Inventory Optimization

That’s a lovely long tail you have!

The ultimate assortment conundrum

From prangs and punctures to general wear and tear, every car endures a lifetime of hardship. To prolong the life of these vehicles, a sophisticated aftermarket spare parts industry has taken off. Although Billions are spent every year on automotive parts and components, businesses operating in this sector face intensifying pressure from consumers to deliver goods as quickly as possible as well as fierce competition from other organizations.

In pursuit of a unique selling point, many businesses have developed extensive assortments encompassing many thousands of SKUs.  While this approach enables businesses to provide customers with a huge amount of choice, managing such a large number of items brings with it its own range of challenges.

When you consider that 80% of a business’s turnover is typically generated by just 20% of the assortment. By holding such large assortments, many businesses invest a huge amount of resources into managing thousands of items that offer limited value to the business in terms of profit but great value to the end customer. With this in mind, what can businesses do to maximize the value of their assortment without compromising their ability to meet the needs of their customers?

Refinement is everything!

Achieving a well refined assortment is about far more than just simply focusing all of your attention on ensuring that the best performing lines are managed as effectively as possible. In order to maximize the profitability of the assortment, inventory decisions should not be taken lightly, especially when it concerns long tail items.

However, unless you have a complete understanding of your assortment, how can you be sure that you are making the right inventory decisions? After all, while a slow moving line may seem like a costly waste of space in your DC, for certain customers, these items could well be the sole reason they buy from your business. Equally, if an item offers only a minimal return in terms of customer benefit or profit, is it really worth investing time and money ensuring that this item is always available?

Managing long tail items is a delicate balancing act between service levels and keeping investment in stock under control. In order to manage these items effectively, it is important that businesses have clear visibility over how each item contributes to the overall corporate goals: through categorizing items depending on their strategic importance to your business, you can begin to adopt a more tailored approach to manage the long tail.

Defining the long tail

For many businesses, it may not be clear exactly which items form part of the long tail. However, a well-structured ABC analysis can provide the insight required to identify clear product groups. While the process of conducting an ABC analysis allows you to gain a greater understanding of the assortment, it is essential that the parameters of the analysis are well aligned with the business’ overall objectives. After all, if your business is focused on customer satisfaction, categorizing items by margin alone will do little to help the business achieve its goals. How you define the boundaries within your assortment will depend heavily on what KPIs are most important to your business.

Essentially, there are two main objectives which determine the KPIs: on one hand the focus can be on the profit margins of an item or the turnover. Alternatively however, the financial elements can be put to one side and customer satisfaction in the form of order lines or transactions can be used as the foundation on which to build KPIs.

Remove the sting

To shape the assortment and help make informed decisions. The following 3 steps can be adopted today to help reduce inventory levels, improve cash flow and help maximize the profitability of your long tail.

1. Stocking decisions
There are likely to be a number of long tail items that are not worth stocking at all as they simply do not offer a significant enough margin to justify investing in stock. However, by not stocking such items, this may put customers off from purchasing items with much higher margins. For instance, while nuts and bolts are unlikely to offer large margins, no one will buy more expensive components if they cannot also get all the components that go with it. Furthermore, there also may be a number of items which are currently non-stocked which would actually be better to keep stocked at all times. This is particularly true for items where there is either a lengthy lead time or a low level of supplier reliability.

In order to make the correct stocking decisions, businesses should base their decision on a broad range of metrics. For instance; how much margin does a product offer? Does the product have a major impact on the sales of other items? How much footfall does the item create? Is there an alternative product that could be sold instead? Does the product have a political impact on supplier relations? Is the product important to the key customers?

In order to make the correct stocking decisions, businesses should base their decision on a broad range of metrics. For instance; how
much margin does a product offer? Does the product have a major impact on the sales of other items? How much footfall does the
item create? Is there an alternative product that could be sold instead? Does the product have a political impact on supplier relations?
Is the product important to the key customers?

2. Re-assess your inventory policy
Given that many long tail items are likely to have volatile demand patterns, it can be very difficult to determine exactly how much inventory should be held. Given that the level of safety stock will differ depending on the importance of each item, it is inevitable that A-line items are likely to have a greater requirement for safety stock as going out of stock could cost the business dearly. However, for long tail items determining safety stock can be a little more challenging.

On one hand, holding excessive safety stocks could mean unnecessarily tying up working capital into slow moving stock which is always at risk of becoming obsolete. However, on the other hand insufficient inventory levels could hamper sales and leave customers disappointed. In order to ensure that inventory levels are appropriate, there are a range of factors that have to be taken into consideration.

3. Prioritize areas which require attention
The real advantage of a well-developed ABC analysis, is that the outcomes enable you to prioritize the areas which require the most attention. With clear insight into which items have the biggest impact on your ability to achieve your strategic goals, you can begin to focus actions on areas which will deliver the greatest benefit. For instance, in order to optimize long tail items, this may present an opportunity to re-negotiate minimum order quantities and lead times or even find entirely new suppliers.

Through reviewing each category that arises as a result of the ABC analysis, you can gain a much clearer picture of how your assortment is performing. Consequently, this approach enables you to spend more time investigating potential problem areas within the long tail, thus helping ensuring the assortment is as refined as possible.

Accelerate the performance of your assortment

For any business, developing a large assortment with great breadth and depth can create a huge amount of value through enabling them to satisfy the needs of their customers. However, unless managed effectively, the long tail can be a huge drain on resources. In order to offer customers the choice and availability they demand while still keeping investment in stock under control, businesses must take steps to ensure that their inventory policy is well aligned with customer expectations, stocking decisions are well informed and opportunities to improve the performance of the assortment are prioritized in order to be exploited fully.

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