JTPP: Localization’s Inventory Dilemma
By Nikki Baird, Managing Partner,
RSR Research
Through
a special arrangement, presented here for discussion is a summary of a current
article from The Journal of Trading Partner Practices (JTPP),
the official online publication of the Vendor Compliance Federation (VCF),
Trade Promotion Management Associates (TPMA), and the Federation of Credit
and Financial Professionals (FCFP).
While economic conditions
have forced retailers to slash inventories as quickly as possible, localization
has caused them to rethink what the “right” level of inventory is to begin
with.
Localization is an
offshoot of retailers’ pursuit of customer centricity. In response to the
power that virtual channels like e-commerce and mobile give to consumers
in the retailer-customer relationship, retailers have been working hard over
the last decade to increase their relevancy to consumers. On one side, that
has meant more personalized communications and offers. On the other side,
it has meant localization of inventory.
At its extreme, localization
of inventory means creating a custom assortment based on a store’s unique
characteristics and demographics. The reality of localization is a little
less extreme: retailers on the leading edge of these initiatives have found
that customizing 25-30 percent of the assortment by store creates an impression
among consumers that the retailer has totally customized the assortment –
the challenge is picking which 30 percent to customize.
But another challenge
has arisen from localization, and that is pressure on inventory levels. If
you require that localization of inventory happens without increasing the
retailer’s overall level of inventory, the only way to do that is to risk
an increased rate of stockout. Put simply, you’re spreading the same amount
of inventory over a larger number of SKU’s. Something has to give.
The biggest
question regarding localized inventory has been exactly this – what will
retailers give to get localized inventory, and is it worth it? Will they
keep inventory levels the same and risk the customer experience in the form
of stockouts, or will they increase inventory in the hopes that they sell
more to cover the investment needed?
The answer, according
to RSR’s latest research on inventory, is that winning retailers have placed
their bets on increasing overall inventory levels (see Figure). The bet has
apparently paid off: winners also report improved margins and improved turns.
How
does this work exactly? By carrying more products that are relevant to specific
customer groups (instead of averaging allocation across stores), these retailers
are able to sell more inventory closer to full price – despite the initial
investment required in terms of carrying more inventory. The key to achieving
this, though, lies in the processes and technologies that support localization.
If you have a supply chain designed for case-level flow straight to stores,
for example, you’re not just going to have to increase inventory, you’re
going to have to give up some distribution efficiencies to break packs and
ship mixed cases.
Retail winners are fully aware of these kinds of implications,
and are positioning themselves now to deal with the process impacts of
localization.
Discussion Questions:
Does the push toward inventory discipline work counter to localization
efforts? Are the benefits of localization worth those inventory risks,
especially in today’s climate? Are there ways to reduce those risks
when pursuing localization strategies?
- Localization’s Inventory Dilemma – The
Journal of Trading Partner Practices - Precision Inventory Management in the Age
of Localization: Benchmark 2009 – Retail Systems
Research
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9 Comments on "JTPP: Localization’s Inventory Dilemma"
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So the report says that having stock leads to increased sales? Am I missing something? Service levels are the priority of any store manager or director, and keeping the assortment localized is a huge component to the total mix. Especially if you are a grocer.
I don’t like to use the terms ‘giving up’ when it comes to merchandising. There is always shelf space available for what can sell, in my opinion. Optimization must come from the store level. That team knows their customers’ wants and needs better than anyone else.
This is pretty basic stuff. Retailers and wholesalers carry inventory. It is one of the important things that they do. They make money on most of it, but not necessarily all of it or even the same amount. The only thing that matters here is if the retailer knows what to buy. Period.
The discussion about the amount of time that they can afford to hold inventory can be a very lively debate. But given the size and efficiencies of the supply chain, we’re talking about a fraction of a penny on each item sold for inventory carrying costs. The debate is really around the space costs–are they fixed or variable? Now you’re talking about whole pennies.
The article (and to some extent the responses) seems to be confusing different types of “localizing”: there is a localizing of tastes/preferences (Cincy likes plaid, Philly likes stripes,etc.) where there is substitutability, and then there is a localization of size/product (the old “snowblowers in Miami” anecdote) where there is none; needless to say, the former is open to “marketing” efforts, while the latter is not. Beyond this basic point, inventory is a numbers game: is the likelihood of a sale to a fringe demographic worth the cost of stocking for that group? Clearly it depends on both the likelihood and the cost(s).
What I found interesting/disturbing in the article is the comment that someone can localize (a small) part of their inventory and “create the impression” of something more: Argh! Sad to see that many retailers are (still) more into APPEARING to offer service than actually offering it.
I’m in complete agreement with Bill Emerson. “The challenge of localization is organizational. How many merchants/planners are in the organization, where are they located, what are their reward structures, etc, etc.”
Localization is great in theory, but something very different in practice. In practice, it’s hard to envision localization being executed to exclude certain SKUs in favor of others, so assortments and inventories do grow, and it’s still not clear to me that localization leads to the net sales increase necessary to support that increase in inventory.
As I’ve written before about localization, “I very much believe that the jury is still out on localization. The fact is that certain economies of scale are inevitably lost with localization, and the benefits are unclear across the full store base of almost every chain. It seems to be a qualitative objective whose financial impact has yet to be fully quantified. Given the competitive environment we’re likely to see for the foreseeable future, every economy will be essential to meet competitive price points, and that’s something that can be quantified.”