The Art of Inventory
Managing inventory is as much an art as a science, and like any art, a number of tried-and-true techniques exist that publishers may want to consider to manage their investment in inventory more effectively.
1. Focus on the ABCs.
Perhaps the worst mistake one can make when managing inventory is to view everything from a one-size-fits-all perspective. All inventory is not alike, and a comprehensive inventory strategy should start with one of most basic tools of inventory management—the ABC Analysis. ABC Analysis is similar to a Pareto Analysis—sometimes described as the 80/20 rule, where 80 percent of an organization's sales come from 20 percent of its titles. Using a full year's sales as the starting point for your analysis, all of the titles in your publishing program should be segregated into three classes:
Class A Titles: This class should include those ISBNs that account for 80 percent of your organization's net sales and ideally should represent 20 percent or fewer of the titles in your publishing program.
Class B Titles: This class should include those ISBNs that account for 15 percent of your organization's net sales and should represent 30 percent or fewer of your titles.
Class C Titles: This class should include those ISBNs that account for the remaining 5 percent of your organization's net sales and ideally should represent 50 percent or fewer of your titles.
Your time and attention should be focused in proportion to the inventory class: Eighty percent of your time should be focused on making sure that you have sufficient inventory on or in the pipeline for the 20 percent of the titles that are your company's bread and butter.
This is not to suggest that you should ignore classes B and C, but—recognizing that all books have a life cycle—don't spend lots of time and resources on product that is likely to offer little or no return.
2. Establish key performance indicators and set improvement objectives.
There's an old adage that says, "You can't manage what you don't measure," and that concept certainly applies to inventory of all kinds, including both finished goods and raw materials. Decide on four to six key performance indicators (KPIs) that you will use to measure your organization's progress in reducing inventory investment. To be clear, these metrics should be compiled for each major product line in your publishing portfolio. Some of the metrics you might consider include:
• Inventory turn
• Inventory/net sales ratio
• Obsolescence reserves
• Obsolescence ratio
• Months coverage
• Direct and implicit carrying cost
• Back orders
• Inventory value by year of publication
Remember that seasonal variations in inventory metrics are to be expected—like the cycles of the moon, you can count on inventory positions going up post-Christmas as the book-sellers clear the shelves of holiday inventory, or college book-sellers return unsold textbooks after the semester rush—so don't get too worked up if you see occasional deterioration in the metrics. However, if the numbers continue to worsen, it's time to start looking for answers.
3. Develop environmental awareness.
At first blush, one might think that environmental awareness refers to ensuring that your company has a sound ecological policy and, to be sure, that is important. But my definition of "environmental awareness" refers to developing an understanding of the market forces that are shaping book-buying behaviors. The sales patterns that shaped your traditional inventory strategies may be undergoing dramatic changes that justify a change in your buying behavior; patron-driven access, textbook rental, open-access texts for higher education, course packs, custom publishing and, of course, e-books are having dramatic effects on the marketplace, and it is no longer business as usual. Your inventory strategy should be adjusted accordingly.
4. Think twice before manufacturing overseas.
While manufacturing in China and India certainly has its place for certain types of product—particularly children's books with complex formats—rising wage rates, currency issues and time in process are important considerations and should be given due weight in developing your inventory strategy. No less important is the basic supply chain maxim that suggests that the longer the supply chain, the higher your safety stock levels should be. Put another way, if you have to increase your print order by 10 percent to 25 percent to make sure you have sufficient safety-stock for Asian manufacturing, is offshore manufacturing really an effective strategy? No less important is the question of availability—producing the product onshore provides dramatically better options to meet unexpected demand—something that you would do well to remember as the Internet grows in importance as a major book-distribution channel.
