Rationalizing Inventory Can Improve Your RVP

By: Laura Smith

It’s no longer a surprise to hear about the drastic reductions in consumer spending and changes in retail buying behaviour over the past year. People are buying less, less often and retail stores are grappling with the decision of what strategy to pursue in a time of economic recession. A recent article by McKinsey & Company recommends retailers, especially those with weaker financial health and/or high growth potential, to focus on reducing costs; specifically by improving their inventory management. Rationalizing SKUs can free up working capital and increase shop-floor efficiency.

However, given our discussions regarding retailers’ RVPs, some might argue that reducing the amount of inventory on hand reduces the store’s selection – which could be its major point of differentiation – and therefore creates a tradeoff between cost savings and lost sales. In my opinion however, retailers can successfully rationalize inventory, as long as they find a way to compensate through other aspects of their RVP. Take the women’s shoe store, FeetFirst, for example. In an effort to reduce inventory costs (holding, handling, obsolesce, etc.), FeetFirst now holds far less shoes in each store, but has introduced ordering and delivery right to the customers’ doorstep, absolutely free. This policy is consistent for every product within the store, even sale items. Therefore customers looking for bargain prices no longer have to settle for the remaining sparse inventory left in the store.

Even though FeetFirst has reduced the selection of shoes immediately available, they have essentially increased selection for customers who are willing to wait a few extra days. For many, this greatly improves their overall experience and perhaps even the convenience factor of FeetFirst’s RVP, given the shoes are delivered directly to their home. Also improving the experience is the increase in staff’s willingness to help, because that they now have the resources available to meet customer needs. Further, reducing inventory shortens the time staff have to spend on non-customer facing tasks and increases the time they have available to help customers. (Even when it comes to cutting costs in general, retailers are correct to focus on retrieving more from their existing sales resources, as opposed to just cutting labour hours).

The best aspect of FeetFirst’s new strategy is that it treats sale-shoppers as equally valued customers. As more consumers begin to count their pennies, retail stores need to greatly improve their ability to treat these customers with the same attention, and even respect, as other shoppers. Soon, most consumers will be appreciating the price aspect of the RVP above all others, and retailers need to adapt their store strategies to meet the large majority.

Given the proper strategy, retailers can improve their RVP and likely increase sales, while still reducing costs by rationalizing inventory. My guess is that if executed well, retailers should see a positive connection between inventory metrics (such as sell-through per period) and consumer retention and satisfaction levels (perhaps even purchase size and frequency). If customers are treated well, I think retail stores will be pleasantly surprised with their patience in waiting for that perfect pair of high-heel shoes.





Sources:

The McKinsey Quarterly, Strategy. “How retailers can make the best of the slowdown.” Kotecha, A., Leibowitz, J. & I. MacKenzie, September 2008.

FeetFirst: Personal Experience