June 1, 2014By Industry Intuition, Views

by Dave Wendland, as seen in Healthcare Distributor magazine, Out of the Box column

December/January 2014

Too much, too little, too late. That’s what I’ve heard for years within the consumer healthcare industry. If you have too little inventory you risk lost sales. If you have too much inventory, you’ll need more of everything — more space, more transportation, more handling, more labor, and more money.

Too much

When our company operated a UK-based office we had the opportunity to work with a number of retail pharmacists who focused the vast majority of their time on their dispensary and paid very little attention to their front shop.

Some of these operations were stacked high with merchandise that clearly had not been performing. Some of it they had purchased through direct means, while other items may have been requested by a customer and the pharmacy, in turn, asked the wholesaler to stock it for them. The problem? Putting the wrong merchandise on the shelf exasperates shoppers and front-of-store personnel.

When I asked one store owner why he had a very large quantity of an item that his front-end manager clearly "worked around" and never sold to a customer, he answered without hesitation, "Because when I sell one of those I make an 80% margin." Digging further, I asked how many he had sold since he first started stocking it. "None," he replied, "the right customer hasn’t come in looking for it yet."

Freeing up space on the shelves — and in warehouses — with items that never or seldom move is simply good business. The idea of inventory is TURNS. If it doesn’t sell — often — it’s time to eliminate it and replace it with something that actually sells through.

Too little

One need look no further than Wal-mart. First, they overrationalized their inventory to levels that created shopper dissatisfaction. To fix the problem, the retailer began filling shelves again to near pre-rationalization assortments. This improved shopper satisfaction, but ran somewhat contrary to original models that predicted significant reductions in inventory costs and manpower to manage the decreased inventory.

Then, more recently, they realized that their inventory control around best-selling items was neither as tight nor as focused as they imagined, resulting in unsustainable out-of-stocks. While focusing on bringing products back to the shelves to levels deemed acceptable to consumers, they may have taken their eye off their in-stock issue. They discovered nearly 600 best-selling items were nearly always out of stock. Their solution? Add a green dot to the shelf tag beneath the best-selling SKUs and ensure that store personnel were paying particular attention to these "must-have" items.

Another challenge for retailers is having too little stock on the shelves. Some retailers have the philosophy that one or two on the shelf is plenty — their warehouse can always replenish tomorrow. The problem is that psychologically, consumers will shy away from items that are sparsely stocked. They will either fear something is wrong with the lonely item or they’ll pass it by, thinking that some other shopper may need it far more than they do. The moral of the story: ensure that adequate stock is on hand to meet consumer demand.

Too late

New items remain the lifeblood of the consumer healthcare industry. The best new innovative items lift the entire category. A good example is Procter & Gamble’s ZzzQuil® which quickly became a rising star within the category. The numbers revealed that this item delivered higher-than-expected results while at the same time driving new category growth within the sleep aids sub-category.

To have brought an item such as this into inventory too late would have been a costly error for distributors and retailers. Predicting the success of a new item is never easy, and mistakes will be made. However, missing out on the impact of a blockbuster is even more painful.

Best practices

Clearly the inventory management issue has been around since the first retailers opened their doors or early traders were selling animal pelts. Store operations stocks the shelves with available merchandise to the best of its ability, likely grumbling that the corporate office is missing key items and adding items that don’t have a prayer of selling. And the vicious cycle continues.

Although unique to each company, there are several best practices that should be part of any conversation when guidelines for inventory management are being reviewed.

  1. Segment inventory and determine appropriate service levels for each segment.
  2. Document procedures for introduction of new items into the inventory.
  3. Determine appropriate replenishment variables for slow movers.

Setting realistic expectations and then managing to those rules is a critical step in good inventory practices.

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