5. Build kits on the fly.
Publishers selling to the elementary–high school, college and some elements of the professional markets are all too familiar with the growth in kits (aka "bundles"). Kits are the assembly of two or more products, each with unique ISBNs, into a shrink-wrapped or boxed offering sold under a separate ISBN. Unless you have a fairly sophisticated inventory system that includes a Bill of Materials module, or an inventory manager with the memory of the Amazing Kreskin, you are unlikely to have visibility to the kit components, and you may find yourself reprinting when you could just as easily be disassembling slow-moving kits and avoiding last-minute reprints.
6. Manage your returns backlog.
Think of unprocessed returns as another source of inventory. Track your returns backlog daily by the date of the oldest returns in the processing queue and/or estimating the days it will take to clear the backlog. Set aggressive targets for processing with the stated objective of processing, posting and returning the inventory back into stock in five days or less.
7. Re-evaluate hurt books.
Spend some time with your colleagues in the returns processing department and take the time to sort through a bin or two of books discarded as hurts. You might be surprised to find a fair amount of inventory that is, in fact, quite salable. It would be especially helpful if you documented your standards for declaring a return as a hurt book, including pictures of what the organization deems as salable and unsalable.
8. Don't forget paper.
Managing inventory means more than just keeping an eye on your finished goods position. Paper inventory levels should be reviewed regularly, and prudence suggests that you may want to think twice before making a defensive paper buy (i.e., bringing in extra inventory to avoid anticipated price increases). While a reasonable amount of defensive buying may be appropriate—remember that the carrying cost for holding paper inventory can be significant—printers' storage fees, obsolescence risk, and insurance and interest costs mount quickly, and the anticipated savings can quickly morph into an unanticipated expense.
If you must inventory paper, minimize the number of grades and sheet/roll sizes brought in. Many publishers print on a slightly oversized roll or sheet to keep inventory investment in check. The incremental cost of printing on an oversize roll/sheet will be more than offset by the lower storage charges, reduced inventory obsolescence, lower safety-stock requirements, and potential incremental discounts earned by purchasing larger lots. Other options for managing paper inventories include:
Floor programs: Many mills/merchants will stock popular grades and roll sizes on the floor at printers (effectively a consignment program), allowing publishers to acquire inventory on the fly, with many of the same benefits as cited previously.
Printer-supplied inventory: While printer-supplied paper can often be slightly more expensive than publisher-supplied stock, the economics warrant closer examination. The printer will likely charge a mark-up over the publisher's direct price, but the cash-conservation opportunities can be compelling and should be carefully considered.
9. Train your people.
Inventory management is a complex and frequently thankless job, and when the situation takes a turn for the worse, the inventory manager is often the first (and only) one called on the carpet. Inventory management is a team effort; it takes cooperation and active participation by acquisitions, sales, marketing, distribution and production, and each function plays an important role in the process. Train your people. Make sure they understand the role they each play and how their actions contribute to the larger objective. Include inventory performance metrics in the goals and objectives.
10. Segregate duties.
Make sure that reporting relationships are structured to support well-considered inventory decisions. Inventory management teams should not report to the sales department (they have an understandable inclination to be sure that there's always enough inventory available to fill every order that comes in) or the production department, where the emphasis on unit manufacturing cost and leveraging economies of scale may lead to print orders for more units than circumstances might require.
11. Love your inventory manager.
A good inventory manager is a gift from the gods, so despite the fact that this may not be the most glamorous job in the organization, if you've got a good one, make sure they feel the love. Recognize that mistakes, even by the best inventory manager, are inevitable, and make sure there's some recognition for a job well done. Inventory management is likely to become more complex in the years ahead, and every dollar freed up from inventory is a dollar that can be invested elsewhere. BB
David Hetherington is director of major account sales for Baker & Taylor's Digital Service Group and an adjunct professor at the Pace University Graduate School of Book and Magazine Publishing. He was previously managing director for strategic business development for Integrated Book Technology, and has held senior positions in finance, operations and manufacturing with some of the industry's largest firms, including Simon & Schuster, Reader's Digest Association, BearingPoint Consulting, Wolters Kluwer Health and Columbia University Press.