anticipated demand, and bring them back up to minimum required amounts of inventory to meet the short term demand, lest they end up in the out of stock category.

Warehouse and DC Inventories

Not all retailers distribute their products the same way, so knowing how the distribution of products works and considering the general or store-specific inventories sitting in warehouses and distribution centers for retailers will help prevent overstocking or overproducing products that may not be on a retail shelf but might well be on a warehouse shelf or already on their way to a retail outlet. Sum up item-level needs to resolve out of stock and under stocked stores to their associated warehouse or DC to prevent over-producing or over-shipping.

Gross Margin Return on Investment (GMROI)

MSRP is a fine concept, but more often than not, it isn’t a true gauge of what an item is selling for. Additionally, shipping items to one retailer or store has different associated costs than to ship to a different retailer or store. Calculating an average selling price for an item for each of retail partner and combining that with cost and inventory levels allows one to identify which retailers are generating the highest gross margin return on investment. Further, as retailers reduce their assortments, key in on the items with the highest GMROI and allow the others to fade out.

To track these indicators, it is essential that is be done at an item/store level if buyers are going to take the vendor seriously and relinquish any control over the ordering process. Managing inventory at this level can be difficult, especially for smaller vendors whose budget and resources are limited but whose retail partners are many. Simply receiving, storing, and analyzing the vast amount of information required to track these indicators often requires whole departments which are even then most often understaffed and overworked, degrading the quality of the answers they provide. The Rainmaker Group offers a comprehensive solution to these needs that culminates in a set of intuitive, business-user friendly reports that allow a vendor to begin analyzing data within hours of the arrival of data from a given retailer, rather than burning the lion’s share of time collating and formatting the information and only briefly analyzing it before it becomes stale. For a fraction of the cost of the overworked and understaffed department that attempts to handle these needs now, the Rainmaker Group’s Accelerated Analytics® solution can automate and improve this process dramatically. To see how Rainmaker can assist in the resolution of your stock out and under stock troubles, request a free stock out exposure analysis or contact us today!

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