Category Archives: Inventory

retail death

How to Prevent Inventory Issues

Retail and wholesale in Australia are getting increasingly difficult with more International brands entering the market and a slow retail environment. This is putting pressure on sales and margins and in turn is triggering shareholders and banks to demand tighter controls to mitigate their risks.

Businesses are coming under pressure to increase ROI through increased sales, controlled expenses and properly managed cash flow. For most retailers and wholesalers, inventory is one of the key assets (if not THE key asset) that directly impacts all three levers – sales, expenses and cash.

Retail going through a tough time

In general, Retail throughout the world is going through a rough patch. The U.S. is on pace to have more store closures this year than any year in recent times. The list of brands / retailers who have experienced hard times (often attributed to poor inventory management) is staggering. Some of the big names in the US include JC Penney, The Limited, Circuit City, American Apparel, Payless, Sears and Radio Shack. Even Macy’s is having to shut stores.

In Australia, we have seen too many retailers struggle and often succumb to the difficulties of running a successful retail business. Dick Smith and Retail Adventures (Crazy Clark and Sam’s Warehouse) were two high profile failures that had inventory issues that contributed to the businesses being liquidated. To name a few in an ever-growing list, other Australian retailers that have seen some rough times recently include Herringbone, Howards Storage, Payless Shoes, Laura Ashley, Perfume Empire, Robin’s Kitchen, Marcs, Pumpkin Patch, Borders (a while ago), David Lawrence and Rhodes and Beckett. Many of these could have been / could be saved with better inventory controls.

Early warning signs

There are simple warning signs of a company that has potential inventory issues. These signs can develop on their own or more often as a group of signals.

  • Cash flow issues
  • % of SLOB (slow moving or obsolete) stock to normal stock increasing
  • Lost sales due to running out of top selling SKU’s
  • Margin erosion due to high levels of discounting
  • Warehouse cost escalation
  • Stock turns lower than industry sector norm
  • Broken ranges
  • Growing SKU count
  • Sales people blaming systems or inventory levels on missed budgets

Causes of Inventory Problems

There are three main areas of interest when looking at the reasons behind the problems:

  • Process
    • Incorrect / insufficient OTB (Open to Buy) procedures
    • Lack of product hierarchies
    • Minimal range planning
    • Unchallenged sales forecasting
    • Not using the system properly
  • People / Strategy
    • Organisational structure
    • Separation of duties between buying and merchandise planning
    • Culture / discipline
  • Data
    • Incorrect / corrupt data
    • Lack of understanding where number come from
    • Lack of transparency
    • How you look at the data – what reports – what KPI

How to fix the Problem

Unfortunately, there is no silver bullet when tackling inventory problems. It is necessary to address several areas to get the wheel moving in the right direction. Typically, a process will tackle a handful of issues from the list below:

  • Process (develop or improve)
    1. Range Planning
    2. Product hierarchy and assortment
    3. OTB process
    4. Product pyramids
    5. New product launch
    6. SKU Rationalisation
    7. System synergies
    8. Rules around seasonal / promotional / core
    9. Identification and management of A, B, C and D stock
  • People / Strategy
    1. Inventory strategy that drives culture and discipline
    2. Separation of duties between Merchandise Planning and Buying
    3. Correct culture and discipline
  • Data
    1. Proper dashboards that show relevant KPI
    2. Correct / current valuation of stock
    3. Proper reporting
    4. Looking at data through different lenses
    5. Understanding the link between category management, range planning and SKU management


Benefits of Strong Inventory Management

The impact of well managed inventory is wide reaching and highly beneficial to all aspects of the business:

  • Increase Sales
    1. The right stock at the right time
    2. Improved delivery performance
    3. Balanced inventory
    4. Transparency for sales team
    5. Shorter lead times
    6. Decreased stock outs
    7. Increase in customer loyalty
  • Decrease Cost
    1. Warehouse efficiency
    2. Less time spent on dealing with bad inventory
    3. Lower holding costs
    4. Reduced mark downs
    5. Employee efficiency
  • Increase cash flow
    1. Increased stock turns / decreased months’ stock on hand
    2. Reduction of obsolete stock


If you would like to learn more about how you could improve your inventory management to benefit your business, please contact us at
Mike Holtzer – Owner, The Retail COO Group

Challenging, questioning, confronting! Experienced Retail / Wholesale CEO, COO and CFO with over 25 years of International Executive Management experience in public and private companies spanning over four continents: Australia, North America, Asia and Europe.

