MANAGING INVENTORY (EDI)
Byline: Faye Brookman
The topic of managing inventory may seem tedious at first glance, but the message at a session at the Summit was that it should never be overlooked.
“We have to have the product our customer wants when she wants it. If we can do this, then our profits will go up and we can invest more in innovative new products from manufacturers and exciting shopping environments from retailers,” said Ann Gravseth, vice president, director of merchandising, women’s accessories for J.C. Penney Co. She chronicled steps that Penney’s has taken to address inventory management.
The company supports all-Electronic Data Interchange for all purchasing functions and is experimenting with electronic funds transfer. “Basically, everything we do is 100 percent EDI,” Gravseth told the group.
Penney’s has a proprietary automatic replenishment program in place in 40 percent of its total dollar business. It manages basic inventory such as tops and underwear. Seventy-five percent of cosmetics is also managed by the system.
“Let’s look at what happened since we started this three years ago,” she said. “In 1995 we had what the customer wanted in basics less than 94 percent in stock, and this year we’re running close to 98 percent of an in-stock position.”
The system uses models to predict needs for replenishment, which runs about 12 days in cosmetics. “So the system orders as needed by stockkeeping unit, by color, by size, and in cosmetics we have it set to reorder every 14 days,” she said.
The third initiative at Penney’s is its Vision 2002. Using the Internet, Penney’s suppliers can link into Penney’s J-Web — an intranet site — and check on inventories, sell-through and purchase orders.
“A fax costs about 50 cents each, and we know you can’t always read a fax when you get it. E-mail is about 1 1/2 cents per (access). The system can be used 24 hours a day. Eighty percent of Penney’s suppliers are using it on a weekly basis,” Gravseth said.
Penney’s will further use the site to have a chat room with Elizabeth Taylor to promote an upcoming promotion for Passion. The site can also be used to tout which stores carry Penney’s Asian line, Zhen.
Marc Pritchard, vice president and general manager for Procter & Gamble’s cosmetics division, said inventory management actually begins with the consumer.
“The best way to managing inventory is to make shopping easy by making sure the right product is available every time. Today retailers and manufacturers invest more than $1 billion in inventory to keep products in stock, yet shopping in the mass category is far from easy.”
Because of inadequate systems in place in the industry today, many shoppers arrive at the store only to find their preferred shade is out of stock — and that’s after searching the 3,000 items on the cosmetics peg wall.
Most consumers then walk out of the store without a purchase. “Research shows the number-one complaint of mass shoppers is product availability. Twenty five percent of shoppers walk out of the mass store without a purchase,” he said. “What’s worse is what you’d find in the back of stores and in manufacturers’ warehouses — $1.3 billion in inventory, think of that — but we still can’t keep the right product in stock.”
Pritchard maintains that a more efficient inventory method can result in savings, yet improve in-stock positions. “That’s worth cash. Industry estimates indicated that almost 30 percent of mass cosmetics inventory is unnecessary. That is a $390 million opportunity waiting for us. That’s cash that can be reinvested,” he said.
P&G worked with several retailers to reduce complexities in how orders have been handled. Warehouses were manually collecting orders. Fifty percent of all orders were shipped incorrectly. The back rooms of retailers were also inefficient. Store personnel also made errors in making counts in stores.”You get the picture of the problem,” Pritchard said.
The solution has been to simplify the supply system. Warehouses have been automated and EDI implemented. P&G invested $28 million in one distribution center linked via EDI. Conveyors and computers run orders, which are now 98 percent accurate.
P&G is also using cross-docking to consolidate small orders into one big order that retailers can distribute to stores. In-store, P&G has vendor-managed inventory where P&G’s people go in and monitor inventory and ordering. Accuracy has improved to 99 percent.
“We simplified. We got out of the old world and leaped into the new world of EDI, automatic reorder and cross-docking,” said Pritchard. Key retailers averaged a 29 percent inventory reduction — one retailer saved $2 million.
Streamline ’97 is P&G’s program to make these improvements available to everyone. Eighty-five percent of sales volume is on EDI with a 99.7 percent accuracy rating in August despite the UPS strike. Sales volume has tripled with cross-docking. The company has passed on $4 million in savings from efficiencies, on its way to making a $390 million opportunity a reality.
“The icing on the cake is that the savings we get are being invested in savings for the consumer,” he said.
While the mass market has had the advantage of using scan data to manage inventory for several years, the prestige market is currently in the middle of instituting scanning to base decisions on sell-through rather than sell- in.
That was the thrust of Estee Lauder president and chief operating officer Fred Langhammer’s presentation.
“The key issue is this industry was built on a sell-in strategy rather than sell-through, and that has a lot of implications. As an industry, we have too often based decision-making processes on intuition and assumption with absence of fact. Inefficiency has crept into how we operate and we’re using this to change to drive the business by sell-through.”
Ninety-five percent of Estee Lauder’s distribution is on a system to collect weekly sell-through information yielding the capability to forecast, with a small deviation, for manufacturing.
Langhammer said the process will also help the company better allocate for second-year spending on new items, as well as determine items to delete. He said Lauder, in the past year, has reduced 200 stockkeeping units.
Joseph Fabrizio, senior vice president, director of stores for Boscov’s Department Stores, said management of inventory is a major challenge — even with scan tracking data and EDI.
He outlined ways to improve in-stock levels without overloading inventory.
“We need to improve every aspect of ordering, shipping and selling product,” he said. “We’re recommending a strategy to operate a collective effort between cosmetics vendor and buying staff,” he said. “I challenge retailers and vendors to share their information and become business partners,” he advised. “If not, our customers will suffer.”
Fabrizio said having the proper software programs are crucial. “We may develop a great system that works for us but not for our vendor, therefore it doesn’t work. Developing that system with the vendor is so important.”
Currently, 80 percent of Boscov’s cosmetics inventory is on quick replenishment, and he hopes to get the other 20 percent.
He urged manufacturers and retailers to work closer together with the goal of enjoying the profit greater technologies promise.
“There is still $12 billion to be saved if we improve Quick Response as an industry,” he said.