Inventory management has come a long way since companies simply sent an employee into the warehouse with a clipboard and a pen. While some businesses still operate with offline inventory management systems, which now can be quite complex, many have opted for the dynamism of Web-based applications.
Far from simply plugging in inventory numbers and letting these Internet opportunities lay dormant, many of these companies are looking for ways to optimize their systems for peak cost savings and improved sales.
Below, those who work in the field of online inventory management systems provide advice.
1. Work with clean data from start to finish.
Joe Palzkill, director of sales and marketing for Omaha, Neb.-based inventory management software provider Direct Tech, says inputting faulty numbers—which well-meaning companies may believe they can sanitize at a later date—is a mistake that can throw off the rest of the optimization process.
"It's the old garbage in garbage out phenomenon," Palzkill says.
George Mollo, president of Nanuet, N.Y. marketing consulting firm GJM Associates, says one of the best features of online inventory management systems is marketers can feed order information into the system in real time. That, for instance, allows the system to subtract products from the inventory count the company accepts as orders. This is far better for businesses than the antiquated batch system, in which companies update their inventories all at once—perhaps at the end of the day.
"So obviously," Mollo says, "[with] orders later in the day, if I was low on inventory, I could be telling a customer I had it in stock when, in fact, I didn't."
At the same time, he says, humans are still quite useful. There's no substitute for quality control, for instance, when a box with 23 items mechanically scans as 24.
2. Build a standard operating procedure.
Palzkill says companies need to determine who's responsible for what and when. This step is about more than deciding who should maintain data. Palzkill points out that there can be a bifurcation between the front office and the back office, with both sides needing to improve communication.
"Often, the Web is controlled by the marketing department and they're just driving customer traffic, and they aren't thinking about whether I have the inventory to even support that traffic," he says. "So there's a whole new way of thinking about it that the merchant and inventory group need to communicate."
Mollo provides the example of Amazon.com, which lets even customers know how many of a certain item are in stock.
3. Build a forecasting model.
Marketers need to ask themselves several questions when building forecasting models in conjunction with their online inventory management systems, says Richard Murphy, vice president of TCLogic of Indianapolis, which provides Web-based inventory management systems.
First, companies should define a goal, as stocking strategy is driven by a targeted service level, he says.
Next, Murphy says, businesses should determine what's driving their inventories. "Is the performance of your inventory being driven by demand points, such as intermittent demand, seasonal demand or trends in that demand pattern? Is it being driven by how you're being supplied? Is it being driven by how you're purchasing inventory, either overseas or domestically? Do [you] have variable lead time patterns? Do [you] have trending lead times, either upward or downward? And find out what is driving your inventory, and then focus the inventory buying decisions around those drivers. And once you've been able to focus around those drivers, then you're going to be able to develop metrics, and once you develop metrics, then you can start measuring the performance of those drivers," Murphy explains. "And hopefully, those drivers will be diminished by the improved stocking strategies that are developed."
Getting into specifics, Palzkill says, marketers can optimize by knowing the product start and end dates and stocking accordingly; managing online events and buying inventory at the appropriate time; and building forward-looking variance reports to address contingencies, such as anticipated additional inventory needs or the necessity of canceling a purchase order.
The most important benefit of Direct Tech's software for West Chester, Ohio-based home improvement product retailer Improvements was that Forecast*21 allowed the company to segment demand by source—whether sales came from the catalog or from the Web site, ImprovementsCatalog.com. Leslie Burke, Improvement's manager of merchandising information, says now the company basically has removed the problem of placing items on back order. "Now, because we know this is, in general, how [a product is] going to sell, how quickly we're going to go through the inventory, it allows [Improvements] to buy earlier and earlier," Burke says.
When marketers get all of this right, Murphy says, it can reduce costs—as it did for his client, W.W. Williams of Columbus, Ohio, a service parts distributor for a large engine manufacturer. "[The client was] able to redistribute that inventory throughout [its] network to appropriately match the demand at each of those  branches. By doing so, [it was] able to reduce [its] freight expenses of transferring product from branch to branch in order to meet demand."
Palzkill says the optimization provides another benefit to marketers: "It all comes down to sales and profits. If you manage your forecasts and inventory better, you will generate more sales because you'll have the inventory when they want it. If it isn't there, you lose the sale. And on the inventory side, you want to schedule your inventory for optimal cash flow. So you don't want the inventory too soon that it's sitting there and you're paying for inventory that you don't need."