Effectively SKU management is not a one solution model
Sku rationalization and inventory optimization are two of the new buzz terms in retail. The power of computers and the sophistication of software have moved retail to a more data driven business model. The ability to slice and dice data and customize inventory reports has allowed retailers to become much more effective in managing their inventory. When the final results were in for the last holiday season the winners were the stores and chains that ended the season with minimum carryover. They were able to maintain their margins, reduce markdowns and meet consumer demand. It all sounds fairly simple, reduce overstocks, eliminate out of stocks of key items and as a result maintain margins, but it isn’t.
The first POS systems offered a simplistic approach to inventory management, setting min/max reorder levels. In reality it provided a basic method to trigger reorders and minimize out of stocks but this method does little to control overstocking. As software systems evolved they incorporated vendor lead times and the ability to include historical analysis into reorder calculations. A bit of an improvement, but it still was basically a one size fits all model. So what are the new features that software systems will have to add to give retailers more effective tools manage the complexities of their businesses?
The first step is to recognize that different retail segments have inventory challenges that are unique and therefore require systems that are flexile to meet those unique requirements. Since your inventory is your biggest asset, take the time to understand its unique characteristics. Some considerations are, how seasonal is it, what is your average sku life cycle, and what is the demand frequency of your inventory.
The demand curve and life cycle of sku’s differ dramatically by retail segment. Fashion and durable inventories require immediate analysis on hot and cold items and an integrated Open to Buy system to control buying within budgets. Historical analysis is only relevant in calculating next season’s OTB for dollars and units.
Fast turnover retailers like grocery require a combination of historical analysis and inventory forecasting to meet demand. Since they order so frequently it’s essential that they can forecast anticipated demand. Out of stocks equal lost sales since consumers have strong brand loyalty. The other significant challenge is managing price changes. To meet these needs POS systems selling to specialty grocers need to offer an electronic interface to key distributors. This interface would provide two way communications for sending orders and receiving back confirmations of what is being shipped and the price. This allows the retailer to manage any price changes in advance of actually receiving the order and therefore controlling loss of margin.
Other retail segments such as appliance and furniture have what it called intermittent demand frequency. Customers buy to replace or because they are buying a new house or decided it’s time for update. These are considered intermittent demands since they are not largely predictable by seasonality or historical sales analysis. Theses retailers need to create a virtual inventory model to effectively manage their inventories. To accomplish this virtual inventory model their inventory control systems need to be integrated with their distributors systems so they have immediate access to inventory availability and can commit that inventory. These retailers work on a lower margin but don’t have to commit dollars to stocking inventory that has unpredictable and “intermittent demand cycle”.
I’ve mentioned only a few retail verticals markets and how they are unique, but there are certainly more examples. The point is when you are evaluating POS systems for your business the first step in the process is to make a detailed list of the software features that are required to effectively manage the unique needs of your inventory.
An investment in technology should only be made after you have detailed your exact needs and can determine how you can get a return on your investment. A system has to allow you to efficiently increase customer satisfaction improve bottom line results.