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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@theretailcoogroup.com
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