By Dan Moran, Product Strategy, Quantum Retail
Are you certain you can only make “one shot” allocations?
One thing that is certain when it comes to predicting fashion trends is that you can count on uncertainty. You can fill the assortment with products that cover all the right sizes and colors, you can set the price that should move and still hit your margin goals. But then uncertainty materializes. How do you really know how much is going to sell by store? How do you figure out how much to ship, how many times you can ship, how many units or packs, and when to send them? The best instincts and even the best system forecasts will always be off by some amount. What can you do to exploit the unexpected opportunities or limit the damage from the disappointing underachievers?
The answer to these questions, as is generally the case in a complex environment, is “it depends.” A lot of factors should be considered, including:
Previous volatility of sell through. If your previous seasons’ performance has included styles that either sold through quicker than expected or lingered with high on-hands well into clearance phases, you have lived with volatility.
Known or expected length of products’ selling lifecycles. More than likely those styles had a limited selling life cycle and a lead time that only allowed for one order or a limited number of reorders from your vendors. A “one shot” or “one and done” approach seemed like the only way to distribute the merchandise.
Current capabilities of your supply chain. If you are constrained by your distribution center to flow through all of your merchandise, or have limited pack choices, or vendors that aren’t flexible with shipments, your current capabilities may be hindering your allocation efficiency.
The economics of your inventory risk. An analysis of the true opportunity cost of missed sales compared to the real cost of marking down and disposing of excess inventory can be an enlightening and valuable exercise.
There are several points through your product’s lifecycle where you can assess your assumptions and constraints and improve your opportunity to increase sales at full price and the resulting profit.
At the point when purchase commitments must be made to vendors for merchandise far in advance of the launch of a new product, a buyer is making a high risk investment. The more information that buyers can apply to experience and intuition, the better the eventual return can be. Historical analysis can provide an understanding of some of the key attributes that customers have needed and wanted in the past. More sophisticated tools can help with modeling more accurate forecasts by evaluating the probabilities of multiple possible outcomes.
As the season approaches, an updated reading of the market trends and the behavior of the product mix in your stores can provide even better context for how inventory should be initially placed. Sales in the first few weeks of the season, coupled with the lifecycle demand patterns of previous seasons can provide a useful basis for a revised forecast for the balance of the lifecycle.
The right data can drive more informed, profitable decisions if you have the capability and flexibility to plan to rapidly react to the latest understanding of your customers’ behavior. A supply chain management concept known as postponement strategy is an approach that delays final deployment of resources until customer demand is revealed and prepared for fast response times. By postponing decisions about allocation quantities to stores, merchandise can be distributed to locations with the best probability of matching predicted demand.
Before launch, calculate how much to initially buy or what portion of the total buy to initially allocate to cover the first few weeks of sales and the lead time to ship subsequent allocations. A few weeks into the season, calculate the quantities needed to cover the revised forecast to the end of the season. You will get an earlier read on which products you may have over or under estimated initially. You’ll need to work with your vendors to see how responsive they can be or have the ability to hold back quantities in your distribution centers, poised for fulfilling store demand dynamically.
The financial justification for postponing allocation distributions to stores comes from calculating and comparing the cost of under-buying compared to overbuying inventory quantities. In an under-bought situation, the potential downsides include being out of stock, lost sales, lost gross margin and varying degrees of customer disappointment. These are opportunity costs that are not easy to precisely measure and often do not get much visibility or scrutiny, but missed margin opportunity can be of significant value. When overbought, there could be costs incurred to transfer inventory between locations, inventory holding costs, costs to dispose of discontinued products or markdown costs if the markdown sale price falls below the purchase cost. These costs are easier to measure and often get more visibility and scrutiny than the less tangible opportunity costs.
In many cases, the value of the lost margin associated with an under-buy is greater than the cost of disposing of excess inventory and it is worth chasing that profit. It can be worthwhile to evaluate alternatives that may incur incremental costs to capture that customer demand – whether that is additional ordering costs, paying for air freight to shorten lead times, or extra internal distribution center costs to manage holdbacks.
There are actions you can take to manage the uncertainty inherent in fashion and shifting preferences of your customers. Buying or shipping less to stores initially and chasing the profitable products and stores in subsequent shipments will provide a great return on your efforts. When the measures of your success are reflected in improved sell-through at full price and a high service level that incorporates the percent of customer demand fulfilled, you can be more certain that you are keeping your customers satisfied.
Look out for the next blog, on Linking Business Intelligence with Strategic Execution.
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1. Optimizing inventory:
Local demand changes at every store on a daily basis. Clustering stores together by store size and geography might simplify the process, but is inefficient and does not take into consideration individual store patterns for size, color, style and quantity of local demand and product preference. Retailers need to monitor the changing demand at every store to align their assortment in the way that is most profitable and aligned to their strategic objectives.
The third largest womenswear retailer in the UK saw like-for-like sales rise by over 2.8% over the 14 weeks to January 3. Since then New Look has continued to perform well while other retailers are finding the going hard. The fast fashion retailer was aided by Q a new inventory management system that allows retailers to achieve their goals for every product in every store. This intelligent software updates inventory in real time, telling you when one size is selling faster, when a line is not selling and when a certain item is flying off the shelves. It means the customer gets what they want every time.
LONDON, UK – November 17 2008. Since 2007, Quantum’s Q solution has been used by New Look to manage its inventory replenishment and allocation processes across its 600 locations. Having increased its retail space by 20% and diversified into online and franchise channels, New Look were seeking a superior replenishment solution to improve management of store/SKU demand and supply.
