Successful Inventory Management:Top 9 Things to Know

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Operations SummitMemphis, May 2-3, 2012

Presented by:George Mollo

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George MolloGJM Associates, Inc.www.gjmassociates.com(845) 627-0788george@gjmassoc.com

1PLAN! PLAN! PLAN!

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PLAN, PLAN, PLANKey CriteriaKey Criteria

MAP – Merchandise Assortment PlanMAP – Merchandise Assortment Plan

“Horizon” Planning view“Horizon” Planning view•Benefits to Entire Organization•Creative costs can be substantially reduced (Factor creative lead

times to add/drop items to match inventory availability)•DC supplied forecasts for bin “profiling” and setup• Longer range planning improves “just in time” inventory• Last minute exceptions - handled more efficiently

Use “simple checks”Use “simple checks”

2KEEP IT SIMPLE !

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Planning Process Overview

Take A Simple & General ApproachTake A Simple & General Approach

Improve majority of items - Don’t try for 100%accuracy on all itemsImprove majority of items - Don’t try for 100%accuracy on all items• “ALMOST” Right NOW is better than… “EXACTLY” Right Later !• Based on History, Analysis & “Gut”• Start at Category Level (Top Down – then Bottom Up)• Why a Detailed Plan?

• Sum of the parts will always be greater than the whole!

Reduce exceptionsReduce exceptions

Use Historical AnalysisUse Historical Analysis

Start (at least) 9-12+ months in advanceStart (at least) 9-12+ months in advance

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Performance IndexPerformance Index• % of Demand / % of items

Space IndexSpace Index• % of demand / % of space

Average Item IndexAverage Item Index• Item Demand / (Total Projected Item $$ Demand in Offer / Number of

items)

Sell RatioSell Ratio• (Item % of page * cost per page) / Projected Item $$ Demand in Offer

Net (Ad) MarginNet (Ad) Margin• Initial Margin % - Sell Ratio %

How to Measure…….Simple Analysis Metrics

3DEFINE / TRACK

KEY PERFORMANCEINDICATORS (KPI)

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Defining KPI

Performance Indicators (KPI):Separate the “winners” from the “tryagains;” and knowing not only what tomeasure, but also how to measure it andwhat it all means, is what separates anddefines levels of success.

You can’t fix what you don’t measure!!!

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• a quantifiable measurement that can be tracked and evaluated,and that is harmonious with what you want to achieve

• a metric that an organization measures to help determine itsprogress towards a goal

• a reflection of the tactical performance of an organization; and, isused to substantiate an organization’s objectives.

• can be quantitative or qualitative, objective or subjective,although preferably quantitative, unambiguous, and reliable.

• a critical measurement of the performance of essential tasks,operations, or processes. A KPI will usually unambiguously revealconditions or performance that is outside the norm and thatsignals a need for managerial intervention

Defining KPI

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Identify KPIs

Corporate

• Revenue• Response

Rate• Average

Order• Expenses• Profit

Operations

• Cost perOrder

• Cost per Call• Abandon

rate• Carryover

(DC)

Merchandising

• Margins• Fill Rates• Backorder

Rates• Cancel Rates• Inventory

Turns

4SET REALISTIC

GOALS

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• Industry Standards• Internal History• Achievable/Realistic

• Industry Standards• Internal History• Achievable/RealisticCorporate

• Historical• Cooperative/Joint• Achievable/Realistic

• Historical• Cooperative/Joint• Achievable/RealisticDepartment

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Setting Benchmark Goals

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MERCHANDISEASSORTMENT

PLANNING(MAP) 14

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Merchandise Assortment Planning

“Adopting a well grounded merchandising plan is farand away the single most important thing acompany must do for success.

The key to growing sales and profits, providing betterdirection to the merchants invariably results inbetter product selection.

More and better products lead to increased responserates, which in turn expand the universe of namesthat can be mailed/emailed profitably, increasingcirculation and sales.”

