True startup productivity is not just making more stuff, but systematically figuring out the right things to build.– Eric Ries

In the context of this changing omni-channel environment we find ourselves in, there are some things that will never change. Ultimately being good at implementing successful retail basics is key. Being good at the basics, from people to supply chain management, ensures more customers, more sales, more profit and ultimately a more sustainable future for your business.

In this week’s post we take a back to basics approach to explore how you can get the most out of your business.

Over the years, we have had many companies come to us reporting declining trading results and overall an ‘unfit’ future outlook. One consistent theme would always appear and this theme was that they simply bought product more poorly than they needed to. Remember the adage that it is not what you sell that puts you out of business, it is simply what you buy.

Talking about inventory management is one matter, however of greater relevance in many cases is to understand the buying systems and frameworks – or rather understanding that too much inventory is the outcome of inefficient or insufficient buying data.

Study the commonality amongst many of these case studies and you immediately see an over-investment in working capital (inventory) relative to sales achieved. The effect of these overstocks on cash flow, lack of freshness of offer and brand are obvious. As was the administrators response to liquidate the inventory.

The other interesting common point was that – by and large – these companies, in an effort to keep pricing fairly stable, implemented the most obvious (and often most damaging) solution available to them. Often, this was due to paranoia about competitor pricing motivations and consumer purchasing elasticity, which is another topic in its own right. They simply change sources of supply or decrease the technical specifications of their product.

The effect on a mythical ‘prime margin’ is deceptively simple as the potential gross margin shows an increase and there are high fives in the buying office as suppliers placate their masters by producing a lesser quality product.

Margins are intact, the supply chain becomes potentially profitable and the only one that can suffer, and invariably does, is the consumer.

Let me share some of our research to support this assertion. We traced one fashion retailer, currently reporting 10-15 per cent decline in sales, and asked a sample of their customers about the quality of their product. Their responses were fascinating: the common theme was that the fabric was inferior, couldn’t machine wash, etc – and they wouldn’t buy products at the chain again.

Another retailer changed its supply source and shifted its quality control process to the supplier as a means of reducing costs. That’s asking for trouble. Not surprisingly, inferior product started to flow into the store and this business – hitherto renowned for the quality of its workmanship and product – immediately started to see significant sales decline to a point where the increased margin could never offset.

A third retailer, faced with margin decline, chose to reduce the core range of product that they were renowned for as a means of ‘sanitising’ the range and cutting back on slower-moving lines. Customer numbers started to decline as out of stocks increased. This over-reactive position is not uncommon amongst the “straw graspers”. The issue here is not so much too little inventory as too much inventory. Both are damaging.

Of course, the worst sin of all is to have too much of the wrong inventory. Many retailers face this issue at precisely the time in which in an economy is punishing those who are ‘unfit’.

Is it any surprise that the CEOs of prominent retailers performing soundly in this market are all extolling the virtues of profitable inventory management linked to sound integrated merchandise platforms and informed, accurate buying decisions. In further detail, study the profitability and net equity of these retailers and you will see that their inventory ‘inelasticity’ is very definitely elastic to the accuracy of their buying systems, reflecting the alternating patterns of their evolving customer base.

Brian Walker is founder and CEO of retail consulting company, Retail Doctor Group. RDG builds business fitness for its clients. Interested in building your business results? Brian and his team can be contacted on (02) 9460 2882 or brian@retaildoctor.com.au.

 

First published on the 10th of June 2015, in Inside Retail