Demand & Inventory Planning

It’s All in the Data: SKU Management for Merchants

Demand & Inventory Planning
February 24, 2022
7 min read

Ware2Go’s Senior Director of Business Operations shares how proper inventory management improves profitability and how merchants of all sizes can use data to make smarter decisions about their business.

Small to mid-sized merchants differ wildly when it comes to cash flow, employee count, and internal expertise. However, most fast-growing brands have a great deal of strength in the areas of marketing, sales, and product development. 

Supply chain expertise, on the other hand, is in high demand, and most supply chain professionals are working in the world of enterprise and consulting. Similarly, an SMB may be fortunate enough to have supply chain expertise at the top of the organization, but it’s often difficult to communicate that information down, or high-level supply chain functions are deprioritized for more immediate day-to-day needs. 

That means most SMB’s are working with limited data and analytics on the supply chain side, and often inventory management and demand management are based on educated guesses and rarely tied to sales data or demand patterns. While inventory management expertise may seem like a nice-to-have for a fast-growing business, it can actually be the key to unlock growth potential and gain a competitive edge in a crowded market.

On the other hand, poor inventory management may leave some young companies feeling like they’re spinning their wheels. Some symptoms of poor inventory management include:

  1. An over-indexed product catalog full of slow-moving SKUs that can drag down the profitability of top sellers
  2. Stockouts that result in missed sales opportunities
  3. Slow inventory turns that drive up inventory carry costs and tie up working capital
  4. Too many expensive long-zone shipments and next-day air for final mile deliveries
  5. Mistaking sales velocity for profitability

Since artificial intelligence and machine learning have hit the scene in supply chain, SMBs have gained access to some of the same reporting capabilities that legacy retailers and enterprises use to forecast demand and manage inventory. These reporting capabilities are powered by an integrated Warehouse Management System (WMS), Transportation Management System (TMS), and Order Management System (OMS) like Ware2Go’s software, FulfillmentVu.

Historically, advanced reporting of this kind required a sophisticated logistics team to ingest and interpret mountains of data. However, by implementing machine learning and AI, many of these processes can now be automated and are accessible to businesses of all sizes. Ahead, I’ll discuss how access to advanced reporting capabilities can help merchants address each of the four challenges listed above.

1. SKU Hygiene: 

Most SMBs’ SKUs fall into one of three categories. Most merchants can easily identify two of them – the high-velocity revenue drivers (A-movers) and the test products or big risks that didn’t pay off and need to be liquidated. The third category can be quietly dragging down the profitability of your A-movers. These are SKUs that may turn one to four times per year, depending on product type. They’re selling, but slowly. Especially with the current warehousing shortage and storage costs at an all-time high, keeping these slow-moving SKUs in your catalog can eat up profits with long-term storage costs.

And these categories need to be examined on a regular basis. Demand is often a revolving door, and the products that moved the needle for you in Q1 may no longer be moving at the same velocity. Regular reporting that highlights changes in sales velocity can prevent you from over-ordering on your next replenishment.

2. Stockouts

Demand forecasting is certainly an important factor in avoiding stockouts, but fulfillment technology has the capability to go step further. The first step is to set automatic reminders to re-order that are triggered when inventory levels reach a certain threshold. The next and more advanced step is to implement AI and machine learning, to recommend reorder points and quantities based on changes in sales velocity that may have gone unnoticed and act as a fail-safe against missed sales opportunities due to stockouts.

3. Slow Inventory Turns

Ultimately, inventory is most merchants’ greatest capital investment. Inventory that sits on a shelf unsold for more than a quarter represents tied up capital that could be invested in product development, marketing, or replenishing more profitable SKUs.

Smart fulfillment reporting can flag slow-moving SKUs, allowing you to measure storage costs against the sale value of the product. This can help you make important decisions about discounting, running a promotion, or discontinuing a product that’s not selling.

4. Inflated Final Mile Delivery Costs

  1. Long-zone shipments
  2. Over-reliance on Next-Day Air

The most affordable way for merchants of all sizes to meet consumers’ 1- to 2-day delivery expectations is to position inventory as close to their end customers as possible. This lowers their time in transit (TNT), both increasing speed to delivery and decreasing cost.

With regular reporting, you can see if you’re sending too many long-zone or Next-Day Air shipments. With a tool like Ware2Go’s free application, NetworkVu, you can even see recommendations of where to move inventory to lower TNT and decrease final mile delivery costs.

5. High Sales Volume with Low Profitability

If you’re not closely monitoring sales at the SKU level, it can be easy to conflate sales with profit. If you’re not closely monitoring the overall impact of sales on a per-shipment basis, you may end up selling yourself out of business.

For example, if you run a BOGO promotion on a low-margin product, you may find that even with an influx in sales, the price differential will never actually improve your profitability. This is where having a fully integrated WMS, TMS, and OMS can take reporting and analytics even a step further. Measuring sales velocity against the entire cost of goods sold (COGS) on a per-shipment basis can help merchants make marketing and promotional decisions that materially affect the profitability of their business.

A Supply Chain Roadmap

The supply chain disruptions brought on by the pandemic have forced businesses of all sizes to prioritize resilience and flexibility in their supply chain. There’s no doubt that the merchants who are nimble and can pivot quickly in the face of market disruptions will ultimately come out on top. But more than that, the merchants who have the insights to make those pivots based on their own sales and fulfillment data will have a clear roadmap to work from and the confidence that their decisions will drive real and sustainable growth for their business.

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