Download White paper - Stock control strategies for online retailers

White paper
Warehousing and Stock
Control Strategies for
Online Retailers
www.ecommercefulfilment.com
What you’ll learn:
The costs associated with storing and managing stock
How to determine the number of SKUs retailers should stock
How retailers can manage inventory to maximise sales
Introduction
While some retailers sell large quantities of just a few products, others have a
catalogue stretching to several thousand. There is no right number of SKUs to have of
course, but when it comes to storage, stock control and reporting, there is often a fine
balance between looking at the big picture, and not seeing what is important in the
details. Unfortunately too many businesses get it wrong and as a result waste a lot of
time and money; something that can make a big difference in the world of
multi-channel eCommerce.
The Cost of Stock
Clearly if a retailer lists more lines, they will need
to keep more inventory which equals more capital
investment. If you assume a 10% cost of capital
(what a bank will charge for a loan, or what a retailer
could make with the cash elsewhere) then the cost
of holding £10,000 more stock is £1,000 a year.
Therefore to justify the additional lines on this value
alone retailers would need to make an additional
£1,000 more profit after tax (not just £1,000 more
income) to break even. This might be £4,000-10,000
in turnover for most businesses.
Retailers also need more space to store the
inventory, and to invest more capital again in
shelving and racking to hold it. The cost of storage
can vary from free (back bedroom) to cheap
(sub-urban warehouse) to expensive (city centre
store).
Other costs include the very hard to apportion
overheads, which can be substantial. Managing the
inventory levels and producing orders, managing
more suppliers, time spent stock counting, time
spent looking for items in storage.
The greater the number of lines a retailer has, the
harder it will be to pick and pack orders accurately
and on time without increasingly sophisticated
software. If a retailer holds a large number of
product lines it becomes critical that they order the
right quantities to prevent over stocks which loses
retailers margin and under stocks which results in
loss of sales, all of which takes time and effort.
These costs alone can have a negative impact on the
value of the products and their margin
particularly when some product lines are slow
moving or do not sell at all. If one product sells half
as often as another the above costs will quickly
stack up and make the slower moving product less
valuable and may even lose the retailer money in the
end. If a retailer has 1000 SKUs with 500 single item
orders per month then only 50% of the stock held is
moving each month. Managing this is key to success
for online retailers. Identifying which items need an
uplift in sales can be difficult to identify quickly.
Assortment Strategy for Retailers
Retailers that sell a small number of products often
task themselves to achieve high product margins as
opposed to high volume that like to ‘Pile it high, sell
everything’. For example a retailer might have 1000
orders per month and 2000 SKUs, often the view is
taken that sales can be increased by doubling SKUs.
This is not good selling, anyone can sell something
on eBay tomorrow, it does not make them a great
salesperson. Increasing SKUs is not a sustainable
business model for the SME retailer. Large brands
such as John Lewis or Topshop sell a broad product
range and they are very good at managing the long
tail, it is what their business is built on. They
constantly monitor data to ensure they are
sweating the most from their products that take up
valuable space on their shelves/pages, but crucially
they are great at managing this and dropping the
underperforming SKUs. It is important to find the
right balance of variety to the customer and bottom
line profitability for your business.
In order to determine how many SKUs work for a
retailer, firstly it’s worth looking at how the market
retailers are selling in response, as they change the
number of products in stock. While choice is
something many consumers look for in some sectors
(fashion, for example), too much choice might make
it difficult for consumers to decide; possibly
reducing (or at least not improving) sales but
considerably increasing overheads and inventory
value. What an acceptable level of choice looks like
will depend on the market sector. For example,
consumers looking to buy sports clothing will expect
a range of garments, available in many sizes, with a
selection of styles and colours, whilst those
looking to buy street clothing or cashmere
jumpers will probably settle for a more limited
choice, provided the item they require is in stock. A
good way of getting a feel for the sector is to have a
look at competitors both in store and online. From
this, it is possible to assess whether more lines are
needed or fewer, but there are other factors.
As a retailer grows, they will sell more stock and so
have a quicker stock turnover. Since large
companies can place larger orders more often, it’s
much easier to have more product lines. For
example, a small company might order a box of 12
bottles of health supplements once a month,
providing them with four weeks stock of that line.
