Best Practices for Fashion Inventory Management

The second largest fashion retailing company in the world, H&M, is “struggling with a mounting stack of unsold inventory” – to the huge extent of 4.3 billion USD, according to The New York Times. If the best companies like H&M suffer from mismanaged inventory and over-stock, the challenges for SMEs and primary retailers can get even tough!

So, Inventory management software and inventory control techniques become a must for fashion retailers to avoid above mentioned blunders!

PwC in 2018, unfolded that 32% of loyal customers will walk away from even their favorite brand, after a single bad experience. If you want successful retailing, here are

Get your basics right at first: Inventory management techniques

Understand your stock and its priorities first. Every business and every product can have different needs when it comes to managing stock. Boil down options to find the fitting inventory management technique/s that help you not just sort your inventory, but also predict and absorb any expected or unexpected seasonal/ trend based changes in the inventory by analyzing margins.

One of the highly suitable inventory styles to put your fashion stock uphold is ABC technique which uses ‘the 80/20 rule’ of Vilfredo Pareto that says that 80% of effects come from 20% of the causes.

Source: http://www.leanlab.name/the-abc-analysis

In this technique, review your inventory and sort all products into three categories: A, B, and C. As shown above, the standard categorization is: “A” category includes 20% volume of inventory which is high selling having 80% value, “B” category includes 30% of the volume having 15% value, and “C” category includes 50%  volume having just 5% value. The numbers may differ from business to business, but you should be able to discern a similar kind of pattern from your inventory. Recognizing your product catalog and categorizing it will help you in knowing which piece is doing good (and how good) in the market and also run the flow of stock smoothly and analyze efficiently.

The most promising method that seasonal retailers have been using far and wide is the FIFO stock control method, which means the products that came in first have to be sold first.

Let’s take up an example:

You sell bags, and you bought them twice this month: The first batch- 100 bags at $10 each and second batch- 200 bags at $20. At the end of the month, you sold 40 bags. So, according to FIFO, the Cost of goods sold would be calculated as:

COGS = (40 bags x $10 FIFO cost) = $400

60 bags from the first purchase are still left on the shelves, cost at $10 each, as well as the remaining 200 bags from the second purchase at $20 each. So: Remaining inventory = (60 bags x $10 cost) + (200 bags at $20 cost) = $4,600

This technique helps you ensure that your products don’t expire on shelves itself!

Other techniques:

Last-in, last-out (LIFO) inventory valuation method assumes that the most recently purchased or manufactured items are sold first – the exact opposite of the FIFO method. When the prices of goods increase, COGS in the LIFO method is relatively higher, and ending inventory balance is relatively lower. Counting COGS for the above example using LIFO: COGS = (40 bags x $20 LIFO cost) = $1,000

Weighted average cost (WAC) is an average where each observation in the data set is multiplied by a predetermined weight before calculation. WAC= COGS available for sale/ the number of units available for sale. In this calculation, the cost of goods available for sale is the sum of beginning inventory and net purchases.

As fashion products are seasonal and trend-based, each product should be coded accordingly. Creating product SKUs as per the season, trend, or another influential basis and entering them in the inventory management software helps in managing, classifying, and quickly analyzing the stock.

The above infographic depicts how you can generate an SKU that includes all information about your product- from Brand name, to the season, to trend and variants too- such a wholesome barcode should be prepared.

Picking and packing are fundamental processes that are executed back to back, continually in retailing. Set up your inventory in a way that your best-selling products appear in front rows and less-selling products are kept behind so that while picking the products from racks, the number of rounds can be reduced. Create consolidated pick-up lists that are based on 1. Item 2. Location, or 3. Order, to make the pick and pack process faster.

Choose the right packing material that doesn’t take up too much space in the warehouse and is pocket-friendly.

Retailers often deliver their products via different courier companies- the packing and storing of products should be done separately, and differentiated storage space should be given for it in the inventory.

Keep the packaging easy to carry, yet enough strong and sturdy that it reaches safely to the customer even in adverse conditions which avoid returns of damaged goods or tampered packaging and saves costs on reshipping.

It’s unfair when customers place fraud returns! Fight them smartly- Record a video while packing and labeling your products which stands out as proof! It’s just that simple.

About returned, damaged or to be disposed products– Keep a separate record in your inventory for each one that is apart from freshly received stock to ease up packing, dispatching or settling returned products.

Make the most of your surplus stock–

1. Return damaged, stained or defective products to the vendor for a refund or sell at discounted rates if they can be refurbished or repaired.

