When Marc Andreessen says something, I like to pay close attention.
This is the man who wrote the first widely-used web browser-- Mosaic, later re-developed as Netscape Navigator, and still thriving in its latest incarnation as Mozilla Firefox. That makes Marc, along with Tim Berners-Lee -- the man who designed HTML and the hypertext transfer protocol-- effectively the co-inventor of the World Wide Web. And the company he founded in 1994 around that browser, Netscape Communications, was the first to really challenge Microsoft’s effective monopoly on the PC and therefore on our digital lives. He was the first to paint a bold vision of the Web itself as the new operating system for our PCs-- open, free, dynamic. And now, as one of Silicon Valley’s most respected investors, he’s out placing some of the smartest bets on the products and services that will define our future. So he is something of a guru for me. An across-the-Web guru whom I’ve never met in person, but still.
So when he says something like “I think 2012 is the year that retail--retail stores--really starts to feel the pressure”, as he did late last year-- I get worried. In fact, all of us who are fighting in the small retailer’s corner should get worried.
If you take a deeper look at why he feels that way it’s for one overriding reason-- the heavy cost of carrying and managing inventory:
“... the economic pressure is huge as e-commerce gets more and more viable ... It's going to get harder and harder to justify the retail store model.
The model has this fundamental problem where every store has to have its own inventory and every store is also a warehouse. The economic deadweight of that entire inventory in each store--that's what took down Borders. [the US book chain that filed for bankruptcy in 2011]”
And he’s right-- the costs of inventory, especially mismanaged inventory can be lethal for any business, but especially for retail. And it’s easy to mismanage inventory-- see our upcoming blog post: “How I turned the worst year in our history into the best by careful inventory planning.”
So if the risks of carrying inventory can be so deadly what is an ambitious retail business to do? What can you do to avoid being made a victim of the growth of online, inventory-light supersites?
Well, as you might expect for a company that makes (among other things) inventory management software, we have a few thoughts on the subject here at Brightpearl.
1)Try not to carry *any* inventory. It’s not too strong (nor is it too paradoxical) to say that despite making inventory management software, we hate inventory. In fact, we’re big fans of the super-lean, just-in-time approach to inventory management pioneered by Japanese manufacturers and taken up now by every major manufacturer in the world. And some incredibly successful retailers as well (see: WalMart). After all, inventory on its own serves no benefit in a business: it ties up capital, depreciates in value very quickly, takes up physical space and (if you’re not particularly tidy) gets in the way of the rest of your business. Never take for granted that your business needs to carry inventory. Always question what you can do to eliminate it almost entirely. Think sleek, almost empty space. Think drop-shipping directly from your suppliers to your customers without products having to touch your store, warehouse or even your payables.
2)So if you must carry inventory, be very clear on why you do. I can only think of 4 half-decent reasons:
a) To allow customers to see and experience the product. Allowing prospects to try before they buy is a noble (and occasionally necessary) reason to carry some inventory but if they’re trying your expensive-to-carry inventory and then buying someone else’s super-low online price, you’re sort of hosed. If you’re going to carry the inventory, you might want to be actively thinking of ways to make sure that when they do buy, they do it from you. Making sure your suppliers provide you with prices that allow you to match the best available online is a start. And as we mention below and discuss in more detail in an upcoming post, if you do it right your physical store becomes a killer advantage over online-only merchants.
b) To offer instant gratification. Again, an important reason but one that I think gets accepted too easily without being tested very hard. Just how much business would you lose if you carried fewer items? You really need to know the answer to this question for each of the product lines and SKUs you carry. If you’re interested in some ideas we have on how to determine the optimal amount of “impulse buy” inventory to keep on hand, let us know in the comments section and we’ll publish more in an upcoming post.
c) To avoid supply chain risk. Sadly, many retailers are forced to carry inventory for hot products that might sell out from the manufacturer or for which the manufacturer is unreliable. If the former, we suggest finding ways to ‘pool’ inventory of those products from fellow retailers who are not your direct competitors. For the latter, we suggest finding a different product or vendor as soon as you can. Holding inventory to avoid supply chain risk is a dangerous thing. The inventory had better be pretty unique for you to take this risk with your business.
d) To decorate your store. This is the weakest reason of all, but many businesses carry inventory just to make for nice shelf and window displays or to make their store look full. As one store owner put it to me, “I’d love to make do with fewer bottles of perfume on display but then the store starts to look so empty.” It does have some merit in fashion and design-driven industries, but you should be able to take a page from the antique stores everywhere and re-use the inventory you carry for reasons ‘a’ through ‘c’ and to decorate your store.
3) For what inventory you do carry, know exactly what you have, how long you’ve had it, and where it is. Because it ages, because it ties up your capital, and because it has a tendency to go walking off in the hands of anyone who doesn’t have your best interests at heart, taking your embedded costs and potential margin with it-- you need to keep a close eye on it. Inventory management systems are the best way to do this. It sounds paradoxical, but it’s companies that have the most software to manage their inventory that tend to have the least of actual inventory around, clogging up their balance sheets.
4) And finally, my favorite: go multi-channel. Make your inventory available through every channel your customers buy through: not just your store, but also your website, other peoples’ websites, eBay, Amazon, wherever you can. Because the more sales channels you have, the greater likelihood you have of selling through your inventory and the fewer days of sales you are likely to have on hand. We have a few thoughts on where you might find software systems that can help you do this well.
As a final thought, we’ll leave you with the following chart. It shows the inventory carried by all US retailers between 1992 and 2009. Notice the steep decline over time as companies become more efficient at carrying less inventory (represented in number of days worth of sales on hand). Where is your business on this measure of efficiency? Don’t know? We think you should find out. We can help.