His proven leadership and operational management skills have assisted multiple wholesalers and retailers around the globe. His no-nonsense approach gets things accomplished quickly and efficiently. With his experience and pragmatic approach, Mike is able to identify the source of an issue and develop clear and concise solutions.

Cash is King and Inventory is Cash

As a retailer, inventory is the most important asset on your balance sheet. Not only is it a major part of the value of your assets, but also the driving force behind generating revenue and profits. And yet, many retailers do not have a basic understanding of balance sheets and inventory, and why merchandise planning matters.

Pen, business items, and business documents with numbers and charts. Concept of workplace of the businessman.


Inventory, or merchandise planning, can seem complex. Ask a handful of retailers what makes a successful merchandise planner, and you’ll be given a handful of different answers. Planning sales and inventory to successfully control your cash and increase profitability is crucial if you want to survive in today’s economy.

Through my experience in working with troubled retail businesses (I was the outside consultant that discovered the inventory problem at Dick Smith), I have always increased the focus on merchandise planning. The person in charge of inventory controls the business. When this function is not controlled, the business can spiral out of control quickly.

Merchandise planners vs. buyers

While both a merchandise planner and buyer work together to keep a business running, their roles are separate. The Buyer decides what to buy and the Merchandise Planner decides how much to buy. These roles need to work closely together, but must not report to the same managers, a mistake some retailers make.

Merchandise planning is the science of Retail (see Science vs Magic). It relies on data analytics and is all about facts. They set and control the OTB. The best Merchandise Planners are highly analytical and often come from accounting or IT backgrounds.

Merchandise Planners:

  • Set and control the OTB (Open to Buy)
  • Forecast future demand (based on history)
  • Develop product hierarchies
  • Should report to the CFO/COO or someone with responsibility over inventory levels and cash flow
  • Manages obsolete stock and end of life markdowns


  • Is the magic and vision
  • Need to push the envelope and think outside the box
  • Identify trends and targeted demographics
  • Understand other markets and how they relate to their market
  • Should report into a Sales and Marketing function

Why are merchandise planners so important?

Ultimately, Merchandise Planners control the purse strings in the business by controlling the inventory. They set the strategy to enable your company to buy the right amount of goods at the right time and at the right price to deliver sales and margin targets.

If buyers control everything you will end up with higher sales, but have bad stock turns and obsolescence issues. If Merchandise Planners control everything, you will end up with perfect inventory, but no sales. The mix has to be right to succeed.

See also:

Science vs Magic

The Buying Pyramid

Merchandise Planning vs Buying

How “Good to Great” worked for me and OrotonGroup

During my time at Oroton, first in the US and then in Australia, we overcame some huge hurdles. My first stint with OrotonGroup was restructuring the US subsidiary and selling it to a group of investors. This took about three years and we faced a myriad of problems from bad outsourcing contract to bad relationships with our department store customers to poorly implemented IT systems. We struggled with a brand that was top tier in Australia, but was virtually unknown in the U.S. Foreign brands trying to enter into the U.S. need to understand what it takes to succeed in a vastly different environment with geographical considerations, more competition and 10 times the population. (More on this in a future article)

We successfully sold the US business and created a franchise arrangement with the new owners. At the end of this process, I casually told the owners of Oroton that if their COO ever quits in Australia, please give me a call. Two years passed and I got a phone call from Ross Lane, the MD of Oroton, who informed me that the COO just resigned and asked if I was serious about moving to Australia and taking over as the COO. I flew to Sydney the next week, accepted the job and moved over a few weeks later.

At that time OrotonGroup was about a $75M company and had Oroton, Ralph Lauren and recently acquired Morrissey. It was making money but was struggling with several aspects of Operations, including a stock turn of less than 1.

After getting my feet wet and getting to understand the business inside and out, Ross and I were introduced to a book called “Good to Great” by Jim Collins. We both read it and liked it so much, we bought copies for the entire management team and adopted the philosophies and terminologies from the book. It began a several year ride of taking a successful business and making it better and better.

The main philosophies in the book were (which I will explain in further detail in future blogs):

  1. You need Level 5 Leadership
  2. First who….then what
  3. Confront the brutal facts
  4. The Hedgehog Concept
  5. Culture of Discipline
  6. Technology accelerators

During the time that I was COO and while we were living the philosophy in “Good to Great” we accomplished great things.

