What is buffer stock? What’s the function of stock?

Buffer stock…what is it?

Different times call for different inventory strategies. However, when the function of stock is not clear, changing the inventory approach can often prove problematic. Many retailers lack synergy between the inventory strategy and the overall strategy of the business. As a consequence, many retailers struggle to align the inventory strategy with the strategic focuses of the various divisions that exist within the organisation.

For DIY stores, this is a very real issue. For instance, in recent times, the popularity for younger people to perform basic maintenance on their homes has decreased. Whereas parents and even grandparents may have been keen home decorators, this trend has drastically reduced. In essence consumers are now spending less time on household chores. As a consequence of this, particularly young people, do not even own a hammer let alone a toolbox. A trend which would have been unthinkable to older generations. Given the impact this trend will have on demand, how should retailers respond?

What is buffer stock? Operational problems

The inventory turnover in DIY stores has been declining for a number of years. Today, stock is typically only renewed, two to three times per year meaning that, typically, around 4 to 6 months’ worth of stock is held at each location. If you take a rough average, this slow stock rotation means that around a quarter of the stock is not sold.

Furthermore, slow moving stock also causes a number of other operational issue. For example, innovation in planograms can also be stifled as shelf space is taken up with products that customers do not want to buy: a problem only exacerbated further by products with poorly negotiated unit sizes. If you keep slow moving items available in stores, it is highly likely that you end up marking down a sizable proportion of your starting inventory at the end of the product lifecycle. Given that all of these issues are likely to have an adverse effect on profitability, retailers cannot allow this to happen.

A good omni channel strategy may provide the solution: through offering specific slow movers via the webshop, these articles do not necessarily need to be available in all stores. With this in mind, retailers should differentiate their offering in each store in order to ensure that the range satisfy the local demand and thus the stock position remains healthy.

Complex puzzle

For many retailers, changing the inventory strategy can prove a tricky and convoluted exercise. The key problem is that each department has its own strategy that is often not well aligned with that of other departments.

For example, the finance team typically want to achieve the lowest possible level of stock in order to limit the amount of working capital tied up in inventory. At the other end of the spectrum, the sales team will gladly extend the range and increase availability in order to reduce the number of missed sales. As a consequence, the supply chain manager is left stuck between a ‘rock and a hard place’ as they attempt to balance stock levels with service levels.

With this in mind, businesses should revisit the boardroom and formulate a sharper strategy. Based on the overall company strategy, the respective divisions (sales, marketing, and supply chain) all need to develop their own departmental strategy; therefore the supply chain should determine the basis for a strong purchasing and inventory strategy.

A good strategy will prevent supply chain managers form being faced with unrealistic or irrelevant KPIs. For example, if there is a sudden downturn in sales, the finance department will typically demand that stock must be reduced by X percent. However, is this the optimal approach? In reality, the only advantage of this approach is that it is simple and, on the face of it, seems logical.

What makes this puzzle even more complex however, is that the pieces are constantly changing. Consumer behaviour and supply chains are constantly evolving and as a consequence, the retail environment is extremely volatile. Take for instance, Black Friday: not so long ago, this term was largely unheard of outside of the USA. However, today this is a major event for retailers across Europe. Given the speed at which retail landscapes change, retailers need to constantly adapt their inventory and procurement strategy in order to keep up with the demands of the market.

Omni-channel retailing

Each sector has its own characteristics which can have a major an influence on the strategic requirements e.g. in the fashion industry, speed and responsiveness are the most important factors. As a results, the first delivery of a new collection (into a store) must be determined through a fair and appropriate allocation which encompasses a size curve that fits the demographics of the respective stores. Thereafter, it is important that stock is replenished in as efficiently as possible. Do you send the last XXXL coat size to a store? If it is a ‘long-shot’ that it will be sold at an individual store; it would probably be better to leave that XXXL coat within the DC in order for it to be ordered via the online channel.

Omni-channel retailing, in reality, means that the online channel supports the retail sales; subsequently life cycle strategies are extremely important and should be automated as much as is possible. If there is only 4 weeks of stock remaining within the DC, replenishment into certain stores should be ‘dampened’ down.

Clear strategy

Through developing a clear and coordinated strategy, retailers can regain control of their operation. Regardless of how the retail environment evolves, this strategic focus will enable retailers to operate as effectively as possible. Furthermore, with clear synergy between the corporate strategy and the supply chain team, retailers can ensure that their inventory strategy keeps up with the pace of the market.