A larger company might sell that quantity in a week,
so they could place an order for four boxes and
still have the same stock cover (i.e. 4 weeks stock).
Alternatively, they could order one box each of four
different SKUs without increasing their
warehousing requirement. If a small company were
to try and do this by ordering in part cases, purchase
costs would likely rise, and just one customer
ordering 3-4 of the same item would put them out of
stock - which will definitely lose them sales.
It is a problem for retailers who have to have
variation - again, fashion sector would be the best
example. There must be size variation, but the key
issue is style variation because taste is subjective.
Retailers cannot stock something to please
everyone. Therefore you need to be selective and
offer as few styles as possible to maximise sales. For
example nightwear manufacturer Derek Rose and
street clothing brand Trapstar do not offer garments
in every colour under the sun but this does not
impact their sales. This is because they both took
great pains to understand their markets and offer
a smaller range of products that consumers in their
sector want.
In some markets, consumer electronics being one
and perhaps underwear being another, there is no
space for the low SKU retailer. Unless they have a
unique product that they are marketing, without a
big selection in these markets people will not spend
the time to browse only a few.
Tools which can help you succeed
as a retailer
What tools are there to help retailers manage this?
(Without the need to resort to huge spreadsheets.)
Analysing every single possible sale in detail. While
arguably this would give the retailer the most
complete information on which to base business
decisions, optimising a SME to this degree simply
isn’t possible and retailers need to accept that it
never will be. Such is the fast pace of eCommerce,
that by the time a retailer has finished creating
pages and pages of complex spreadsheets,
something will have changed and the process will
have to start again – only it will have taken so long
to analyse every detail that the competition will
be ahead. How is the smaller retailer to compete?
There are several methods but most revolve around
not holding inventory to start with (the other option
is to invest £ 000,000s and hope for the best).
- Just in Time ordering (JIT). Retailers list a large
range of products, but by buying only what they
have sold and probably by buying several times a
week, it’s still possible to offer a good service to the
end customer (if not the best) without any
inventory. Overheads will still be high, but not
intolerable.
- Drop ship. The retailer is in effect just advertising
someone else’s products and taking a commission,
however unlike an affiliate scheme the retailer takes
payment and deals with the customer service side,
while the dropshipper sends the inventory. In this
case it is essential to have a good drop shipping
partner.
- Outsource fulfilment. Outsourcing allows retail to
apportion the costs of storing, picking and packing a
product quite easily. Best in class fulfilment services
can offer analysis tools to help retailers see at a
glance which SKUs are overstocked but still
profitable, which are overstocked and will lose
the retailer margin due to the costs of storage and
which lines need to be reordered based on the rate
of sale and lead times.
If outsourcing is not an option the following
calculation can provide the information a retailer
needs. Calculate the storage cost per cubic foot, and
a pick cost per product (divide total annual labour
cost by number of items). Likewise other costs can
be apportioned in a similar fashion. It may take a
while, especially if the retailer stocks lots of lines,
but it will provide a real insight into the costs
involved.
www.ecommercefulfilment.com
Conclusion
While the above solutions are certainly succesful
for many companies, retailers that have a small,
but carefully selected range of niche or specialist
products which they despatch from stock, stand the
highest potential of making the best margins.
About James and James
James and James help SMEs to focus on their sales
by providing a completely outsourced warehousing and order fulfilment solution. James and James
store, pick, pack and despatch orders on behalf of
online retailers.
James and James founded their fulfilment company
because they were both frustrated by outdated
logistics systems in retail. They solved a number of
issues present in the logistics industry by building a
warehouse management system from scratch,
utilising cloud technologies and without
preconceptions.
The result is a warehouse that provides complete
visibility to retailers - often they can see the
operation in more detail than if it were in-house.
By using cloud-based technology their system is
quickly scalable, allowing them to bring on more
warehouses in a matter of days.
Information is provided in real-time over the
internet; a big change from the old days of emails
and file transfers. Since their technology allows
James and James to integrate with multiple online
shops, accounting packages and CRMs, they allow
logistics to be automated, meaning companies can
benefit in a way normally only affordable by very big
businesses.