Multichannel Retailing Week: Inventory Management

One of the most under-appreciated jobs in Multichannel Retail is the title of Inventory Manager.

The inventory manager supports the merchant. By looking at sales history, the circulation plan, the e-mail marketing plan, the online marketing plan, and traditional advertising, the inventory manager determines how many units of an item to purchase.

Multichannel retailing made inventory management very challenging. Five issues really challenge the inventory manager.

First, inventory managers have to deal with different measurement techniques in different channels. The catalog/telephone channel captures "lost sales". In other words, when a customer calls to place an order, and the item isn't available, the fact that the customer "wanted" to purchase this item is recorded. This is a huge benefit that catalogers have over retailers. If 1,000 units were forecast, and customers "wanted" to purchase 1,850 units, the inventory manager has access to this data. Next year, the inventory manager will order the appropriate number of units. In retail, once the 1,000 units "sell through", there are no more units to purchase. In retail, there is an art to forecasting what would have sold. The online channel strikes a balance between cataloging and retailing, in that "lost sales" can be captured by the multichannel retailer, if management is willing to capture the information.

The second challenge facing multichannel inventory managers is the information systems they get to use. Catalog/Online systems are frequently different than Retail inventory management systems. The systems don't always talk to each other, and the systems occasionally utilize different metrics. This means that folks working in catalog/online channels view the business differently than folks working in the retail channel. Different skill-sets evolve. In some ways, it is like the catalog/online inventory manager speaks Spanish, while the retail inventory manager speaks Portuguese. The multichannel CFO plays a key role in this relationship. If the CFO understands the importance of linking disparate systems, staff can evolve to speak a common language. Linked systems, however, need to accommodate the unique measurement differences between channels. This does not always happen in multichannel retailing. If retail wins out, it is possible that demand will not be captured in the catalog channel, sub-optimizing catalog marketing activities.

The third challenge multichannel inventory managers deal with is the information captured in inventory management systems. In most cases, changes in marketing strategy cause significant changes in unit sales. For instance, a drop in circulation depth of twenty percent frequently yields a ten percent decrease in sales. Featuring an item in an e-mail campaign may drive a fifty percent increase in sales of that item. Paid search can influence item sales. In most cases, the inventory manager does not have an organized information system that allows the inventory manager to analyze the simultaneous influence of all of these factors. Really talented inventory managers tabulate their own information system in spreadsheets, and build good relationships with circulation, e-mail marketing and online marketing individuals.

Fourth, not all items sell at the same rate in all channels. Items that are prominently featured in catalogs sell well over the telephone, sell at an average rate online, and may not sell well in retail stores. Items featured in e-mails cause online sales to surge, but may not drive any retail or telephone sales. The audience purchasing via telephone, online, and stores is frequently different. The telephone audience is often older, and lives in rural areas. The online customer may be younger, living in the suburbs. The retail customer lives near a store. Differences in demography and lifestyle cause each item to sell differently, by channel. The inventory manager does not usually have this type of information available in a systematized way. The inventory manager has to make a lot of guesses, in order to be accurate.

Fifth, the inventory manage has to be really accurate, but is not given the tools necessary to create accurate forecasts. If too much merchandise is purchased, then overstock occur, costing the company a ton of profit. If too little merchandise is purchased, sold-outs and lost-sales occur, costing the company a ton of profit. The inventory manager is constantly hounded by merchandising and financial staff members to be accurate. The reward for being accurate is harvested by all employees. The risk for not being accurate falls upon the inventory manager.

Over the next ten years, we will see an inventory manager from a multichannel retailer create an inventory management system that integrates the issues listed above. Many vendors try their hardest to do this today. I believe somebody will figure out how to leverage all of the spreadsheets clogging network drives at multichannel retailers, allowing the multichannel inventory manager to be more effective. This information will be combined with clickstream data --- sales information, marketing information, and the items customers viewed on the website will be combined in a way that allows inventory managers to do a better job.

With luck, CFOs will agree that these systems are needed, and will spend the money to implement them.