  1. We doubled the size of the business from $75M to $150M and doubled the share price at the same time.
  2. During this growth we managed to keep inventory at the same level through the implementation of a proper merchandise planning department. We more than doubled the stock turn and were on course to get it to be where it should be even with the obstacle of buying Northern Hemisphere Ralph Lauren product for the Southern Hemisphere.
  3. We consolidated three warehouses into one efficient distribution centre.
  4. We moved our head office from the northern beaches of Sydney to the CBD to be closer to our partners.
  5. We issued further shares and raised the capital needed to buy Marcs (seemed like a good idea at the time – more on that later).
  6. Outsourced our clothing manufacturing capability to Apparel Group as it wasn’t our core focus.
  7. Launched the Aldo brand into Australia through a licensing agreement.
  8. Cemented a great working relationship with the executives at David Jones that secured us as one of their top suppliers.
  9. Implemented a new end to end ERP system that, after a few hiccups, was the foundation that OrotonGroup built on and continued to grow with.

This is just a taste of what can be accomplished when you follow the right management philosophies and direction. “Good to Great” helped immensely during this great building phase at OrotonGroup.


Margin vs. Mark Up

I hate to bring up a subject like this, but it amazes me how many people get this wrong. When I am consulting, I have learned to ask further questions to make sure I know what numbers I am dealing with, not necessarily the numbers that are said.

Margin %

This is calculated by taking the margin dollars and dividing it by the sales dollars. (Selling Price – Cost) / Selling Price x 100% Example: You are selling a product for $100 that costs you $40, the Margin on the item is 60%. This can never be more than 100% so if someone quotes more than 100% margin, they are talking mark up.

Mark Up %

This is calculated by taking the margin dollars and dividing it by the cost. (Selling Price – Cost) / Cost x 100% Same example: You are selling a product for $100 that costs you $40, the Mark Up on the item is 150%.

As you can see, it is a simple calculation but can make a big difference. If I am talking to a retailer in Australia and they tell me that their margin is 60% or above, depending on the type of product they sell, it signifies a decent margin. If they tell me they have a 60% margin, but they are really talking about mark up, there is an immediate issue that needs to be looked at. There is a huge difference between a 60% margin and a 60% mark up. When they are confused, it can be a huge problem.

What is included in margin is an entirely different issue that I will explain in another article.

Merchandise Planning vs. Buying

There is a difference between Merchandise Planning and Buying. Within a business these two functions should be separated as much as possible and should report to different managers. This is a concept that I am very passionate about and have used in many projects to improve a GMROI within retail/wholesale businesses. Inventory is your number one asset and needs to be controlled and managed properly.

There has to be a close working relationship between the two, but these two departments should also challenge each other and push for perfection.

Merchandise Planning is about the science in retail. It is highly analytical and relies heavily on data. It is about facts. Merchandise Planners most often have accounting or IT backgrounds. Without stereotyping, I have found the best merchandise planners to be from England, South Africa and the US. They tend to be more pragmatic.

Merchandise planners implement structure where chaos often exists. By using past data they plan future demand. They control the OTB (Open to Buy) and will manage how much to buy within specified, agreed, hierarchies. They will match the OTB back to budgets and forecasts and adjust for overselling or underselling (something that many retailers overlook). Referring to my article The Buying Pyramid, they love to buy for the bottom section – basic / core product – because it is logical and easy to formulate. The Merchandise Planning department should report into a senior executive that is responsible for inventory levels (if you don’t have someone responsible for this, you should) and overall budgets, usually a CFO. Merchandise Planners should also control markdowns and obsolete inventory.

Buyers are the magic in retail. They understand that trends change and that a business needs to be ahead of the trend to be truly successful. Buyers know what is happening in other markets and can translate that to their own markets.

They are more visionary and will want to push the envelope and will always be looking for the next best thing. In my article The Buying Pyramid, they love to buy for the top section, the window dressing, the fun and exciting product that few people buy. Buyers should report into a sales / marketing senior executive that is responsible for revenues. Buyers should control promotions, with the help of the Merchandise Planners.

Keep in mind that these rules, like most rules in business, are not a rigid set of rules, but a philosophy. There is not a list of ten rules to follow to be successful in retail operations. Philosophies would revolve around:

  1. Communication – merchandise planners and buyers have to work closely together
  2. Integration – data has to flow seamlessly between all areas and be accessible to everyone
  3. Discipline – there has to be checks and balances to keep things under control and the inventory sales and gross margins to budget

See Science vs Magic

See The Buying Pyramid


Buy what you sell rather than sell what you buy!

