Retail Distribution Report

Aug. 1, 2001
Inventory Management Is Key to Retailing. Warehouses and distribution centers can help retailers juggle the demands of multi-channel fulfillment. Here's how to convince retailers you're more than the middle man.

Inventory Management Is Key in Retailing

Warehouses and distribution centers can play an important role for retailers, helping them juggle the demands of multi-channel fulfillment. But you must convince them of the value you bring, that you can be more than a “middle man.”

by Leslie Langnau, senior technical editor

About the only retailers who are making money through online channels these days are those with established catalog businesses, according to a survey done by the Boston Consulting Group and For those less profitable, a major problem is still the disconnect between the online storefront and back-end fulfillment systems.

But lack of integration is not the only issue. Like the mythical multi-headed Hydra, retailers have a number of challenges and problems. They have had to establish multiple channels so quickly, they weren’t always able to do so efficiently or cost effectively. Thus, there’s still room for cost reduction. For example, rather than ship product out of one facility, many retailers use separate warehouses or distribution centers (DCs) for each of their channels.

Logically, use of a global inventory is the ideal solution. But it won’t be easy to realize. For one thing, managers aren’t paid to share their inventory. Retailers have set up bonus and compensation packages that reward managers on turns of inventory, the ability to sell a certain amount at full price, and so on. “Why would they take any portion of inventory that they plan to sell at first price and move it to another division and not get the same margin?” asked Bob McKee, fashion industry application director, Intentia.

“Retailers’ upper management must make changes in the way things are measured,” said McKee. “That’s really the bottom line for a lot of problems that exist throughout the industry relative to the movement of merchandise. Whether it’s vendor managed inventory or collaboration, planning, forecasting and replenishment, the way in which things are measured has a lot to do with the decisions that are made.”

“Behaviors need to change,” agreed Jim Byrnes, president, Ability. “It comes down to who controls the inventory. And some aren’t willing to give that up to DCs. But cost will drive retailers in that direction.”

Tracking inventory

Inventory management, aside from who controls it, is a major issue. Retailers have concerns about loss or theft as well as stock-outs. Reconciling what’s on hand with what’s in the system is often a problem. “They know they had a specific amount in inventory,” said McKee, “but where is it now? They often don’t know if it’s the numbers not matching up or if it’s shoplifting or just out of stock.”

Then, there’s obsolescence. “Especially as retailers move into finished goods, which often have short life cycles,” noted Byrnes. “If a retailer is late getting product to a certain location on time, they eat the inventory.”

To better control inventory and product delivery through multiple channels, the big boys in retailing are using several solutions; some are more coercive than cooperative. In several cases, the solution is partnerships with established players in a channel. Wal-Mart, for example, partners with Fingerhut Business Services for its on-line store, For in-store stock, though, it’s thrusting inventory management and replenishment back onto suppliers. And it basically works like this: suppliers don’t get paid until the merchandise passes through the cash register. Thus, the manufacturer is carrying the inventory cost, making it important to manage production and inventory even better.

Not all manufacturers or suppliers are ready for this, especially as they are shipping smaller quantities to the retailer more often. Frequently, suppliers find their operation “is doing two very different functions in the same facility: trying to consolidate piece and case as well as pallet tasks,” noted John Davies, vice president, product strategy, Optum Inc. “And they are doing this with equipment set up for pallet operations, so it’s been difficult for them to figure out how to break that down.”

This is where the “middle man” can contribute. Vendor-managed inventory is a good way for warehouses and DCs to provide a value-added service.

“Everyone is always trying to get around the distributor, but DCs do have unique skills that manufacturers don’t have,” said Byrnes. “For one, they reduce the number of contacts a vendor must deal with. This many-to-one arrangement lets each do what each does best, leaving inventory management to the professionals. Distributors are experts at matching and moving inventory, and this is where they can increase their value within the supply chain. They connect the manufacturer to the retailer.”

Plus, DCs have many of the tools needed to manage the risks of obsolescence and stock-outs. With inventory optimization tools, they can gather data residing at the retail location and use it to predict future demand for replenishment.

Collaborative planning, forecasting and replenishment (CPFR) tools, for example, enable such data gathering. However, retailers and suppliers are not that convinced this technology will add value to their operations. According to a study from AMR, 80 percent of retailers and suppliers do not believe that CPFR is critical to their strategies. But about 45 percent of retailers and 47 percent of manufacturers expect to be capable of real-time collaborative data flows within two years, ranking replenishment management as a top priority.

Before this future arrives, though, retailers, manufacturers and others must decide how to handle retail exchanges. There are four major exchanges in this industry, none more that a year and a half old. Already, more than $250 million has been spent developing them, with little progress made. Gerry Storch, vice chairman at Target Corp., called for a consolidation of these exchanges, at the recent Retail Systems 2001 conference, because of the lack of progress. But reducing these exchanges to one will be difficult. Incompatible systems and business approaches are only two of the problems. Government scrutiny against price collusion could be another. It may take more than two years for true real-time collaborative data flows.

And more

Management of inventory in retail increasingly involves promoting and growing the brand. But these tasks are being done by the product suppliers and the manufacturers, not the retailers. Retailers are redefining their core business as that of providing the space for a product and an exciting shopping experience for the consumer. This is another area where warehouses and DCs can add value to their relationships with retailers and product suppliers. MHM

Inventory Management Software

Here are a few of the suppliers of inventory management programs:

• Catalyst International: WMS Release 8.1.

• HighJump Software: Warehouse Advantage.

• Industri-Matematik International Corp.: Vivaldi Store Replenishment.

• Intentia: Movex.

• Logility: Voyager Collaborate.

• Retek: Retek Distribution Management.