Inventory Management

The entire business model of a retailer works on the business model of buying at a lower price and selling at a higher with the difference being the profit and buying on credit and selling on cash. This business model works only if the retailers has optimum inventory.

So how does a retailer have optimum inventory? What are the factors to be considered to ensure optimum inventory? How does a retailer end up with excess stocks?

The general points to be considered is the average sales per day, number of days stock holding required (this will be based on the credit days offered by the brand, frequency of supplies), the potential of the brand, shelf space, the minimum load factor required for the brand to be supplied etc. considering all these factors the retailer can arrive at inventory level.

But is this as simple as that? If yes why does a retailer end up with excess stocks or expiry stocks?

A lot of things can go wrong thereby leading to such a situation. A brand might offer a great promotion, thus with an aim of certain target a retailer might buy stocks. But customers might not be as excited by the promotion as expected thereby affecting sales. This could lead to stock pile up. Generally a retailer would not prefer the same offer for a very longtime.

High inventory could be due to the obligation to have the entire assortment of a brand/company on the shelves. There could be various dimensions to it.

Same brand same category different products

E.g. in olive oil a company will have various types of oil ranging from pomace to extra virgin oil in pack sizes ranging from 250 ml to 5 ltr in different packaged form from tins to glass bottles. Even minimum quantity of each of these product leads to high inventory.

Same brand different categories

Certain brands are very strong in certain categories and the company attempts to enter into newer categories with the same brand name. To find a foothold in the new category the company uses carrot and stick approach. Support in terms of availability, offers  in key categories are provided only if the retailer agrees to ensure availability in other categories where the brand does not have dominance, thus leading to high inventory for the retailer. E.g. a health drink major having presence in the biscuit category.

Different brand different categories same company

A company might have multiple brands in multiple categories. E.g. a company might have presence in edible oil as well as wheat flour under different brand names. The company will use the same tactic as mentioned above to ensure its entire assortment is available with the retailer.

Apart from these reasons high inventory could be due to high expectation from a newly launched product thereby leading to stock pile up. Even wrong ordering by the retailer or natural conditions such as weather condition (especially for soft drinks and juices) could lead to high inventory. The minimum order quantity of the company could be yet another reason.

So how does a retailer avoid high inventory? Firstly any decision cannot be entirely based on gut feeling. There should be science behind it. Past sales data of the same product or similar product should be considered. Also the companies need to work with the retailers in ensuring optimum inventory as excess stocks leads to delay in payment by the retailer, old dated products of the brand on the shelves and a lot of other issues.

Optimum inventory is in the interest of all stake holders-customers, retailers, distributors and the brand companies.

Any instance of excess inventory in the stores? Ideas to maintain optimum inventory.

Please share with me



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