Several Smart Ways To Raise Profits By Decreasing Inventory

Decreasing your inventory for profit is not an oxymoron. Assortment Optimization doesn't always mean that retailers must meet, match, or exceed the competition's assortment by adding products. Determining what sells well and where you make the most profit are the places for retailers to concentrate their efforts. Using Assortment Intelligence analytics, retailers can capitalize on information about which products are not selling well or where are you carrying too much inventory for too long.

Benefits Of Limiting Inventory:

1. Higher stock turnover (by virtue of eliminating slow-selling items);

2. Lower stock-outs;

3. Higher bargaining power with vendors;

4. Higher sales per square foot (by reducing slow-selling items and using smaller store formats);

5. Higher profits (due to lower costs associated with pricing, recordkeeping, and carrying additional inventory).

Some Lessons From Costco To Make Your Website Business More Profitable:

-- Limit number of items listed on your website: "We have the same discipline online as we do in the warehouse," said a senior vice-president of eCommerce. Costco uses a limited selection on its web site, with just 5,000 items.

-- Keep a high percentage of online assortment unique to your Web site. If you have a website and a storefront, it keeps the experience unique and alive for store shoppers if products on the website are not available in Costco's membership warehouse locations.

-- List the same item multiple times in different product categories to make limited selection of merchandise appear much bigger than it is.

-- Use drop shipping for Web sales. About 80 percent of the merchandise sold on Costco's Website is shipped by its vendors, thereby freeing Costco from expenses associated with holding inventories, markdowns, and other related costs.

(See also, Barry Berman's post: 5 Ways Retailers Can Make More Profit By Reducing Product Assortment & Managing Websales Like Costco Does).

Avert Showrooming By Culling Inventory:

It was suggested in a Forbes Business article by Adam Ozimek, Are Retailer Showrooms Going Extinct? that a way to discourage showrooming at Best Buy is to cut inventory. "By keeping so many TVs on its sale floor, Best Buy is offering itself up as a showroom for Amazon... Don't make customers choose between seven different models of the same general product," says Farhad Manjoo of Slate. "Online retailers free ride on the showrooms of Best Buy when potential customers can walk into a store, check out the extensive stock, and go home and buy the product they like best online."

"The guy in the blue shirt shouldn’t make you choose between a dozen nearly identical models," notes Manjoo. Why not show you a single set, a TV that Best Buy’s experts have determined offers the best features at the best price, Manjoo suggests. (And make a sale right on the spot). "The firm could do the same across its inventory, culling the tech universe down to a few essential, can’t-beat products."

Bottom Line For Your Bottom Line:

Here's how wise use of Assortment Intelligence analytics benefit retailers: 

-- Helps avoid costly mistakes by projecting product assortment needs in advance;

-- Helps identify new opportunities around changes in product mix;

-- Helps find areas of potential cost reduction;

-- Helps discover overall effects of your assortment on the bottom line;

-- Helps plan on products that will bring profit with the least downside on inventory management.

Don't Drown In An Unmanageable Sea Of SKUS

"You cannot really be best at what you are doing if you have too much to manage," said the Costco executive. "The key to successful assortment management is to satisfy the shopper's need for choice and innovation -- and manage to be profitable -- without drowning in an unmanageable sea of SKUs."  
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Gilon Miller, CMO

About Author

Gilon is a seasoned marketing, sales and business development executive with over 15 years of experience in the software and Internet business. He is the Founder and CEO of GuruShots. Previously, Gilon was the CMO of Upstream Commerce, VP of Marketing at iMDsoft and Director of Global Marketing at SAP. He earned an MBA at the MIT Sloan School of Management and a BS in Electrical Engineering from Tufts University.
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