Friday, August 16, 2013

Category Management Series: Considering Inventory As An Asset (Inspired by The Ikea Edge)

One new post in the category management series, linked to my reading of Anders Dahlvig book. Ikea has based its success on low pricing. But more than buying cheaper than the competition, one of the key component of this low price strategy is the mastery of supply chain and inventory. 

Most of retailers consider inventory as a liability. Indeed, a high inventory leads to decreasing the cash flow. Cash flow is important in the retail business. A positive cashflow, allowed by buying products with 30 to 60 days to a supplier and selling the merchandises in 5 to 10 days, allow the retailer to invest in opening new stores or new activities. Owning a high inventory is therefore considered as a bargain.

But rather than that, Ikea believes that Inventory is an asset. Having a high inventory allows your store to minimize the stock out situations, and then maximizes your sales. Low inventory leads to low stock in store, and hence you miss some sales. Ikea's main goal remain the sales.

Here is an example of how low inventory management has a bad impact on sales and the overal performance of one retailer: Most of retailers deliver its results at the end of the fiscal year, on december, 31st. Hence, most retailers tend to order as less as possible, to get as low stocks as possible. But the end of the year is a very important time of the year for a retailer, a period where retailers make most of their sales. By giving too much importance to low inventory, one retailer may miss some important sales.

Also, one more thing: Instead of trying to pay its supplier as far as possible, Ikea would rather pay their supplier on time. Indeed, paying suppliers far allows the retailer to play with its positive cashflow. But Ikea think differently: By paying its supplier on time, the supplier has less financing issues with its cashflow, which allows Ikea to gets better buying conditions, and then lower the cost of its inventory (because they get better conditions).

I believe it is a very unique way to consider inventory, but what I like about this philosophy is to always prefer stock availability than low stocks, because sales must always be the main and primarly goal of one retailer.