What You Can Learn About Inventory Management from Amazon & Walmart
By Loni Klara
If you’ve ever hosted a party for a large group of people, you know how important it is to properly stock your kitchen. Miscalculate the number of burger patties, and your guests go hungry. This is the scenario every business must face as it grows and increases its inventory.
For big businesses like Amazon and Walmart, smart inventory strategies have been instrumental in their success. Without a proper stock of supplies, these companies would not even exist, let alone succeed.
But beyond managing a steady stream of goods for their customers, there are several crucial factors in inventory control that determine the difference between these two retail giants and every other failed competitor.
Here’s a closer look at their behind-the-scenes inventory activities and what we can take away from their example.
Walmart: Losing $3 Billion Due to Poor Inventory Management
When you operate on a scale like Walmart, even a slight mistake in inventory management can mean billions of dollars down the drain. In 2013, the chain announced a staggering loss during its first quarter. The culprit? Excess inventory compared to sales, out-of-stock merchandise, and disorganized back rooms, among other things.
Coming from a revolutionary retail giant renowned for its cost-effective vendor-managed inventory system (VMI) that eliminates excess elements in the supply chain, this sent a big message to other industry players–keep a very close eye on your stock.
Out-of-stock items meant a lower fill rate for Walmart, leading to lower customer satisfaction and worst of all, potential customers turning elsewhere to purchase the items not found at the store. At the same time, the stores also had excess supplies taking up space because they had miscalculated the demand for certain items. To top it all off, the back rooms were so disorganized that employees often could not find the merchandise, or keep proper track of the store’s inventory.
In other words, it was a disaster.
But besides telling yourself not to repeat their mistakes in your own business, what else can you learn from this example? Well, let’s see what Walmart did to get back up on its feet after the fiasco.
Taking away the key learnings from its internal reports, Walmart built an app to provide employees with real-time sales information including data and trends, as well as the ability to restock items with just a few clicks. Mark Ibbotson, the Executive Vice President of Walmart U.S.’s Central Operations explains, “Gone are the days of a manager having to disappear from the sales floor for huge blocks of time … we live in a digital age, where apps are intuitive and people can do what they need to do, when they need to do it, without delay. That’s how retail needs to operate.”
For suppliers, Walmart created an app called the Supplier Portal to help them keep an eye on the shelf to check if supplies are running low. Though the benefits of this technology include improved customer service and more efficient employee management, it also specifically helps all players stay up-to-date on inventory in order to avoid another preventable loss due to disorganization.
Even if your business can’t afford to build an in-house app, the lesson here is pretty basic–keep your records straight.
According to Metin Cakanyildirim, a professor at the University of Texas-Dallas, the most common way businesses lose money because of poor inventory management is simply that “they do not or cannot keep good records of inventory … a good inventory system does not really require heavy hardware/software investment.”
However you keep track of your inventory–whether by hand, by spreadsheet or by software — the important thing is that you do it as meticulously as possible. Don’t repeat the same mistake Walmart made.
Amazon: How Inventory Information Can Influence Sales
An online trailblazer topped by none, Amazon operates like Walmart in that it also outsources inventory management to the sellers. However, there’s a significant difference in the way Amazon presents this information to customers, which directly influences its sales.
A study conducted in 2016 by Cui, Zhang and Bassamboo examined the effects of the inventory information that is conveyed to customers during the purchasing process. Customers can see how many times the product has been purchased, and see how many items are left in stock. The results confirmed that this had a direct psychological effect on the purchasing decisions of customers–fewer items in stock led to a sense of urgency, while bigger quantities purchased signaled to customers that this was a good deal.
For online businesses in particular, the study on the relationship between Amazon’s sales and transparent inventory information demonstrates that there’s an opportunity to take advantage of items in low stock, as well as the popularity of a high-selling product.
Not only that, but with brick-and-mortar stores facing a decline in recent years while online sales are on the rise — as of 2016, approximately 50% of American households are subscribed to Amazon Prime — it’s more important than ever to pay attention to online sale trends, and how your inventory can be utilized to your advantage online. Considering that Amazon accounted for 46% of all online sales in 2016, something must be going right in their sales strategies.
Like Walmart, technology does play a role, as Amazon uses an algorithm to keep its fulfillment centers at maximum efficiency. Their vast storage spaces are operated by both humans and robots to account for all their inventory. Again, you may not have robots, but there are other places small businesses can turn to for inventory help.
This is Professor Cakanyildirim’s word of advice: “If you do not have the time, capacity or experience to get where you think you should be, get help. Local universities have faculty with knowledge and students with time. Your difficult inventory problems will make nice projects for the folks at universities, especially research universities.”
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Originally published on the QuickBooks Resource Center.