Demand Chains are about providing customers with what they want – anticipating their needs, as opposed to pushing product into the market before demand is there. In other words, buying what you sell rather than selling what you buy.

Value Chains are about understanding your customer and understanding what they perceive as value, and why. This is similar to old fashion supply and demand where your supply chain may alter as your customer, or their perception of value changes. Take for example selling something as simple as a bottle of water. Supplying and selling a bottle of water on a hot secluded island would be different to selling a bottle of water next to a fresh spring.

Customer segmentation is a key element in designing / buying the right product for the right customer. The best example I have seen in this area is clothing designers that identify a celebrity that they are designing for. Put that person’s picture throughout the design studio.

It is also essential to understand where and how your customer wants to buy that product. This will differ from business to business and sector to sector. Do they want to buy it in your own bricks and mortar store? Online? At a retailer that sells multiple brands? Locally? Internationally? The list goes on.

How does the Supply Chain fit into all of this? Over the next few weeks we will look at the “Seven Rights of Supply Chain Management”:

  1. The right product
  2. To the right customer
  3. In the right place
  4. At the right time
  5. In the right condition
  6. At the right quantity
  7. For the right cost

We will need to understand what the customer values and eliminate the cost of everything else. We will also discuss what affects these areas. We will cover:

  • Supply chain efficiency
  • Getting to the market faster
  • Merchandise Planning
  • Globalisation
  • Customer expectations
  • Technology

We will also discuss unnecessary areas that drive costs up and where retailers have to get better:

  • Cost of obsolete
  • Bad transportation
  • Redundant activities
  • Multiple warehousing
  • Expediting
  • Shortfalls

What is the Supply Chain?

Most customers don’t think realise how many steps a product encounter before ending up on the shelf of a retailer. The process starts with raw materials and can filter through suppliers, manufacturers, wholesalers, transport companies, distributors and more, before it hits the retailer. These interconnected processes make up the Supply Chain and can involve internal and external functions. Getting the product from its most raw form all the way to the customer.

These value add processes require proper planning and integration to achieve maximum efficiency. Focussing attention on only one element of the supply chain does not get the desired result. You need to look at the entire chain and understand how it flows.

Logistics is one of the elements of Supply Chain and usually covers warehousing and transportation. This is a very key element, but will never be optimised if the other elements don’t flow correctly.

Understanding your supply chain is essential to running a profitable business. I have seen many great brands and products fail because they don’t get the supply chain right.

Map it out! Find out how all of them link together and find the inefficiencies. Start with the high level processes and then dig down into the detailed areas. I always find this an interesting “discovery” when engaged by a new client. It really highlights the hidden areas that cause long lead times, higher prices, unnecessary functionality, unused technology and a carryover of old old processes.

Next blog will be about Demand Chains………

Improve your return on inventory – Meet Jim and Roy

Increase your stock turns and Gross Margins and watch your cash flow and bottom line profit soar! You will receive a higher return on your investment in inventory and the decrease underlying costs associated with carrying inventory. Meet Jim and Roy – otherwise known as GMROI (or GMROII) – measuring Gross Margin Return on Inventory (Investment). It measures your efficiency, or inefficiency, in buying and selling stock. Simple enough, right?

The formula for GMROI is gross margin (GM) dollars for a year divided by average inventory (GMROI = GM $ / INV $). It is easy to see that if you increase gross margin and decrease inventory you will increase GMROI. Understanding the concept is only the starting point.

Many retailers think that you just increase your price or stop discounting to increase GM. They may also think that you can simply have a clearance sale or huge end of year sale to decrease inventories. These tactics are small parts of the overall strategy and can work, but can also be counter-productive if you’re not careful and don’t pull other levers.

One simple way, that is often overlooked, to improve GMROI is to move the inventory through faster.

You can look at GMROI this way:

GMROI = Turns x (Gross margin % / Cost of goods %)

This allows you to see that turning inventory faster allows you to obtain a much higher GMROI.

What is the upside to this?


Store A

Same Sales / less inventory

Same Inventory / more sales













Average Inventory




Turns (COGS / Inventory)









You make 45 cents more for every dollar invested in inventory. Doesn’t sound like much, does it? But it is.

This means that you could achieve the same sales and margin with $250,000 less stock (more cash) OR invest the $250,000 in better stock and achieve more sales and $900,000 more margin.

Yes – I know – it is not this simple. The reality is that there are many levers to pull to achieve this and it usually is not quite this clean. The purpose of this example is to show you why you want to do it.

COMING NEXT – “Low risk ways to increase stockturn”