INVENTORY - STOCK 'n'roll

Stock management is a delicate business. Either you don't have enough and lose customers as a result, or you overstock and get caught out with huge quantities of expensive product you can't sell.

Like so many aspects of the industry today, managing inventory is agh and lose customers as a result, or you overstock and get caught out with huge quantities of expensive product you can't sell. volatile and risky business. Hold too much stock and it ties up capital and ends up obsolete on the shelf. Hold too little and your customers go elsewhere.

According to John Meredith, marketing manager at inventory clearance specialist PST, inventory levels play such a crucial role in the fortunes of so many companies that life in the channel has become tougher than ever.

'With product life cycles so short, margins so tight and consumer demand and loyalties so difficult to predict, the market has become incredibly fickle,' he says. 'Although somewhere along the line there has to be enough stock to meet demand, physical inventory has become a hot potato - no one wants to be left holding it because they know they'll end up getting their fingers burnt.'

He adds: 'Since the advent of mass manufacturing, industry has been engaged in a continuous struggle to balance supply and demand. But the perfect forecast is an elusive dream. It remains difficult for any supplier that services the consumer market through a distribution chain to avoid both the occasional embarrassing shortage and the profit-sapping overstock position.'

It's a problem that certain sections of the industry are working hard to address. Leighton Morgans, European sales and marketing director at inventory expert LPA Software, believes companies must start treating inventory differently to tackle the problem. 'Holding stock has always been viewed as a necessary evil in the channel. It is, after all, an essential component without which we couldn't do business,' he says.

'Traditionally, however, holding stock has also been viewed as one of the penalties of business in IT - it costs 25 per cent of the value of your inventory just to hold it and sell it. That's where attitudes have to change. Before we can make the inventory begin to work for us, we have to start looking at our stock-holding as an asset, not a liability.'

Morgans argues that the very nature of the market is what drives its volatility. 'Volume markets in IT aren't really like volume markets in any other field,' he says. 'Take the grocery market, for example. It's easier to predict demand for groceries because the world's population needs a constant, renewable and finite source of nourishment. Even if you do overstock with, say, Coca-Cola, it's easy to get rid of by laying off in other areas.'

He adds: 'The IT market, on the other hand, is already stuffed full, so the overstock has nowhere left to go. The potential risk is much greater because the net value of the stock is that much higher. If channel companies keep trying to eke out a hand-to-mouth existence in volume, price-driven commodity markets, where inventory management is nigh-on impossible, they will not survive.'

Richard Thompson, chairman of EMS - an outsourced field marketing company that specialises in helping Vars move stock - says resellers are facing other problems in their fight to keep inventory trim and profitable. The lack of price protection at the low end is exacerbated by vendors flooding their channels with product. The situation is exposing dealers to some extremely harsh elements and forcing them to play some dangerous games, such as hedging and ordering just in time for launch so their purchase price is lower than the purchase order amount.

'Vendors must take at least part of the ultimate responsibility for the mess in the volume channel,' Thompson adds. 'Channel stuffing is bad for distributors, resellers, customers and, ultimately, vendors because it forces resellers into taking desperate measures. Although some are getting fat by ordering short and late, they are taking massive risks in doing so.

'Before long, someone is going to be found wanting and will get caught in the act. Ripping off users is a bad idea because just one dealer getting caught will damage the channel's tarnished reputation even further. Dealers are under enough pressure from the likes of Dell without fanning the flames with a scandal.'

Tino Canegrati, EMEA PC sales manager at Hewlett Packard, agrees with Thompson's argument, adding: 'If you want a successful and lucrative distribution channel, you simply can't push volume any longer. Apart from the fact that volume is damaging to the business in terms of morale and reputation, all the available money is tied up in inventory and that doesn't help anyone. When prices drop, someone has to pick up the tab. Even where there is a little price protection built into the market, the vendor ends up having to increase the initial list price of the products to cover the risk.'

According to Thompson, everyone with more than a single-tier distribution policy will have to review their route to market and rethink the way they approach customers: 'It's easy to look for quick fixes and easy ways around the stockholding dilemma, but in the end it's very simple - you don't manage the inventory, you manage the customer.

'The mistake so many resellers make is in thinking that managing customer relationships is just about sending a card and a bottle of wine at Christmas. It's about managing wants, needs and expectations too.'

He adds: 'The channel still has a lot to learn about looking after inventory. Rather than living hand-to-mouth, trying to second-guess the market with the help of nothing but their wits, resellers have to start employing better, more considered stock control techniques and learn to forecast demand intuitively.'

Thompson argues that dealers need to become much more astute at reading and predicting underlying trends in the market: 'A product release is often the death knell for existing lines. Dealers need to be aware of precisely when products are announced, released and ultimately shipped.

That way they will know when to order and when not to order. At the moment, they're having to cut off their noses and loss lead to clear the stock that is sitting around the warehouse and strangling cashflow.

'The problem is that too many dealers still operate their businesses in a reactive way. A new product is released, so they immediately stock up on it. But if their customers want an alternative for whatever reason, they still have to fulfil, so the new stock sits on the shelf getting old and boring. What makes it so difficult is that when you get caught with stock, it's always a surprise. Dealers are never ready for it so they rarely have contingency.'

Morgans agrees: 'Instead of fire-fighting the whole time, dealers need a specific set of tools to help them make the right decisions and forecast what they need and how much. At the moment, too many are stocking their shelves blindfolded.'

Even where resellers are using such tools, he says, they're often the wrong ones. 'The software tools that many resellers are using are based on products developed for the consumer goods sectors and many of these products are still too closely related and geared to those markets. Consequently, they are all wrong for our industry, where demand is less consistent and much more sporadic.'

