JTPP: Localization’s Inventory Dilemma
By Nikki Baird, Managing Partner,
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
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.
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.
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
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