Every business wants the highest yield or gross margin return on investment possible for its inventory dollar. Whether you’re in retail or wholesale, inventory is often the single largest, continuous investment you make and the ultimate goal is to make that investment work for you. But what is the right approach? For example, you ship to your stores two times per week—is that the best schedule? Or you need six units on hand to make your shelf look full, but what are the cost and profit implications if you make the investment?
One common approach to increasing profits is to search out the best “deals”—forward-buying a time supply that you can realistically sell through before carrying costs eat into the profit. But it is a misconception to believe that you can achieve the maximum return on investment (ROI) simply through deal buying alone. However, by employing the principles of profitable buying and approaching replenishment and fulfillment processes from a service and profit-oriented point of view, your purchasing and replenishment buying group can contribute substantially to your overall profit while increasing service levels.
Looking back to the 1980s, there was a lot of “low-hanging fruit”—opportunities that could be leveraged by incorporating the principles of profitable buying. Then in the 1990s, it became common to have a siloed replenishment/fulfillment application to replenish stores. The principles of profitable buying weren’t applied due to the normal constraints of retail store operations. But in the 2000s, true inventory optimization applications were developed to take advantage of the basic tenants of profitable buying. Today, even the simplest distribution network can profit by optimization. This has greatly expanded the opportunities for businesses to profit by applying the principles of profitable buying, which include:
- Forecast optimization
- Replenishment optimization
- Opportunity buying
- Order acceptance
Managing Inventory Holistically
To reap the rewards of profitable buying, organizations need to understand the importance of managing their inventory investment for the entire enterprise holistically, and not simply moving from node to node, or silo to silo. In fact, employing the latest optimization tools provides complete visibility across the entire supply chain, thereby synchronizing supply and demand to drive profitability. And because synchronization occurs simultaneously across the supply chain, rather than handing off from one silo to the next, significant speed-to-benefit can be achieved.
Simply stated, smarter buying means higher profits. Consistently applying the principles of profitable buying—an appropriate safety stock investment coupled with balancing the cost of carrying goods versus the cost of acquiring goods across your network—optimizes your inventory investment and puts more dollars on the bottom line.
Line-up for Maximum ROI
To realize inventory optimization and the additional ROI true optimization can bring, your organization’s commitment must start at the top. There needs to be agreement and vertical alignment from top to bottom, from the sponsor/business owner to the buying group and across the organization. Everyone needs to be on the same page when it comes to managing inventory strategically based on your organization’s business objectives regarding service, working capital and profitability.
Demand Forecasting and Inventory Optimization solutions are architected to help you gain a profitable advantage on both the “buy side” and the “sell side” of the business so you can attain a higher ROI. By managing your inventory investment holistically, you can lower costs, achieve higher service levels, and ultimately increase your competitive advantage.
Rodney Daugherty is Senior Director of Product Strategy for Demand Forecasting and Inventory Optimization at Manhattan Associates.