According to Debbie Templeton, director of planning at Packard Bell/NEC, there is more to forecasting than simply taking historic customer ordering information and drawing supply projections from it. 'Predictions based on sales history can be extremely dangerous if used in isolation,' she says. 'However, if done properly, a combination of historical trends, current market trends, individual product road maps and customer profiles can provide a good - if never perfect - forecasting system.'

Templeton continues: 'On the understanding that forecasting is never accurate, the key way for the industry to balance supply and demand is to shorten the supply chains, reduce channel inventory and hence maximise flexibility. But this has to be combined with a high level of intelligence applied to stock and sales information, literally on a daily basis.'

Morgans adds: 'It eventually becomes a self-fulfilling prophecy. If resellers can't or don't predict demand accurately and with confidence, they'll get into trouble and lose money and custom as a result. And the next time around it's even worse. When things become tight again, you err on the side of caution and back off slightly. Even if you don't lose money in inventory, you lose market share.'

The view is reinforced by Otto Strandvig, UK country manager at accounting and finance software specialist Damgaard. He also says the supply chain is an increasingly crucial area in the battle to keep inventory levels competitive: 'As time goes on, the smaller dealers are going to have to wise up and be as smart as the big boys if they want to stay alive. That means creating an efficient supply chain that optimises stockholding while giving them the flexibility to be responsive to customers.'

Steve Weller, European industry marketing director at supply chain management vendor i2 Technologies, supports this argument. 'Supply chain planning is key to the problem,' he says. 'With greater visibility between suppliers, manufacturers and distributors, companies can significantly reduce the size of their inventory by being able to predict demand accurately and anticipate stock-outs before they happen. This visibility is being increased by the ubiquity of the internet and the increasing number of companies sharing information via extranets.'

According to Strandvig, dealers will have to fight to keep up with their suppliers' e-commerce needs if they are to avoid even greater pressure.

'Manufacturers and distributors are gearing up for this by enabling their own systems with electronic commerce and supply chain management. Resellers will have to buy into the same technology,' he says.

'But that doesn't necessarily mean a huge investment in complex e-commerce software. Platforms, such as Microsoft's Commerce Server and Internet Information Server, offer a lot of the functionality you need to build an efficient, low-inventory supply chain at a low cost.'

He continues: 'The hardest part is linking in your own business systems, such as order entry and billing, so you can use your customers' activity levels to drive, generate and fulfil your own inventory requirements automatically.

If you can predict what your customers will want, you can predict what you will need and pass on that requirement to your suppliers electronically.'

It has been suggested that dealers should consider adopting ERP and just-in-time approaches to managing inventory to deploy systems across their business. However, especially for the smaller reseller, using these systems would not only be like using an elephant gun to kill a mouse, but take several months or even years to launch. Moreover, outside the top echelons of the channel, few could afford it.

Specific inventory systems to meet the needs of vendors, distributors and dealers have been available for some time. Dell uses one of i2 Technologies' internet ordering systems to cut inventory times in its distribution model. Weller says: 'Many companies are still producing and warehousing weeks' worth of goods to account for fluctuations in demand.

However, the intelligence provided by Dell's Web-enabled supply chain planning system has enabled it to carry less than seven days of finished product, the eventual aim being to get this down to a matter of minutes.'

Dell is renowned for its direct-to-market model, but Weller insists there are some focused applications for the channel. Dell is its own distributor - the applications for reseller-focused distributors are obvious.

Weller says: 'Once the system is in place at a distributor's site, each of the company's suppliers can log on to a secure, personalised Website where they can view forecasts and customer ordering information to help them gauge the distributor's need for particular components. The vendor's production schedules meet those of its customers and the distributor holds the correct amount of stock based on real-time demand coming from its customer base.'

Kevin Rollins, vice-chairman of Dell, says: 'The internet is at the heart of everything we are doing. With IT, the value of inventory is quickly being replaced by the value of information. In the future, this will allow distributors, resellers and their customers to meet demand exactly. Users will be able to specify individual requirements, make an order request and get a real-time delivery date and a price based on the constraints of the distributor's supply chain.'

In addition to optimising their supply chain, dealers also need to focus on the areas where they have the greatest expertise, according to Thompson.

'Dealers have to exercise some common sense and put some kind of safety net in place to protect themselves. They need to learn good sell-through techniques so they're far better at selling the products that they make a business decision to stock. I don't think many dealers realise the impact and damage to their working capital when they buy hard into one brand and fulfil with another.'

He continues: 'If you stock Canon printers and someone phones and asks for a Sharp model, you have to try to sell them the virtues of the Canon equivalent or let the opportunity go. While it is undoubtedly a tougher sell, it is often easier than it sounds. Although most customers ask for brands by name, what they actually want are products that can offer particular functions. There's nearly always an opportunity to convert the buyer. If you stick to the sell what you stock guideline, you limit the potential risk.'

According to Colin Hudson, business development manager at Masterpack International - a provider of supply chain management systems - a sound inventory management strategy depends on two things - the volume/margin of the product and the importance of service to the customer. 'With high-volume, low-margin products such as printers, distributors are attempting to move from a BHS - buy, hold, sell - distribution model to an S3 model - sell, source, ship. Many distributors now refer to this practice as virtual warehousing,' he says.

'However, with low-volume, high customer expectation items, dealers are retaining the BHS approach but are trying to protect themselves by negotiating price protection agreements.'

The consensus is that, in the end, dealers have a fairly straightforward choice to make. They either spend time and money now on managing their inventory more effectively or spend even more money later, paying for their obsolete stock and for the business they have lost.

Whichever way you look at it, dealers that ignore the warnings will find themselves right back where they started - with lots of old stock sitting in the warehouse.