Roadmap to Perpetual Inventory

By  Alana Okun — July 27, 2006

To achieve a greater return with less investment in inventory, retailers must update and automate existing inventory planning processes to improve in-stock positions while reducing overall inventory levels. For many retailers perpetual inventory systems can mean the difference between success and failure. Advanced technologies and algorithms are available to provide retailers with the visibility and control over inventory needed to improve customer service levels.


What It Means


Perpetual inventory is the practice of tracking and knowing the value of inventory and quantity of merchandise on hand at any time by tracking sales, returns and receipts with information systems. It enables merchants to make better, more fact-based assortment and inventory management decisions and helps sales associates locate merchandise through the inventory management system, rather than calling other stores to locate an item. Customers benefit from having merchandise more readily available. These efforts contribute to higher comparable store sales, improved profitability, higher customer and employee satisfaction as well as cost savings.


Traditional inventory management practices are being made obsolete by increasing global sourcing and contract manufacturing, more dynamic product life cycles and multi-channel distribution, says Beth Enslow, analyst with Aberdeen Group in the report: Are Your Inventory Management Practices Outdated? These trends are driving the need for companies to adopt new inventory management technology that better accounts for supply chain complexity and can reduce inventories by 20 to 30 percent, while simultaneously increasing customer service levels.


Whats At Stake


Getting customers into the store is only part of a retailers battle. Retailers must have the products customers want once they are in the door. Customers indicate that having products in-stock was two to three times more important than any other expectation, more so than usual desires like efficient check out and available sales help, according to the AMR Research report: Retailers: Well-Stocked Store Shelves Brighten Everyones Holidays. Getting replenishment right is critical; 47 percent of the consumers surveyed said they will shop elsewhere if an item they want is out of stock, and just two percent will return to the same store when the product becomes available, according to the report.


Perpetual inventory can help improve gross margins and ROI by minimizing inventory carrying costs, reducing lost sales through improved in-stock, reducing markdowns and store-to-store transfers with timelier product availability, and improving productivity at the distribution centers and stores. For example, Wal-Mart sold 700,000 DVD players at a loss over the weekend, but had stacks of a profitable accessory kit sitting next to the players, according to AMR. Sixty five percent of people buying a DVD player also bought an accessory kit, and the net result was a profitable promotion. The company also credited deeper assortments and a wider range of price points with helping weekend sales. The bedrock of success for efforts like these is product on the shelves.


How To Succeed


While perpetual inventory systems and mobile computers are critical in improving inventory visibility and accuracy, information accuracy is key to successfully achieving perpetual inventory. If the information is inaccurate, the ability of the system to provide a high availability of products at the minimal operating cost can be compromised, says Rob Garf, research director, AMR Research. Even a small rate of stock loss undetected by the information system can lead to inventory inaccuracy that disrupts the replenishment process and creates severe out-of-stock situations.


In order to employ perpetual inventory, retailers must treat their stores like a distribution center, says Garf. There are many steps required to account for location of product items must be scanned as they enter the back room, product must be scanned as it is placed on the shelf and it must be accurately scanned at the POS.


As with any IT-related project, retailers should start by revaluating the organizations processes, avoid underestimating the cultural barriers involved in upgrading inventory management systems, and determine how store labor will be impacted by additional steps. The increase of steps in accounting for the products moving from the truck to the backroom to the shelf increases labor, says Garf. However, that should be offset once the retailer reaches computer assisted ordering, which will decrease the manual replenishment process.


Retailers such as RadioShack are relying on high-performance technology and processes to improve inventory management. The company replaced several legacy systems in order to create a more agile enterprise. Working with Accenture, the retailer was able to define the new application architecture, including Oracle-Retek Merchandising System, Manugistics Demand and Fulfillment modules and Manugistics Transportation suite.


RadioShack now has the ability to manage store-level perpetual inventory and accurate in-stock for more than 15,000 items across its 7,200 stores. Service levels have improved and the cost savings from this initiative are meeting RadioShacks expectations. Accenture also worked with RadioShack to develop a new process design, organizational model and training plan to improve its distribution center inventory planning process.



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