A Case Study In Planning Excellence

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What make some retailers great and others mediocre? By and large, it is the dedication to sound business principles. One of these core principles is: Proper Inventory management. Clearly stated, Inventory Management encompasses those activities whose focus is deriving the greatest possible return on the companies' single largest financial asset: Its Trade Inventory.

It is amazing to find that so many companies do not have a formalized inventory management process. This does not mean that these companies do not have an 'inventory plan', but it frequently means that the merchandising area is working with a set of plans that may have little or no relationship to the company's financial budget. This simply should not be.

A case in study is a successful, privately held, medium size juniors ready to wear retailer headquartered in New Jersey. They compete in B and B+ malls in the northeast. The merchandise is very trendy and there is a lot of price competition.

For some time they did their merchandise planning on a sophisticated series of linked spreadsheets that the director of planning and distribution had worked very diligently to devise. After some time a decision was made to install one of the leading planning applications.

The installation, implementation and rollout of this planning application was a success. However it was a success not because the application was superior or technologically advanced, but because the organization understood the need to manage their inventory. They had a strong inventory process which lead to a culture wherein inventory management became paramount.

This formalized process was engrained with regular meetings. This took the form of Weekly best-seller meetings and Monthly plan review sessions.

On Monday Night, Everything is beautiful:

Like most retailers Mondays, this company spent the day analyzing the prior weeks business. The entire merchandising organization, senior management from the Store organization, marketing/visual display, and the controller met to review to the best sellers. The primary topic of conversation was the best selling styles, or classes and what action could be taken to capitalize on the current trends. The outcomes of the Monday meetings were the marching orders for the week on how to get more business.

On the Monthly plan reviews, everything was ugly.

On the Thursday following the end of the fiscal month, an all day meeting was held to review the business at a relatively detailed level (sometimes this ran into Friday where necessary). The GMM would review with the DMM, Buyer, Asst. buyer, and planner the details of the business, starting at the top and working down to the style level if necessary. Each major division would review the major business components (Sales, Inventory, Markup, Markdowns, Gross profit, and Gross Margin). Although each element had a place in the discussion, Inventory levels were paramount.

Merchandise areas that were well run and under control could finish in an hour or so. For those areas that showed serious deviations from the plan, the review process could take hours and be quite painful. For styles whose rate of sale had slowed to the point where they could not be meet the target "Out date", the price was slashed significantly. The goal of the price reduction to "Move the goods out as soon as possible", and the impact on the Gross Margin was considered less important. If a significant amount of markdowns (beyond the plan) needed to taken, it was done aggressively. If by the subsequent month's plan review the goods had not been significantly reduced. The GMM insisted that additional markdowns be taken, and taken with impunity regardless of the impact on the Margin.

Culturally the net affect was very positive. The buyers were duly motivated to markdown and clear goods on their own (for fear of a heavy hit to the margin). The net affect was an organization focused on turning goods. Although Annual Inventory Turnover, and the direct impact on GMROI, were not reviewed on a monthly basis, maintaining a fast turn was one of the primary goals.

It should be noted that this company worked on very short lead times on a majority of their merchandise. This made it the process of clearing merchandise quickly that much easier. Although this short lead time enhanced the ability to manage the inventory effectively, the key dynamic here was the development of a mind set of obtaining more of what is selling and reducing the exposure on what is not. This philosophy works whether lead times are twelve weeks or twelve months.

The moral of the story is that companies that focus on managing inventory levels are successful because good inventory practice becomes ingrained in the culture. It becomes ingrained in the culture because the process is formalized and practiced religiously.