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Three tips for a productive conversation on inventory management with your retail partners

Can a brand marketing campaign be effective if a product is out of stock?  In general, marketing teams don’t spend much time talking about inventory levels or inventory management and how it could impact the success of a campaign.  After all, in-stock is a problem for the sales team and the retailer, not the marketing team, right?  Let’s not debate which team is responsible for growing sales.  Instead, let’s agree that regardless of the situation you are in, in-stock and inventory impact the ability to sell a product to a consumer and that affects all organizations.

Why wouldn’t inventory be on the shelf?

Inventory is an investment.

After the long, tedious process of pitching your product to a retailer, negotiating relationship terms and finally receiving the long-anticipated “yes,” why would the product not be on the shelf?  The first thing to know is that inventory is an investment for retailers.  Inventory ownership ties up a lot of cash.  There is continual focus on the retailer side to keep inventory on plan and find ways to improve productivity and turn, often called “Inventory Optimization.”

Inventory optimization is all about ensuring the product is available for the consumer to purchase, but not in excess. Ultimately, the outcome retailers are looking for, when going through optimization is reduced inventory levels.  Top-turning SKUs will be identified, and inventory investments will be made to ensure consumer demand is met, while the balance of skus will be reviewed to reduce investment. The key word here is “investment,” and making sure that money – and inventory – is managed prudently.

Another important fact to keep in mind is that retailers and brands experience the impact of out of stocks differently.  When a brand is out of stock, it isn’t always a missed sale for the retailer.  Often times, there are other products that will meet the consumer’s needs and that product will complete the sale.  For the brand, the sale is missed and transferred to a competitor.  Not all products have 100% transferability to another item, and brand loyalty will definitely impact substitutability, but the retailer will experience less of the out-of-stock sales impact compared to the brand.

Forecasts are flawed.

Even though retailers experience less of the impact of out-of-stock items, leaving a consumer to settle for their second choice is not the plan for retailers.  The cause of low in-stock is almost always the result of an imperfect forecast.  Forecasts and plans are created months in advance for the purpose of predicting what will happen in the future.  I used to tell my analysts and planners that no matter how hard they worked on constructing the perfect forecast, some portion of it was going to be wrong.  The measure of a bad forecast is the degree to which it was inaccurate, not whether or not it was wrong.

Retail forecasts are also limited by the data inputs used to construct them.  Typically, retailer forecasting systems do a good job of incorporating historical sales information.  Most of them primarily utilize at least 1 year of history.  What the systems lack is the “why” or the trigger for the profile peaks and valleys.  Some of the factors are under the retailer’s control, like promotional activity, and other factors are outside the retailer’s control, yet still impact the sales trend, like weather.  With both factors, a forecast built only on historical sales data will likely be inaccurate because, among other issues, the profile trend triggers will likely shift in timing year over year.

Also, deviations to the forecast can take time to correct.  Each week, sales will actualize differently than the forecast by a little or by a lot.  Retail inventory management systems are built not to overreact to deviations unless the trend has occurred over a few weeks.  This ensures the trend change is real and not a one- or two-week occurrence.  The extra time to adjust the forecast creates an even bigger impact to inventory in-store which can potentially creating out-of-stock issues.

Are retailers open to feedback on inventory management?

Yes, but…

Retailers know that their systems and forecasting capabilities have limitations, and by definition, forecasts can’t be perfect.  This opens the door for brands to have conversations with their retail partners, but this isn’t a unique conversation for a buyer or inventory analyst to hear.  In my experience, those discussions are usually brands telling buyers, “If you buy more, you’ll sell more.”  With that in mind, below are three tips to have a more productive conversation on inventory with retailers.

Tip 1: Don’t have the conversation without data and insights.

“Data and insight” aren’t a picture of a shelf without product.  Retailer reporting systems include an in-stock measurement.  If there is a global inventory shortage, the buyer and analyst should have visibility to that and will be reacting.  What is less visible are differences below the surface.  Trends or insights into which stores have inventory shortages can help diagnose the issue and not just report the symptom.  This helps improve the forecast going forward as well as correct the issues happening now.

Additionally, be aware that forecasting systems have limitations.  Data that quantifies and explains historical peaks and valleys is helpful to share with retailers.  Most retail systems will build a sales profile that mirrors last year’s profile.  Changes in seasonality or promotional timing, as an example, need to be accounted for, and can easily be missed by retail systems.  This is a great in for vendors to have a conversation with retailers on inventory forecasting.

Tip 2:  Keep your own forecast.

If having product on shelf is important to your brand, you need to keep your own forecast.  Forecasts are designed to predict future demand based upon historical actuals.  There’s a lot of science involved and a lot of assumptions.  Keeping your own forecasts helps you identify where you and your retail partner are aligned on assumptions and where there are deviations.  As a former retailer, when a vendor complained about missing sales because my team didn’t buy enough product or complained about production inefficiencies due to receiving inaccurate order projections, I always asked the brand how their forecast compared to my team’s forecast and if they had discussed it with the retail team.

Tip 3: Be an active participant in the forecast.

Have a conversation with your buyer and inventory analyst about the forecast.  Ask questions about how the forecast was built, assumptions that were included, and planned deviations compared to last year.  Be prepared to share with the retailer how your brand is driving demand improvements from last year.  Share your data and share how you have forecasted the season as a comparison.

I realize that in-stock analysis requires a lot of data to complete, and to do it accurately, requires sku, week (or day), and store level information, which is a lot to manage and calculate, let alone draw insights from.  However, when you decrease your out-of-stock rates, you increase the opportunity to sell your product to a consumer.  Plus, the extra data and inventory conversations provide value to your retail partner, which makes it harder for the retailer to run their business without you.  Remember, out-of-stock is everyone’s problem.

If you need support in managing the data, learn more about our retail strategy services or contact me.