THE PROFIT LAB // Top 10 Ways to Pull Profit from Allocation
Strategy #1: Understand your demand to achieve better allocations
The conventional allocation process allows you to select a base of historical data to either use as a base of allocating, or to create a plan to allocate into. The assumption is that the data will reflect the way products behaved in those stores and that the pattern will repeat itself.
The true objective is to fulfill as many of the customer expectations regarding the allocated product in a given location as possible. Unfortunately historical sales fail to represent those customer expectations. This is because sales have been limited by the amount of inventory a store received. When a customer wants to buy an item and it’s not there, it’s a lost sale. We typically refer to the customers’ expectation as demand. The difference between demand and actual sales is lost sales.
If we are to do a better job of fulfilling the customer expectations, we have to allocate to demand rather than sales. If we don’t, we’re invariably creating self-fulfilling prophecies. If sales is less than demand we’ll only fill back to sales potential rather than demand potential. We’ll never capture the demand. The result… missed opportunities!
What you can do now
The key to understanding demand is accounting for situations where demand is missed. When products run out of stock there is exposure to missing sales opportunity. Short of creating complex logic to accurately assess missed opportunities, some pre-analysis of your data may lead to quick improvements.
When selecting your base of history, take a look at situations where stores reached 0 inventories. If you’re looking at a group of items, look for unexpectedly low store level inventories. Limit the time period you’re referencing to a range where low or out of stock situations haven’t had a chance to become relevant. While you may miss some trending by doing this, you’ll almost always improve the understanding of relative store selling and thus improve your allocation results.
What you should consider
If you’re considering investing in new allocation capabilities, insist on – no demand, demand! Without understanding demand you’ll consistently miss opportunities to improve your allocation results and therefore your company’s results.
All demand is not created equal. If an incorrect plan or forecast is used to derive demand when you have stock out situations, the result can be even worse than not using demand at all!
The best modern allocation systems have the ability to not only create a forecast to fill in demand, but to evaluate the quality of the forecast across multiple dimensions of merchandise and location using the most current data BEFORE using it to derive demand.
We’ll be taking a closer look at forecasting related to fashion allocation later in this series.
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Follow this series to learn all 10 strategies for improving allocation. We will be deconstructing the allocation process and exploring opportunities to improve within your current allocation processes and technology limitations. We will also review key areas to think about if you are considering investing in improved allocation capabilities.
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