THE PROFIT LAB // Top 10 Ways to Pull Profit from Allocation
Strategy #7: Test the opportunity in a second allocation shot in short life merchandise to significantly increase margin
When fast fashion merchandise sells, it’s quickly replaced with the next great style. Single allocations are the nature of short life fashion. However, conventional wisdom follows that because this merchandise sells through so quickly, there’s no opportunity to react. Retailer must instead rely on their experience and the “art” of retail to guide them to the single, best allocation answer with the ever present “One Shot Deal”. One receipt shipped completely to fulfill all demand.
While this may seem to make sense for very short life items on the surface, it invariably leads to missed opportunities. Some of the assumptions that have lead to this becoming commonplace in fashion retail were based on technology and/or process limitations. Any other reasons deserve a friendly challenge.
Can using one or two weeks of actual selling to drive a small second shot really have a significant improvement vs. the one shot deal on an item that lives for less than six weeks? In a word… YES! There is enough insight in that little bit of data – and enough error in your initial allocation assumptions – that doing this well invariably provides improved returns.
Consider this: If you avoid a 20-30% markdown in 5-10% of your stores by sending an item that would’ve been marked down to a store selling it at full price rather than being a lost sale, how much does that add up to in margin? Now extend that for all products that ship with one shot. It often adds up to hundreds of thousands if not millions of dollars in found profit annually.
I’m not suggesting that there’s no cost to this. I frequently get challenged with reasons why “we can’t do that” – Suppliers won’t… DC’s can’t… labor costs are too… etc. While these can be real concerns, they’re not issues beyond being addressed. Does having a second allocation opportunity provide enough return to justify the effort? Until you ask the questions and do the math you can’t be sure. Here’s a hint though… it almost always does.
What you can do now
If you can do a second shot but you’re not doing it, start! If you have limitations keeping you from doing it, challenge them. Have you asked the vendor if they’ll ship in two shots 2-3 weeks apart? What if they say it’ll cost them too much. A nickel per unit in cost hike on a $20 item is probably easily offset by the benefits. Do the math & ask! Same with DC costs. Is there a corner of the DC we can use? Can we put one person on it part time for a test within a category to prove it?
Try these things now and you could be poised to make significant impact to this holiday season!
When it comes to actually allocating, use the recent week or weeks as your base. If it’s too little data or too volatile, combine that with forward weeks for a similar item from last year to get more data while still influencing it with the recent selling. There’s a lot of opportunity to be found in second shots!
What you should consider when looking for new capabilities
Modern systems take advantage of advancements in technology and data processing to analyze what the last week’s or even the last few days mean to the behavior of a product. They can relate this to other items and locations now – and in history – to derive how this item is acting within its lifecycle and to derive a much more confident representation of what’s likely to happen as it moves toward the later stages in its life within each store. This enhanced understanding of product and store behavior commonly leads to profit increases well beyond 4% and into double digit increases in some cases.
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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