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Merchandising Strategy

Assumptions:Assumptions:•Products fatigue if not reinvented or renewed (especially as

house mailings comprise 60-80% of the mix; repeat webcustomers)

•Best customers need more newness because of their interestin the book/website and rate of purchasing activity

• The cost of paper and postage will continue to increase•Competition will continue to increase in all distribution

channels. (MO/E-commerce).•No more than 2-3 out of 10 new products are winners

•Perform above book average•Are profitable

•Repeat items planned at breakeven margin - will do worse•Repeats can suffer 25-35% attrition rates with each

additional insertion

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Axiom 1:Sales in a typical catalog, regardless of

product category, are distributed acrossitems as follows.

Best selling 1/3 2.0x book averageMiddle 1/3 .8x book averageBottom 1/3 .26x book average

Merchandising Strategy

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Axiom 2As the space given to an item is increased

or decreased the impact on sales is equalto between 1/3 to 1/2 of the change.(aka “Rule of 50”)

e.g. If we increase the space devoted to an itemby 60% we would expect the sales of the item toincrease between 20 and 30%.

Merchandising Strategy

Category (MAPS) View

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rAii

Description Items % Dmd % Avg Itm P I Mrgn Space % S I SRNetMgn

TOTAL DROP: 314 100.0% 5985.0 100.0% 19,061 1.00 57.9% 64.00 100.0% 1.00 43.1% 14.8%

GIFTS 87 27.7% 1310.7 21.9% 15,066 0.79 61.0% 15.00 23.4% 0.93 46.1% 14.9%

HOME 72 22.9% 1472.3 24.6% 20,449 1.07 54.6% 17.00 26.6% 0.93 46.5% 8.1%

APPAREL 53 16.9% 1897.2 31.7% 35,797 1.88 59.8% 15.00 23.4% 1.35 31.8% 28.0%

ACCESSORIES 102 32.5% 1304.7 21.8% 12,791 0.67 55.4% 17.00 26.6% 0.82 52.5% 2.9%

6UTILIZE A SIMPLE

ITEM PROFIT MODEL

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Contribution Levels

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Gross MarginGross Margin

VariableVariable

FixedFixed

Item Profitability Model:Item Summary

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Item # ABC123Description Sample Item

Cost 11.63Inbound freight 3.0% 11.98

Retail 30.00Unit Estimate 15000

Extended Cost 179.7(k)Extended Retail 450.0(k)

Cost % 39.9%Mark-Up % 60.1%

% of tot dmd $ -you might expect to cxl 9.0% 40.5Total Returns as % of ships/ $(k) 11.8% 48.3

Net Sales ($k) 361.2

Item Profitability Model:Variable Expenses

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Variable CostPromotion 0.00

OR promotion (% of demand) 27.0% 121.5Cost of pick-pack-ship 10.0% 36.1

Miscellaneous CostsCost of Money/Borrowing 0.0% 0.0

Addn'l Overhead, warehouse space, etc. 0.0% 0.0

Contribution after Variable($k) 56.8

% net 15.7%

Variable CostPromotion 0.00

OR promotion (% of demand) 27.0% 121.5Cost of pick-pack-ship 10.0% 36.1

Miscellaneous CostsCost of Money/Borrowing 0.0% 0.0

Addn'l Overhead, warehouse space, etc. 0.0% 0.0

Contribution after Variable($k) 56.8

% net 15.7%

Contribution after FixedFixed Exp 10.0% 36.1

Profit 20.7% net 5.7%

Item Profitability Model:Fixed Expenses

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7UNDERSTAND

& DEVELOPRELATIONSHIPS !

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What to Measure…..It’s All in RELATIONSHIPS !

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Analyzing Demand

ItemsItems

CategoryCategory

SpreadsSpreads

SpaceSpace

Price PointsPrice Points

It’s All in RELATIONSHIPS !

