Inventory execution and replenishment optimization should focus on efforts to reduce stock-outs through better replenishment and fulfillment strategies. Some stores are out of stock way too soon in the product lifecycle and others are left with far too much stock at the end, which has to be marked down. These are fundamental errors in the fulfillment operation that retailers cannot afford to make, but they happen all too often. The key operation between the initial buying decision and the final end of line markdown is in inventory execution – managing the supply of goods to minimize out of stocks, lost sales and overstocking.

If markdowns are up – Your Inventory Management system is down

Inventory management systems have helped retailers to improve in this area of inventory imbalance, but the continued use of significant markdowns suggests that things are not getting any better for retailers.

In fact, there are two separate areas where better decision making is required:

• The initial purchase stage – deciding how much product the retailer needs in total
• Distribution – how and when to allocate that quantity across stores and channels

Markdowns are often a fix for things that did not go to plan earlier in the product lifecycle, so improvements in product planning and inventory execution to reduce excess inventory will have a marked impact in reducing the need for markdowns and maximizing profit. Many of the mistakes being made at the product planning and inventory execution stages are as the result of simplification – aggregation of data and assumptions across multiple stores – which rides roughshod over the variability of customer profiles and demand from one store to another.

A fashionable downtown store in a major city may need a stock richer in traffic generators and high value image items, whereas an out-of-town store in a low income area may need its mix of products to be higher in value items. Fashion retailers have the added complexity of garment size, which means that they need to have a different mix of sizes too, depending on the stores location.

Most of the technology being deployed today to optimize the productivity of inventory is designed to operate at the end of the product lifecycle and is focused on price. Of course the end of the lifecycle is the time to execute markdown strategies, but in fact the most effective and profitable strategy is one based on the whole of the product life and also focuses on inventory.

Product Lifecycle management

There are three key points in the lifecycle of any product where the retailer needs to make the right decisions in order to control demand, price and profitability.

These are:

1. The initial buy, including packaging
2. The re-buying and distribution of the product throughout its lifecycle
3. The pricing of the product, including markdowns

A holistic approach is recommended for managing the complete lifecycle of a product. There are a few key points that most people can agree upon:

• Understand customer demand
• Marry the art of merchandising with the science of execution
• Learn and build knowledge
• Track and react to product performance

The key is to understand customer demand at the micro or store/product level. Maximizing profitability depends upon knowing what customers wanted and when, not just what you sold.

Stock smart

Markdown Optimization has become all the rage of retailers and retail technologists, but what is a markdown and how should we optimize it? A simple definition is a reduction in price, or the amount by which a price is reduced. To mark down is to alter price in order to raise demand. At one time retailers called this exercise ‘clearance’ and marked down the price of their goods just once a year, if ever. That was in the annual sale, a time when demand was low and the retailer wanted to clear excess stock in order to make way for new products.

Today markdowns are a continuous process for the retailer. Clearance sales are seldom annual events. They may be seasonal, and in the fastest moving retailers – fashion in particular – the retailer may choose to mark down items literally every week.

5 tips to avoid markdowns:

1. Determine the role of every product In the overall assortment and at an individual store level. Have the power to execute the inventory allocation process with a strategy necessary to meet that role.
2. Understand the type of stock needed at every location by building better clusters or achieving store specific inventory allocation.
3. Optimize inventory execution so that you have optimal stock in higher traffic stores and avoid overstocking lower traffic stores. You need to understand your current and forecasted customer demand at the store level and convert that into the best stock distributions, considering pack constraints.
4. Follow a fast fashion model where product lifecycles are shorter. Constantly rotating inventory, especially in fashion keeps your store fresh and gives the customer something new to see.
5. Create a holdback strategy. Do not push all of your inventory at once, wait to see what sells. Release inventory to high traffic or trend leading stores first to get an idea of consumer interest before allocating to all stores. Retailers can also release their assortment online to see what customers are buying – this will allow you to save on production, distribution and purchasing costs because you will have a much more accurate understanding of what products there is demand for and which products will actually be profitable.

A holistic approach

A new holistic approach to retailing integrates merchandising and fulfillment processes while managing and reporting on inventory from the store-level up, in real-time. It provides merchandising plans, goals and strategies that directly drive product fulfillment. This allows the fulfillment process to be driven by a bottoms-up view of item behavior, fused with plans, goals and strategies. Real-time performance analysis enables a rapid response if a product or location is failing to achieve its goals or has the ability to exceed them.

This concept derives trends from relatively short and recent learning to make accurate predictions of future behavior and drive decisions that maximize inventory productivity. It is unlike traditional ’number-crunching‘ approaches that rely on interpreting trends and forecasts based on huge pools of historical data. As a result this method of analysis has the flexibility to respond in real time and at a much finer level of detail (store level) than would conventionally be possible.

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Managing Markdowns: Why prevention is better than the optimization cure
Dr. Linda Whitaker, Chief Scientist, Quantum Retail

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Get back in the game

Are you ready to know exactly what your customers are asking for at every location and to have the ability to react as their wants change? If you are looking for a solution that can drive momentum for your business this year, check out the solutions offered by Quantum Retail. Our customers see valuable results in 8 to 12 weeks and our implementation approach gives your team access to the system from early on, so you can manage changes to your processes with ease. Quantum Retail continues to help all of its clients drive positive business value more rapidly than anything seen in retail.

For more information on replenishment, markdown optimization and allocation, visit: http://quantumretail.com/services/markdown-exit-management/

You can also follow our 4-part 2010 Retail Outlook series here.