Until that happens, the complexity of a multichannel business will continue to challenge inventory managers. These folks are frequently compensated at or below the company average for professional staff, but bear more risk than the average employee.

Your turn. What is your view of multichannel inventory management?

CEO Concerns About Reducing Catalog Marketing

Lots of phone calls with business leaders over the past month. All ask me essentially the same question.

Question: "Postage is about to put a squeeze on my expense structure. Should I begin transitioning out of catalog marketing?"

Strategically, there are a lot of things to think about. Listed below are a sampling of the issues CEOs need to consider.

• How old is your average catalog customer? If your catalog customer is 55 or older, you need to embrace your catalog marketing efforts.

• What percentage of your direct-to-consumer net sales come from the telephone? If this percentage is more than fifty percent, you need to embrace your catalog marketing efforts.

• What percentage of your direct-to-consumer advertising budget is in search, affiliates, portals and e-mail marketing? If you aren't already spending at least twenty percent of your direct-to-consumer advertising budget online, you need to embrace your catalog marketing efforts for awhile, until you learn all the ins and outs of online marketing.

• Multichannel Forensics: If prior catalog buyers are in isolation mode (meaning they do not at least try out ordering online), you need to embrace your catalog marketing efforts.

• Testing: This is as good a time as any to hold out catalog mailings to a group of loyal catalog customers for a period of at least six months. When you do this, what happens to online spend? Does it increase, decrease, or stay the same? If it decreases or stays the same, you need to embrace your catalog marketing efforts.

• E-Mail Marketing: A colleague forwarded me an e-mail marketing campaign. The e-mail did not sell merchandise --- rather, it told the customer to look for their catalog in the mail. If your e-mail marketing strategy is to market your catalog, you need to embrace your catalog marketing efforts.

• Customer Acquisition: What happens to new customers if you stop traditional catalog prospecting activities? The future of your business is new customers --- if you don't acquire new customers via the online channel, you need to embrace your catalog marketing efforts.

• Paid Search: When you analyze paid search performance, do you find that customers ordering via paid search also received a catalog? If so, you need to embrace your catalog marketing efforts.

• Online Marketing Budget: What happens if you double your online marketing budget? What is the impact on online sales? If you don't know the answer to this question, you need to embrace your catalog marketing efforts until you can answer this question.

• Staffing: Do you have a transition plan for all of the folks who have served your catalog efforts for the past two decades? Contact center and distribution center considerations are not trivial.

• Merchandise Strategy: Can you appropriately forecast sku-level sales if you don't have a catalog driving customers to the online channel? Does the mix of merchandise purchased change between online-only customers, verses online customers fueled by catalog marketing?
  

• Customer File Management: Have you run a five-year simulation of the expected change in your customer file? In other words, will you have enough customers, repurchasing at high-enough rates, spending enough money per repurchaser, to fuel the future of your online business? If you don't know the answer to this question, you need to embrace your catalog marketing efforts until you complete your Multichannel Forensics analysis.

Profit And Loss Responsibility

About two months into a new fiscal year, the occasional ups and downs in a business begin to average out. You begin to have a good idea whether your year is heading in a positive direction, or if it is starting to become difficult to achieve bonus levels this year.

If you have profit and loss responsibility, your year is at an interesting inflection point. Most of the folks working in our multichannel businesses don't get to see the interplay between executives, especially when sales levels are not meeting expectations.

The merchandise executive feels a lot of pressure. Her merchandise is not selling, and there could be many reasons for this. Maybe the database marketing executive didn't mail the right customers. Maybe the online marketing executive isn't attracting the right traffic to the site. Maybe the brand marketing/creative leader is depicting the merchandise in an unflattering manner. She needs help understanding what is happening in the relationship between her customers, and her merchandise. No focus group of nine individuals, no survey of 3,000 loyal purchasers will provide the insight she needs to make decisions today.

Working with merchants who take accountability for sub-par business results is an absolute blessing.