Category ShareCategory Share

Item Count (density)Item Count (density)

Page SpacePage Space

Demand (Book/Offer & Item)Demand (Book/Offer & Item)

Page or Spread AveragePage or Spread Average

Etc……..Etc……..27

Use Multiple Measures –Referenced to Each Other

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Item Selections

RelationshipsRelationships• Price Points (within Category)• Competition (External & Internal)• Ranking (A-B-C)

RelationshipsRelationships

• Internal & External

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Vendor Relationships

Goals:• Increase Margin• Lower Costs• Eliminate “Hidden Costs”• Improve Inventory Turns• Increase Margin Dollars vs. Percentages• Reduce Cost of Goods Sold

Take Ownership/Control of your Costs

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8ENCOURAGE

COMMUNICATIONS

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Guidelines

Willingness to Share Information-no SilosWillingness to Share Information-no Silos

Building Interdepartmental RelationshipsBuilding Interdepartmental Relationships

Results Depend On Organization’s PoliticsResults Depend On Organization’s Politics

Processes rather than “silver bullets”Processes rather than “silver bullets”

Accomplished with little or NO CostAccomplished with little or NO Cost

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Building Department Relationships

Partnering - Critical to SuccessPartnering - Critical to Success

Team–protects each other’s interestTeam–protects each other’s interest• Consider: “It saves me $$$ but does it cost another

department time or $$$?• Is it worth it?

Partner with Other DepartmentsPartner with Other Departments• Merchandising & Inventory Mgmt• Merchandising & Marketing• Merchandising & Creative• Inv. Mgmt & Marketing• Inv. Mgmt & Creative• Inv. Mgmt & Finance• Inv. Mgmt & Operations

Communication with Suppliers

Understand Supplier Production Cycle & ProcessUnderstand Supplier Production Cycle & Process• Avoids unrealistic “demands”/expectations and delivery complaints• Discuss potential price increases, product changes, etc.

Partner with Suppliers --- Listen to their needsPartner with Suppliers --- Listen to their needs

“Godfather Rule” – you always want the bad news first!!“Godfather Rule” – you always want the bad news first!!

Provide suppliers estimated SKU forecastsProvide suppliers estimated SKU forecasts

Share catalog/key web presentation (est. circ?) with suppliersShare catalog/key web presentation (est. circ?) with suppliers• They may partially “back up” buys

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Communication with Suppliers

Supplier Compliance Manual (be clear what youexpect of Suppliers)Supplier Compliance Manual (be clear what youexpect of Suppliers)

Be reasonable and discuss Supplier “issues”Be reasonable and discuss Supplier “issues”

• e.g. labeling issues, costs, delivery timeliness, ifbackorder chargebacks (explain overall costs),etc.

Don’t create a P&L line for Supplier chargebacks– Build a PartnershipDon’t create a P&L line for Supplier chargebacks– Build a Partnership

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9RULES

OF BUSINESS

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Six Tips for Culture/Team Building

Keep it SimpleKeep it Simple• Everyone must feel comfortable with the culture.

Leave room for individuality and personality.

Make it GlobalMake it Global• Everyone, including management, must buy in.

Make it MeasurableMake it Measurable• Create specific guidelines and make them a part of

the performance assessment process.

36“Be Our Guest – Perfecting the art of Customer Service” by Disney Institute, 2001

Six Tips for Culture/Team Building

Provide training and coachingProvide training and coaching• Incorporate the elements of the culture into

employee training and ongoing performancecoaching. Encourage peer-to-peer coaching.

Solicit feedback and ideas from the teamSolicit feedback and ideas from the team• Foster a sense of ownership and expand the pool of

creative input by allowing employees to contribute tothe (show) project.

Recognize and reward performanceRecognize and reward performance• Build employee motivation through formal and

informal reward and recognition programs.

37“Be Our Guest – Perfecting the art of Customer Service” by Disney Institute, 2001

Cardinal Rules of Business

Product is KING. Never compromise quality for costs or price.Product is KING. Never compromise quality for costs or price.

Almost Right Now is Better than Exactly Right later…..”Almost Right Now is Better than Exactly Right later…..”

A bad decision is better than no decision at all!A bad decision is better than no decision at all!

Do 1st things First, 2nd things NEVER!Do 1st things First, 2nd things NEVER!

Always tell the bad news first-never lastAlways tell the bad news first-never last

Invest your time with winners ... not losers.Invest your time with winners ... not losers.

Have fun doing what you're doing or find something else to do.Have fun doing what you're doing or find something else to do.

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Contact InformationContact Information

George MolloGJM Associates, Inc.www.gjmassociates.com(845) 627-0788george@gjmassoc.com

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