Part 3: Perspectives and Types
Perspectives refer to location hierarchy levels, like store, distribution center, wholesale customer, or company.
Types refer to the level of ownership, or commitment, the perspective has on the inventory, like what is physically in the store or what is physically in the store plus what is in-transit.
- Perspective: From whose point-of-view
- Types: Where is my inventory in the supply chain?
Conservation of Inventory
Just one comment before we jump in to perspectives. This is probably the most important concept regarding the inventory balance set: inventory must add up to what you started with and what was added minus what was removed.
When we talk about perspectives such as a store or a distribution center, the conservation of inventory is still in effect. What is a transfer-out of one system may be a transfer-in to another system but no matter which perspective you take the inventory will always balance.
Let’s look at an easy example. Let’s say I have 1000 units in the distribution center and 100 units in the store. I want to transfer 50 units from the DC to the store. Assume a zero leadtime for purposes of illustration.
Our total system has 1100 units of inventory. Now when I transfer the inventory from one perspective to another notice the total system inventory is preserved. Let’s move 50 units from the DC.
We’ll explore three types of perspectives as it relates to the inventory balance set:
- Supply Chain – how inventory moves from a factory to the final selling location.
- Seasons – how inventory, particular softline product, moves around.
- Sales Channels – Within the supply chain there are other refinements that need to be made that support the various sales channels a retailer may have.
What I’m about to describe is my point-of-view on the difference between receipts and transfers. To be honest, there’s really no right answer as long as the inventory remains balanced. But having worked with these equations in many analytics there are definitely methods that make life a lot easier.
Receipts occur when inventory is considered to be owned for the first time into the business’ supply chain. All subsequent inventory movements within the supply chain are transfers. This makes balancing the inventory much easier and you can track the movement to and from transfer locations.
Equations get very confusing and challenging to interpret if you call a transfer a receipt after it’s been introduced into the supply chain. For example, let’s say a store obtains inventory from the distribution center and directly from a factory, or a drop ship.
The drop shop should be considered a receipt and the DC inventory should be a transfer. If the DC inventory was defined as a receipt then there’s no easy way to reconcile the inventory movement within the supply chain, i.e., between the DC and the store, because it’s mixed up with the drop ships.
In addition to the challenges caused by defining DC to store movements as receipts, there is the additional problem of measuring in-transit. Some retailers will assign ownership to stores immediately after a transfer is requested. Technically, this is not yet a receipt because the inventory is still in the DC. The transfer-in metric can be part of the store’s inventory balance set, accomplishing the ownership issue.
Let’s take another look at our DC and store example. Let’s add receipts this time. We’ll ship 200 units from the factory to the DC and 150 units from the factory directly to the store. We’ll continue to assume a zero leadtime.
Nice and clean. And, it allows us to track where the inventory came from and where it is going. Finally, it allows us to introduce in-transit and on-order measures and allows us to conduct further analysis on where the inventory is located, who owns it, and when it is likely to show up.
With regard to in-transit and on-orders, I’ll cover that in more detail later on in this post when we talk about about types.
Up to now we’ve only talked about inventory movements as it relates to locations: stores, distribution centers, factories, etc.. Seasons are generally considered as product attributes not time attributes even though they conceptually are thought of having a begin and end. So moving inventory from one season to another is anything but intuitive.
Seasons are fundamental to softline merchandise planning. Typically as part of an assortment plan they form the foundation of what the merchant would like the customer to see when they walk in the physical store or virtual store (online). There simply is no easy way to reconcile this type of assortment plan to a fiscal, merchandising plan without some type of compromise.
Remembering our guiding principle: the conservation of inventory will help us greatly here. I have managed this two ways both having their own pros/cons which I’ll discuss, but both will maintain a balanced inventory set. The first is to create another set of transfer metrics. The second is to harden the begin and end of a season and associate specific inventory deliveries to a season.
Extra Balance Set
Creating another set of transfer metrics allows every merchant to determine for themselves when they feel a season begins or ends, or if perhaps, they want to carryover their inventory. The challenge with this method is that the inventory movement is completely dependent on the merchant to make this indication and that every merchant uses this indicator consistently.