The inventory executive feels a lot of pressure. He is bonused on outstanding fulfillment, great gross margins, and rapid inventory turn. When the business goes south, he needs to liquidate merchandise quickly. He'll demand additional clearance catalog mailings, increased e-mail frequency, free shipping, 20% off your order, whatever it takes to sell out from under the pile of unwanted garbage the merchants bought. The customer experience becomes secondary to moving merchandise at any cost.

The database marketing executive feels a lot of pressure. She is often the first person to be blamed for sub-par business results. It is so easy to assume that the wrong customers were mailed catalogs, that the e-mail campaigns were not actually delivered to the customer, that the post office forgot to deliver 200,000 catalogs, that the techno-geeks who forecast sales made big mistakes. It is hard for executives to accept the fact that customers didn't want to purchase our merchandise. This is the time of year that the database marketing executive starts trying to craft a story about customer behavior --- a story that doesn't offend folks, but adequately gets her off the accountability hook.

The finance executive feels a lot of pressure. He knows that additional mailings, online advertising, price reductions, shipping promotions and any of a number of additional incentives will cause expenses to not leverage well against sales. He'll demand that the database marketing executive re-forecast the customer file, and re-forecast sales for the remainder of the year. The board/owner will need to know the expected profit impact of the sales implosion. The finance executive will take more heat from the board/owner than is deserved.

The brand marketing/creative executive feels a lot of pressure. She is trying so hard to provide an outstanding experience for the customer. She reads a dozen blogs that preach the critical importance of "managing the brand". She reads another dozen blogs that constantly harp on how brands fail to treat customers well, marketing blogs that take repeated potshots at companies for failing to meet customer expectations. Then she looks at her business peers, who are about to trample the customer experience to move merchandise at any cost.

How does she convince them that this is bad for the business?

Worse, how does she provide a viable alternative for clearing $10,000,000 of overstocked merchandise, one that doesn't trample the customer experience? Do any of the marketing bloggers have a credible, creative solution to this problem? How about the vendor community?

This is a key element of profit and loss responsibility that vendors, bloggers and pundits fail to appreciate. There is tremendous pressure to bail out the profit and loss statement, tremendous pressure to get out from under yesterday's poor merchandising decisions today, tremendous pressure to save one's job. Few of the options (discounts, promotions, price cuts, free shipping, additional mailings, additional e-mail contacts, you name it) are good for the long-term customer experience or are good for "the brand". Comments like 'the brand should have offered great merchandise that the customers wanted to buy in the first place' fail to solve the problems the executive has to navigate through today.

Without viable alternatives, the brand marketing/creative executive is in a no-win situation. You can see why the average Chief Marketing Officer lasts 23 months --- no viable short-term solutions to move overstocked product, no way to protect the customer from the impending onslaught of advertising of crappy merchandise, no way to truly succeed in her job.

The operations executive is nervous, because a continued downturn in business results in staffing cuts in the phone center and distribution center. Who wants to go through that experience?

The human resources executive deals with secondary issues created by stress. Employees begin snipping at each other. Some employees quit, heading instead for the lucrative surroundings of a successful business. HR is not a fun place to be during a downturn.

The information technology executive is nervous, because the executive team is demanding that website improvements be completed now, to improve business. The executive team also is demanding business intelligence solutions from information technology folks --- the executives want to know why customers aren't purchasing, and cannot articulate questions in a way that an information technology executive can effectively program into a report.

Profit and loss responsibility changes the way one thinks about a business.

When business exceeds expectations, it is easy to think about theoretical issues like return on customer, providing an exceptional customer experience, enhancing the "brand", developing new business opportunities, figuring out how to grow to three billion dollars in sales, giving customers a say in advertising, developing a CEO blog, you name it.

But when the business fails to meet expectations, all that fun stuff goes out the window. One bad year costs the executive her bonus. Two bad years costs the executive her job. Short-term decisions are made to save the profit and loss statement, to buy another six months of time to acquire new merchandise that the customer might want to purchase.

