by Jon Mays and Brooks Kitchel

The growing emphasis on ever-leaner retailing means the days of hedging inventory bets with colossal surpluses are gone for good. The costs of inventory mishaps—both in terms of actual bottom-line economics and brand experience for customers—have driven many retailers to significantly reduce their inventories.

Meanwhile, it’s grown increasingly difficult to predict the actions of American consumers, whose intentions are less and less correlated to their actual behaviors since the recession.

While most retailers have cut their inventories accordingly, leading retailers are optimizing their remaining inventory to get the most bang for their buck.

1. Aggressively share inventory across channels

Truly sharing inventory across channels creates the opportunity for tremendous customer experience benefits and can help avoid having to mark down large amounts of leftover merchandise.

From a customer experience perspective, shared inventory increases the likelihood that a customer will be able to purchase a product in a particular size or color, regardless of channel. For small bricks-and-mortar locations, sharing inventory can open up a whole new array of choices for customers.

Sharing inventory also allows retailers to buy generally wider, shallower assortments—offering more products and with less risk that there will be huge amounts left behind to discount. Nordstrom increased its inventory turns from 4.84 to 5.41 by sharing its inventory across channels.

2. Prepare for accelerated innovation

Consumers have become increasingly accustomed to a constant stream of new, innovative products. Fast-fashion retailers are a popular example, but this desire for fresh products permeates the entire retail and consumer products sector, from televisions to coffee pots.

Offering the latest and greatest can help entice consumers to shop more frequently, and failing to do so will drive them to competitors. But introducing new products—and exiting old ones—also creates complicated situations for merchandisers.

Of course, a deep understanding of the marketplace is essential to being able to anticipate when a new product or trend is going to come along. From there, it takes careful planning and collaboration to be able to move that new inventory through the supply chain while exiting old products across channels.

3. Bet big where it matters

As retailers trim inventory levels, many are tempted to cut from the top—slicing from the highest-performing stores and styles. Instead, many would be better served by supporting the highest-performing stores and styles with additional inventory and trimming from their lower-performing counterparts—in essence, throwing good money after good.

Cutting from a low-performing style or store can cause only so much additional damage, while supporting high performers has the potential to significantly boost sales. In Kurt Salmon’s work with leading retailers, we have yet to find a situation where a client over-bet on a high-performing style or store.
Understanding each store’s markets and core assortments will help inform the decision on where to bet big while limiting risk.

4. Invest in core assortments

As inventory dollars shrink (in part because of rising production costs in China), merchandising executives are increasingly tempted to spread out those dollars among a wide array of styles. Resist this urge and instead focus on supporting core offerings.

Most retailers will be unable to compete with behemoths like Amazon.com that offer a virtually endless collection of products—and trying to compete can be extremely brand-damaging. Spreading inventory investments too thin can result in a broad assortment, but with little inventory across it. In this situation, core products will rapidly sell out, leaving customers disappointed, hurting the brand.

Instead of trying to be a jack-of-all-trades, retailers who understand their core customers’ needs and wants can tailor their assortments to focus on what that customer is most likely to purchase and then invest heavily in those products.

5. Manage inventory further upstream

When working with a pared-down inventory, it’s essential to limit the amount of time that inventory isn’t available for sale.

This is accomplished through increased collaboration between planning, buying, sourcing and supply chain functions, and by utilizing a more sophisticated, streamlined supply chain.

Above all else, this supply chain must be flexible and demand-responsive. Some retailers are turning to near-shoring, or production in Central or South America, to accomplish this. One option is to produce small quantities of each style close to home, testing them in-store and online and then sending larger orders of popular styles to China, as Nine West does. On the other hand, retailers could use near-shored facilities to produce quick reorders of popular products mid-season.

But flexibility isn’t just about product—it’s also about timing. It’s important to have the supply chain capabilities to deploy inventory to different parts of the country at different times. For example, it may be critical to deliver lawn and garden products to the Southeast in February, but those same items may not be needed in the Northeast for several more weeks.

Retailers have already been asked to work with less, but many can do more with their pared-down inventories—armed with a deep understanding of their core customers and a solid set of internal processes.

Together, Jon Mays and Brooks Kitchel have more than 30 years of experience advising industry leaders on their inventory management strategies.