retailers purchasing and distribution system should be set
up to bring supply as close as possible to demand, thereby dramatically
reducing unnecessary inventory and minimizing lost sales. Carrying
unnecessary inventory creates financing costs and forces a retailer
to sell at markdowns, eroding margins in both cases. The flip side
is not having the correct item in stock and therefore failing to
satisfy a customer. This unsatisfied customer is not one of the
millions of potential customers somewhere out there, but one of
the select and valuable few who made it into your store, liked one
of the styles you have, was willing to pay the price you ask, but
you didnt have the correct color and size. To use
a baseball analogy, this is like striking out with the bases loaded
and two outs.
retailers whose distribution systems are set up to understand and
respond to their demand will be the winners in the marketplace.
The way to read demand is through Minimums, which set a minimum
stock level for each item, in each store, based on actual historic
sales. The Minimum serves as an equilibrium point: stock levels
above the Minimum mean you are overstocked and keeping capital unnecessarily
tied up in inventory that will not sell; stock levels below the
Minimum mean that you are understocked and risk losing sales. So
a retailers supply system must be calibrated to keep the stock
levels (item by item) as close to this equilibrium level as possible.
Just to keep things interesting, this equilibrium level is a moving
target as customers tastes are constantly changing.
an ideal distribution system, Minimums should be used to control
distribution of merchandise from a central warehouse to the stores.
Therefore, the actual Minimum depends on the time it takes to move
an item from a warehouse to a given store. Maximums, on the other
hand, should be used to control the purchasing of merchandise from
vendors and its shipment to the central warehouse (see figure above).
it takes one week for your warehouse to process a transfer order
and send an item out to a store. To keep the example simple, we
would want our Minimum to be the amount of items sold during that
seven day period. Now suppose that for this particular style, our
vendors need four weeks to re-supply our warehouse in which case,
we would want our Minimum to be equal to the amount of items sold
during that seven day period multiplied by four (or even better,
the amount of items we have sold in the last 28 days).
To continue with our example, lets suppose you last week a
certain store sold three white, size 4 Tommy sneakers.
This store would order 3 more white, size 4 Tommys from the central
warehouse. At the same time, the warehouse would order 21 white,
size 4 Tommys from the vendor. If the following week the same store
sold 4 white, size 4 Tommys, it would order 4 more pairs from the
warehouse, which would, in turn, order 28 pairs from the vendor.
We can imagine a line of imaginary trucks full of Tommy sneakers
each week waiting their turn to deliver the shoes to our hypothetical