And when the company is publicly traded, all of these issues are magnified by shareholders demanding a return on investment today. Most of you reading this blog are indirect shareholders --- you have 401k accounts, and you're not patient when your 401k account loses value, are you? You indirectly contribute to the problems you openly grumble about.

One can see how special visionary leaders are --- the rare individual who can keep an eye on strategic, visionary issues, while navigating choppy waters every-other or every-third year.

Today's online marketing executives have not gone through a lot of these business cycles. The online channel has pointed straight up for a decade. It's only a matter of time before the pressures all executives feel are thrust upon our new generation of online marketing executives.

Virtual CEO: Coldwater Creek and Inventory Management

Through comments and e-mail, many loyal readers of The MineThatData Blog voiced their opinion on creating a good customer experience when items are sold-out on a website. This discussion started when Becky Carroll talked about items being pulled from her shopping cart during a recent online shopping experience at Coldwater Creek.

What has been discussed can be summarized around at least four key constituents.

First, you have the customer, who rewards outstanding shopping experiences with loyalty and word-of-mouth.

Second, you have the inventory executive, responsible for the unforgiving task of not buying too much merchandise (requiring markdowns, and less profit), while at the same time not buying too little merchandise (causing lost sales, less profit, and a reduction in customer loyalty).

Third, you have a management team that prioritizes the work of the information technology folks, ultimately determining what the online customer experience looks like to the consumer.

Fourth, you have the Chief Executive Officer, responsible for determining an incentive plan for her leaders, an incentive plan that rewards leaders for accomplishing company objectives.

In most direct-to-consumer businesses, one of the primary objectives is to maximize fulfillment while minimizing markdowns. There is a sweet spot where profit is maximized. When too much merchandise is purchased, markdowns occur.

Markdowns are horrible for a business, because the business freely gives up profit to pay for mistakes in execution and anticipation of fashion. A $100 item that has a $50 cost of goods yields $50 of profit. Marking the item down to $69 to clear it reduces profit on that item from $50 to $19. Worse, the customers who buy the item are often discount-oriented customers, meaning there are fewer loyal customers willing to pay for something at full price.

Lost sales are also horrible for a business, as evidenced by Becky's post. Lost sales can create a bad experience if not executed correctly, and can reduce customer loyalty.

CEOs like to provide incentives to Inventory Executives, incentives that protect the profit of the overall business. An Inventory Executive might receive a larger bonus payout if he hits the 'sweet spot' between lost sales and markdowns. An Inventory Executive quickly loses his job when he fails to hit the sweet spot.

As a result, the Inventory Executive has a significant incentive to endorse any strategy that protects the profitability of the business, and the long-term prospects of keeping a well-paying job. This person could encourage any activity that is, theoretically, not a great customer experience, if it means that more data is collected on items where the Inventory Executive makes a mistake.

I am not saying this is what happens at Coldwater Creek. I am saying that seventeen years in this industry help me understand what the business is up against.

So here is a challenge for all of my readers who responded via comments and e-mail on behalf of the customer (I have yet to receive one response supporting the leaders of a business).

Pretend you are the CEO of Coldwater Creek. Knowing what you now know about managing inventory, how would you set up a bonus plan for your leadership team that achieves the following:

• Protects the 'sweet spot' where your inventory team doesn't purchase too little merchandise, or too much merchandise.
• Provides incentives for your creative or online marketing team to write language that is customer friendly when merchandise is not available, or is about to run out.
• Provides incentives for your IT staff to work outside of company-stated priorities to fix problems like the shopping cart issue that frustrated Becky, while still addressing company-stated priorities.
  
• Provides incentives for your analytical folks to develop analytical tools to correctly forecast potential sales when items run out.

What would your bonus plan look like for your leadership team, to accomplish these objectives?

An even more intriguing question to consider --- what do you do when your CEO and Inventory VP don't have a passion for the customer experience, won't allocate resources to fix the problem, are not likely to be fired in the next few years, and are delivering outstanding sales and profits? Now what?