IT has a role to play too because the data transformations are critical to maintaining inventory balance sets. The ETL, extract-transform-load, team will need to make a debit/credit transaction every time inventory is moved from one season to another. Make the inventory movement transparent to the merchants and simple to understand.
Also, to make matters a little easier, you might consider creating an alternative hierarchy off of the product grain (usually style-color). This simplifies the reconciliation to a fiscal calendar. For IT, this will require a table with the time-product hierarchy intersection or, if performance is a problem, these will need to be de-normalized on the main tables.
Here’s how a balance set might look.
Hard Season Begin and End
By hardening the begin and end date of a season simplifies reporting greatly but it also means that all merchants must agree to these time frames. This method presents some geographic issues particularly around climate and hemispheres. Sometimes we forget when it’s winter in the northern hemisphere it’s summer in the southern hemisphere.
To work around some of these challenges, some retailers will associate deliveries to specific seasons. For example, receipts associated with a March 15 delivery may be defined as Summer even though the delivery name says March 15 which is in the Spring.
Methods that hard code seasons present a big challenge with how to associate the sales to a particular season especially if the inventory extends well beyond their intended selling period. One solution is to automatically move the inventory out of the season and into a carryover status. The carryover attribute can be a season, or just a product attribute/indicator. This provides a good analytic to distinguish new inventory from older inventory.
If the retailer is fortunate to be operating in more than one sales channel, as most are now, then you’ll need a mechanism to move inventory between them. The most important thing to remember is to consider the “perspective” each channel has. Here are some of the more typical sales channels to consider:
- Traditional Retail Stores (Brick & Mortar)
- Store In A Store (Concession)
- Outlet (Factory Stores)
- Drop Ship
Moving inventory between and within some of these channels probably requires a deep understanding of your company’s transportation logistics operations. Two important nuances are worth mentioning.
Transfers to Outlet or Factory Stores. Traditionally, these transfers typically are done to move inventory from a full price store to an outlet store after a season, or particular assortment mix is past-season. These transfers may reset the MSRP valuations in order to calculate more meaningful discounts and/or markdowns. Careful consideration to accounting laws should be taken. More and more, outlet channels are producing their own inventory in order to make the store look well-rounded so mixing the inventory brings all kinds of interesting challenges.
Wholesale: Your Perspective Or Theirs? The great thing about technology like EDI is that your wholesale customers may be willing to share the sales and inventory with you in a consistently defined manner. This is particularly important to the wholesaler because it allows them to calculate the demand of their products and enables them to forecast future seasons, among other things. The challenge is to make sure your inventory balancing is done based on the “perspective” of the channel. For example, If the perspective is your company, then shipments into the wholesale channel would be considered a “retail sale at a wholesale MSRP value”. The same inventory to the wholesale account would be considered a “receipt at cost”.
In this section I’ll discuss the inventory status, or “where is the inventory”? There are hundreds of measurements taken by retailers but here are the most popular:
Inventory Types and Inventory Statuses
- Planned But Not Ordered. This might be part of a merchandise plan, assortment plan or ladder plan, or it might be a commitment to buy to a factory such as a blanket order. But at this stage, a purchase order has not been written.
- Ordered But Not Shipped. This type marks the beginning of the “On-Order” stage where a purchase order has been written but the factory has not yet shipped.
- Shipped / Inbound. Still considered to be on-order but the physical inventory is on it’s way to your initial destination, presumably a distribution center.
- DC Onhand. The physical inventory has been received and three-way matched indicating (usually) that your company is now the owner of the inventory.
- Allocated. Once received, the inventory is then allocated to a particular sales channel, immediately flows thru the DC, or is put away in stock and allocated at a later time.
- In-Transit / Outbound. This is physical inventory that has left the distribution center and is currently on its way to the final destination.
- Transferred-In. The final destination has taken possession of the physical inventory.
- Sale. Inventory has been sold.
- Transferred-Out / Adjustment. Excess inventory is transferred to another location or is adjusted in some way, such as for shrink or a retail/cost adjustment.