How much is enough? For stores big and small, the constant battle to keep inventory at optimal levels is as old shopping itself. Today, it's a billion-dollar-a-year risk--perhaps the single biggest for the retail industry. The risks cut both ways: Too much stock can bring slower turnover and cash flow, while too little can mean lost sales. The carrying cost of retail inventory includes storage, financing, insurance, theft and damage. Some items, like perishable goods or "hot" cyclical fashion items, carry the additional risk of becoming stale or obsolete before they can be sold. For a business, the cost of stocking excess inventory averages 20% to 25% of the value of the goods, according to Lehigh University professor Lawrence Snyder, who co-authored a study on how traditional stores can benefit from integrating their inventory management with their online offerings.

The "bricks and clicks" model, as Lehigh University's Snyder describes it, calls for moving some goods to large centralized distribution centers, which have the economies of scale to lower the carrying costs of inventory. Some companies, including Circuit City, have moved to a "drop shipping" arrangement, where wholesalers deliver goods right to the consumer without the retailer actually taking possession of them.

Snyder's modeling shows that multiple stores need to stock more combined inventory to satisfy consumer demand than one location would, given the vagaries of more or fewer customers to patronize any one store.

While Barnes & Noble carries about 100,000 book titles in its stores, its online offerings total more than 2 million. That calls for more centralized distribution, where the cost benefits can spill over to the store-bound inventory that's sharing the facility. That the big locations must be stacked is an important part of the online business model. Customers are much less forgiving when a company's Web operation runs out of a product than they are when a given store does.
http://www.forbes.com