Chaos in Organizing Inventory
How to organize the inventory in highly demand markets
By Madelon Eland, Walter Verdiesen and Simon Drews
Possible headlines in the newspapers every other day
“Consumer trust has been eroded”
“How ‘Best Buy’ stole Christmas”
“Walmart does not deliver the expected customer experience”
“Cutting back staff results in strong customer dissatisfaction”
“Nike’s losses account to 100 Million Dollars in Sales”
Headlines in the newspapers can increase a company’s popularity or be its downfall. Those examples here are made up, but refer to actual problems the companies in question have faced in the past. All those problems were related to the organization of their inventories and mishaps in inventory management.
They are all players in a high demand market environment, so they need to be able to deliver “on point” when the customer wants the product. So, how can it be, that they were facing such inconvenient problems? They not only “eroded the trust” of the customers, but also did not reach the expectations the customers had. What went wrong? For that, let’s have a closer look at the following two well-known global players.
Walmart
Even a successful company like Walmart has actually had some major out-of-stock inventory problems in the past years. Analysts have described it as mismanaged inventory. And for Walmart, its inventory plays a huge role in its success. For other retailers as well, but as Walmart’s inventory value amounts to around 26 billion dollars, it might be considered even much more important for them, then for others.
In the last couple of years, 5 to 10 percent of this inventory value was not put in the stores. So, on average, around 2 billion of potential sales got lost immediately. But the actual losses were way bigger than just that. Customers that were not able to buy the things they wanted, could decide not to come back in the future. As customers had already certain expectations regarding the availability of a product, the dissatisfaction, when they did not find what they were looking for, was often even greater.
However, the bottleneck for Walmart was not necessarily the stock shortages, because 90 to 95 percent for such a large company is not bad at all. But, for some reason, getting the goods to the shelves in the store posed a big problem. Analysts say that Walmart has to have enough employees to do this, but because of a shortage of employees, the shelves in the store were not stocked good enough. And this even went so far, that some customers did not return, because they were disappointed.
And Walmart just worsened the problem by reducing the number of employees even further, because of the loss of sales.
In short, the main reason why some people stopped buying their things at Walmart is because of the empty shelves as well as bad services.
In the end, it was a failure of Walmart’s management, as they did not foresee the consequences of not having all the products ready at the right time. Especially what it meant for the customer experiences.
This example of Walmart shows the importance of having a good inventory management and what can go wrong, if you do not do it absolutely right.
A big company like Walmart was able to handle these losses of sales and managed to rectify the problems they had. But imagine this would happen to smaller or less resourceful companies! They would, perhaps, not survive such a mishap.
Nike
One other example is Nike. They faced some problems with inventory due to demand management problems in the past (2001). Certainly, a different age and time, but nevertheless interesting to discuss.
Nike did not foresee the huge demand of the popular Air Jordan shoe and as a result they could not deliver all of the shoes ordered by the customers. It certainly is not optimal, if you have a situation in which some Nike shoes are available, but the highly demanded ones are out of stock. But that actually happened with Nike’s inventories.
What you don’t have, you cannot sell. Or to put it the other way around: The customer won’t buy, what you don’t have on shelves in the store. 2001 might have been some time ago now. The internet as we know it today didn’t exist in that way. But still. This example emphasizes an important point. The inventory was simply too small and it took Nike too much time to produce the shoes and then deliver them fast enough to satisfy the demand. This miscalculation resulted in a direct loss of 100 million dollars of sales.
It is important to mention, that this example clearly demonstrates the link between demand management and inventory management.
What can companies do?
Of course, there are a lot of scenarios and even more counter measures you can take into account. However, we want to focus on three major things.
First, inaccurate data is a fierce foe of every inventory management department. To be able to have the correct inventory level, you first have to make sure that the information your supplier receives actually matches with the real stock of your inventory. Otherwise, your supplier might deliver the wrong product at the wrong time. So, use a modern inventory (information) system, stay organized and vigilant and consider using RFID (Radio Frequency Identification).
Second, make sure that you reorder in a timely manner. Don’t wait too long or it could mean: Goodbye customer satisfaction, hello stock-out. Look for out-of-stock patterns and implement good demand forecasting.
Last, but certainly not least, remember that for instance your warehouse does not only consist of machines and tools but also employees (human capital) that make sure you don’t run into issues of stock. So, in short: Train your people, optimize your processes (also for your employees) and make sure they have the right tools, so they can finish their tasks with proficiency.
Conclusion
In general, data and the management of that data, is very important. And as you have loads of data, you will need the right inventory management software. As we also saw, demand management and inventory management are closely interlocked. They are the two sides of the same coin. Only if you combine both, you can prevent out-of-stock sales by restocking in time, calculating the correct reorder point levels or just by having alerted and motivated employees.
Thank you so much for reading
Madelon Eland, Walter Verdiesen and Simon Drews
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