2. Returned products can be reused and updated as fresh stock in the software, only if refurbishing is possible.

3. Out-of-season stock can be kept as a reserve, and temporarily it can be removed from the data of current inventory.

4. Don’t let your returned products get stocked up, sort and update them asap otherwise they’d just get lost into the massive inventory of yours.

Online marketplaces like Amazon manages returns by following ‘Amazon’s A-to-z Guarantee claims’ returns policy that is neutrally governed. Amazon lets the buyer file an ‘A-to-z Guarantee claim’ after buyer and seller can’t settle the issue. For every claim buyer proposes, Amazon provides the seller a chance to present their side of the matter providing a window of 5 business days in which the seller can issue a refund or communicate to the buyer and settle the matter or lastly, report the buyer to Amazon if the buyer is found a fraud.

Customer-centric automation can be done by setting up shipping details, choosing shipping courier, his/ her address and all required information with that particular customer and add tags or needed customizable features using custom triggers so that order can be automated.

Automate your order by setting time-based triggers– to buy 100 units of your product on 1st of every month or after every 20 days. Automate Purchase Order creation when inventory pieces reduce to a certain extent, 20% of your inventory capacity is the advisable level when you can set a reorder automation. This way, order management and a standard amount of inventory can be maintained even if you miss out on repurchasing. Automation also forecasts your future order to be placed by predicting your order and demand patterns. Set real-time variant-wise stock updates and get POS analytics done efficiently, which you can share with your suppliers and discuss further to aid decision-making and profitability. Automatic E-mailing to customers on events like order acceptance, shipment, return invoice, etc. can save time. Shipping label generation and shipment tracking number can be set to generate automatically by condition-based triggers.

The automatic warehouse transfer, from one active warehouse to a stock-up warehouse, can also be set after a particular season ends or at some period within a year, whichever is decided upon. Send orders to Amazon MCF– if you are using FBA ( Fulfillment by Amazon ) for stocking & shipping,  and selling across multiple e-commerce stores & marketplaces, then automatically submit your multi-channel orders to FBA inventory using Auto-MCF. The software can allow you to set specific criteria & parameters based on which your incoming orders will be automatically sent to AmazonFBA.

Once the inventory starts flowing, start analyzing.

Where your stock is going wrong? Or where is it lying? And why?… Answers to these questions via statistics as the numbers speak for the inventory status and levels of operations. Monitor the following few essential metrics regularly:

Service level metrics

Service level metrics are the criteria negotiated between a customer and their service provider that define a quantitative target that has to be achieved for the service provided. Let’s understand all the service level metrics about Amazon:

The Order Defect Rate (ODR) is calculated by

All orders with a defect as a percentage of total orders during a given 60-day time period. Amazon’s policy requires sellers to maintain an ODR under 1% to sell on Amazon.

The Return Dissatisfaction Rate (RDR) measures your customers’ satisfaction with their return experience. Return Dissatisfaction Rate = All negative return requests* as a percentage of total return requests. Amazon’s policy requires sellers to maintain an RDR under 10%.

*Negative return experience includes Negative Feedback Rate where a return request has negative buyer feedback. Late Response Rate where a buyer is not responded to within 48 hours. Invalid Rejection Rate which is the incorrectly denied orders.

Customer Acquisition Cost is calculated by dividing all of the marketing expenses by the number of Customers gained in a particular period.

Cancellation Rate (CR) means all orders as a percentage of total orders during a given 7-day time period. Amazon asks sellers to maintain a CR under 2.5%.

Late Shipment Rate (LSR) means all orders with a ship confirmation that is completed after the expected ship date as a percentage of total orders over both a 10-day or 30-day period. Amazon asks sellers to maintain an LSR under 4%.

Other metrics

Inventory turnover rate is a ratio showing how many times a company has sold and replaced inventory during a given period.

Inventory to sales ratio can be calculated by dividing average units of inventory available by total units sold, which reduces your Stock to Sales Ratio as low as possible, without losing sales.

Carrying costs of inventory are all the expenses associated with holding inventory, including maintenance, storage costs, warehouse costs, and scrap costs. There are four significant components of inventory carrying cost: capital cost, storage space cost, inventory service cost, and inventory risk cost. Summing up the carrying costs-

Hence, the above points prove that inventory management & practices are a crucial part of businesses involving retailing as they can make or break profits.

Fashion houses are generally apprehended as a fancy business only. But to develop a successful fashion label, never forget to pay detailed attention to behind-the-scenes activities like inventory!