Businesses’ Hatred Of Keeping Products In Inventory Is Their Fatal Flaw In Competing With Amazon
The one thing a physical store can do that Amazon can’t is provide immediate availability, but retailers hate keeping products on the shelf
By David Grace (Amazon Page — David Grace Website)
A Simple Example
The coax cable connecting my hard-disk recorder to my flat screen failed and I needed a replacement. I drove to the Best Buy about a fifteen minute round trip from my home.
The store had more visible employees than it did customers.
A young man in the AV-cables section told me, “We only have twenty-five foot coax cables. They’re $25. Our Sunnyvale store has some shorter ones.”
The Sunnyvale store was a round trip of more than another half an hour’s drive away, so I went home.
Just for fun, I checked Best Buy Online and discovered that there was no Best Buy within 250 miles that had any six foot coax cables. The Sunnyvale store did indeed have a twelve-foot cable for $19.60 including tax. Figuring my travel costs at $.50/mile my round-trip transportation cost to the Sunnyvale store would have been at least another $7.
So I did what I should have done in the first place — I bought the cable from Amazon Smile.
The Cost At Amazon
Amazon had a high-quality, 10-foot cable in stock for next-day, free delivery for a total cost of $11. As a bonus, Amazon Smile would also make a donation to my favorite charity.
So, let’s compare.
Best Buy Vs. Amazon
$26.60 plus 45 minutes total travel time to buy a twelve-foot cable from Best Buy and $11, three minutes of my time, and a donation to my favorite charity to buy a ten-foot cable from Amazon Smile. Not a difficult decision, is it?
Yes, I would have been willing to pay a little more to get the cable immediately from Best Buy instead of tomorrow from Amazon, but Best Buy was not equipped to provide the product immediately.
That’s the key.
Best Buy Fumbled It’s Principle Advantage Over Amazon
The one thing that a brick and mortar store can theoretically do that Amazon can’t is provide immediate availability. In my case, Best Buy failed to leverage its major, Number One potential advantage over Amazon because it failed to install an inventory management system that was able to keep the products it was supposed to have in stock actually on the shelf.
Instead, Best Buy was using what appeared to me to be an inventory-management system that was stuck back in the 1990s.
How A Retail Inventory System Ought To Work
Here’s how a proper inventory control system should function in order for a brick and mortar store to provide immediate delivery and thus be able beat Amazon:
- The system knows how long it takes to restock each and every item, that is it knows the time period between ordering that particular item from the company’s warehouse and the receipt of that re-ordered item at the store’s loading bay. Let’s call that the “Re-Supply Time.”
>>>>Let’s say that for this 12-foot coax cable the Re-Supply Time was ten >>>>days.
- Next, the system would need to know the average number of units of each item that the store could expect to sell during that Re-Supply Time. In this case, Best Buy’s system would need to know that, for example, on average that particular store could expect to sell 3.2 12-foot coax cables in ten days.
- The system would also need to know exactly how many units of each and every product are in the store at all times.
- Lastly, the system would need to correlate the number of units in the store at each moment with the number of units expected to be sold during that unit’s Re-Supply Time so it could know when to re-order that product.
In this example, when the cash registers recorded a sale dropping the number of coax cables in-stock below 4 the system would automatically order at least another 4 units.
Of course, the system would need to continuously update/revise
- the Re-Supply Time from the warehouse to that store for each product,
- the average number of units of each product that the store could be expected to sell over that the Re-Supply Time, and
- the actual number of units in-store at any given moment.
On top of that, each store would need a process in place to move all the units received at the loading dock onto the shelves in eight hours or less.
I have to say that I’m skeptical that Best Buy or any other brick and mortar store is actually going to implement such an inventory-control system.
Why?
Retail Stores Don’t Want To Keep Products On The Shelves
Because brick and mortar stores hate to increase the amount of products in inventory. They view products in inventory as “dead money” — as money that has been spent on stuff that might sit there for weeks or months without generating any income.
They see inventory as a burdensome cost rather than as a potential profit.
This attitude doesn’t just apply to retailers. Manufacturers also hate having either materials or finished products in inventory.
Manufacturers Hate Having Inventory
Today, no business wants to have anything above the bare minimum number of items sitting in inventory. Today all the systems, all the processes, are designed to keep inventory of both materials and finished products as low as possible.
Manufacturers call that Just In Time (JIT) manufacturing and JIT ordering.
Why America Ran Out Of Stuff
If you’re wondering why America ran out of or is running out of paper products, masks, lumber, gasoline, integrated circuits, steel, and hundreds of other things it’s mostly because manufacturers ASSUMED that the quantity of their products that were going to be ordered tomorrow would be the same as the quantities that were ordered yesterday.
The instant that orders went up 20% or 30% the supply chain began to unravel because everybody had been cutting inventories and the lack of products and materials in inventory made it between difficult and impossible for companies to materially increase production.
- Imagine the producers of a particular product needed more dyes and bleach in order to manufacture a higher volume of their product, but
- the companies making the dyes and bleach needed more chemicals to make the dyes and bleach and
- the companies making the chemicals used to produce the dyes and bleach needed more drums to package the chemicals they manufactured to make the dyes and bleach, and
- the companies making the drums needed more steel to make the drums,
and so on and so on and so on. A supply chain is a chain and an insufficiency in any link is enough to prevent increased production of a product at the end of the chain.
Today, every business wants to sell its products, but nobody wants to hold anything more in inventory than the bare minimum it needs to manufacture the number of units it sold last month, so when demand changes even a little the entire system gets stressed, and when demand changes more than a little the entire system breaks down.
Every link in the chain is a maxed-out link because the company responsible for that link is holding the lowest possible inventories.
Inventory Is A Buffer That Can Deal With Changes In Demand
The bean counters wrongly assumed that the orders tomorrow would always be exactly the same as the orders today. That meant that if orders materially increased manufacturers couldn’t ramp up production to meet the new level of demand, make more sales, and make more money.
Inability To Meet Increased Demand Makes You Unable To Make More Money
If orders materially fell, the bean counters insisted that the company immediately fire workers and cancel orders to their suppliers, both of which guaranteed that if and when sales returned to their previous levels or increased the company would be unable to fill those orders, which meant that the company would be unable to make higher profits.
They forgot the truism that you have to spend money to make money.
The executives were so focused on avoiding costs they made it impossible to increase profits.
And then there’s Amazon.
Amazon Knows That It’s Bread & Butter Is Keeping Products In Inventory
Amazon understands that its lifeblood is having products in inventory. When others run away from having products in inventory, Amazon runs toward keeping products in inventory.
That’s why brick and mortar stores are not emotionally or intellectually capable of competing with Amazon — their entire DNA is coded with a policy of avoiding keeping products and materials in inventory.
Training Customers Not To Even Bother Visiting A Retail Store
Not finding products on the shelves trains consumers not to even bother going to the brick and mortar store in the first place because experience has taught them that the retail store won’t have what they’re looking for in stock.
Next time they’ll save the wasted trip and just get it on Amazon.
— David Grace (Amazon Page — David Grace Website)
