Control your inventory in a world of lean retailing

As retailers adopt lean retailing practices, manufacturers are feeling the pinch. Retailers no longer place large seasonal orders for goods in advance-instead, they require ongoing replenishment of stock, forcing manufacturers to predict demand and then hold substantial inventories indefinitely. Manufacturers now carry the cost of inventory risk--the possibility that demand will dry up and goods will have to be sold below cost. And as product proliferation increases, customer demand becomes harder to predict. Most manufacturers apply one inventory policy for all stock-keeping units in a product line. But the inventory demand for SKUs within the same product line can vary significantly. SKUs with high volume typically have little variation in weekly sales, while slow-selling SKUs can vary enormously in weekly sales. The greater the variation, the larger the inventory the manufacturer must hold relative to an SKU's expected weekly sales. By differentiating inventory policies at the SKU level, manufacturers can reduce inventories for the high-volume SKUs and increase them for the low-volume ones--and thereby improve the profit-ability of the entire line. SKU-level differentiation can also be applied to sourcing strategies. Instead of producing all the SKUs for a product line at a single location, either offshore at low cost or close to market at higher cost, manufacturers can typically do better by going for a mixed allocation. Low-variation goods should be produced mainly offshore, while high-variation goods are best made close to markets.