Posts Tagged ‘product strategies’

Localized Replenishment-Step 5: Lock and Load

THE PROFIT LAB // 10 Steps to Finding Profit in Localized Replenishment

5. LOCK IN THE TARGET BEFORE LOADING THE INVENTORY //

Step #5: Lock and load

The previous post in this series discussed establishing your goal. What is it you’re that trying to achieve? Odds of getting to the ideal inventory answer without knowing the goal are slim. That goal becomes the driver that helps us identify what inventory position we should stock to.

A major part of determining the goal is assigning the role of a product. Once the role of a product in the assortment is established (e.g. traffic driver, money item, fringe item, image item, etc.) it provides guidance that can be used to direct inventory targeting. If we use a traffic driver for example, the goal is to have a high in-stock because we don’t want to disappoint customers who shop specifically for that item and are likely to buy other things while in the store. If we translate this into a metric value that you have available to drive your inventory targets, you’ll be more aligned with the goals of each product. This perspective will allow you to more appropriately define targets than common approaches that focus mainly (or entirely) on sales volume.

Since most traditional replenishment systems use a service level target as the inventory driver, we can use that to accomplish the objective. In the case of the traffic driver, a very high service level is implied. Due to the nature of a traffic driver we can think of missing a sale as being more costly for these than other items because of the implication that other sales will be lost if we lose this item’s sale. These items will, therefore, have some of the highest service targets of any products.

The process becomes a bit more complex when we start looking at other roles such as money items. Money items are all about profitability so the goal is to find the target that maximizes selling without being subject to overstocks, which erode profitability. In traditional environments, we are again constrained to using service level as a driver so an analysis and a few assumptions will be required to find the appropriate targets. Margin will have an impact on the answer as well. For example, an item with a high margin can lean toward a slightly higher service level since the value of having an extra unit that may capture a possible sale is less than the cost of a markdown that might result. If margins are tighter, we need to be more conservative since the cost of markdowns and/or holding can more quickly slash margin and profit.

Similar logic can be applied to any role you define for products in the assortment. It’s also necessary to consider the remaining life of a given product. A product that is approaching the end of its life will have more margin exposure (due to inevitable markdowns ahead) than an item that has a long lifespan.

What can you do now?

First, define product roles and translate those into high-level definitions of what they mean as objectives relating to inventory. Since most traditional systems are driven by service level targets we must then begin to analyze the facts that reside in historical performance to determine what levels of service result in achieving the measures each role implies. How much service leaves you with a profitable ratio of inventory (money item)? How much service enables you to capture as many sales as possible without resulting in carrying an unacceptable level of inventory (traffic)? How much service enables you to minimize inventory investment and perhaps purposely be out of stock occasionally but not so much that the image that item represents isn’t lost (image)? How much service enables you to capture sales opportunistically but sell through quickly with little exposure to carrying costs or markdowns (fringe)? And so on and so forth.

What should you consider in the future?

If you’re investing in a new technology, this is an area where more modern solutions really begin to distance themselves from traditional approaches. Modern, sophisticated replenishment systems actually evaluate the literal profitability results that any given inventory decision results in and does this uniquely for each product-location combination. Some of these systems also consider impacts to profit including cost of holding merchandise and impact of likely future markdowns. Better systems actually work across multiple objectives to ensure more complex goals can be met. The best actually evaluate their past inventory recommendations and measure success, which are learned from and applied to future decisions so results continuously improve. If you’re investing in new technology this area of inventory targeting is one dimension that can have a surprisingly large impact on the quality of results.

Learn more about next generation technology here >>

Images courtesy of FreeDigitalPhotos.net.

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Retail Sciences–Part 4: Creating Proper Assortments

New products enter the realm of retail every day and it’s only natural for retailers to jump at the chance to gain a piece of the market share. But as new merchandise continues to enter the supply chain, retailers are left with too much inventory. It’s difficult for retailers to decide which products to trim; retailers aren’t so good at retiring products in stores or taking items out of catalogs that no longer sell or have lost their place in the merchandise mix.

However, it doesn’t end there. Retailers need to understand how consumers will respond to the de-listing of an item and the overall economic impact it will have. It’s a balancing act that requires going beyond individual product profitability and instead considers the interests of the business, manufacturers and consumers.

Case Study 4: How many items should I carry in a particular category and location?

Problem

The task of creating proper assortments is referred to as Assortment Rationalization, a term that encapsulates a variety of assortment related problems. Here, the concentration is on a very specific assortment question, the answer to which defines the breadth of the assortment: How many items should I carry in a particular category and location?

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Download the full post here>>

Look out for our next post on market basket analysis. 

2012 Retail Outlook-Part 2: The Age of the Shopper

The new consumer of 2012

What retailers once knew about consumers no longer holds true today. Just as the retail industry has changed, so have consumers with 2012 becoming the age of the shopper. Shoppers now hold all of the power and retailers are forced to comply to win them over. Building trust is an essential component for shaping lasting, meaningful relationships with the new shopper and for gaining their full attention.

Who is the new shopper?

Knowledgeable, empowered, dynamic, smart. The consumer’s of today are technologically savvy and increasingly smarter seeking more and more information than ever before with access to an ample amount of date through a variety of sources: mobile devices, tablets, apps and social media. It’s through these platforms that shoppers are connecting, learning everything about products and brands and seeking and giving advice to friends, family and even strangers on purchase decisions. In fact, millennial Internet users showed a greater reliance on anonymous recommendations and reviews when making purchase decisions according to a study by Bazaarvoice.


Source: www.eMarketer.com

In addition, 42% preferred social networks such as Facebook and Twitter to post and share product, brand or service experiences.


Source: www.eMarketer.com

Why trust matters

Retailers previously thought loyalty and rewards programs were the best means to communicate and connect with consumers. The truth for today’s consumers is that retailers need to redefine their relationships and determine what it means to be loyal to their customers, not the other way around. Anticipating behaviors, attitudes and preferences and engaging with them on their terms and through their outlets are key to winning over the shopper of 2012 and to creating mutual trust. So why does trust matter?

The IBM Institute for Business Value surveyed more than 28,000 consumers from around the world. They discovered that although consumers continuously engage in, critique, promote, and sometimes dismiss a brand, they dedicate their loyalty to only a select few retailers. It all comes down to one factor: trust. Retailers need to listen, become involved with and become valued members of the communities that connect shoppers to one another as well as shoppers and brands together. By immersing their selves into the worlds of the 2012-consumer, retailers have the ability to know everything about a consumer.

Trust is about more than simply understanding customer wants and needs. From privacy concerns to shopping cycles, retailers can evolve their processes demonstrating loyalty to consumers and building trust and transparency. Because trust is the foundation of all relationships, opening up and giving people the opportunity to talk about a brand is going to be the expected norm. Today’s consumers demand trust. Retailers would be wise to deliver on expectations in order to create loyal brand fanatics.

For the love of the customer

Linda Hundt of Sweetie-licious and Dave Ratner of Dave’s Soda and Pet City opened Independent’s Day at Retail’s BIG Show. The two successful retailers discussed creativity and the ability to make customers love you more.

All it takes is a mix of ingenuity, creativity and drive to make customer’s love retailers more, just ask Linda Hundt and Dave Ratner. Hundt is an award-winning baker and entrepreneur who aims to give her customers the most unique retail experience she can offer. She uses pure originality along with her personal experiences and love of her customers and employees to make her bakery a success. She develops loyal customers by offering hugs to patrons and delivering products in personalized packages.

Ratner, another entrepreneur, has made himself spokesperson for his business and is featured in most of the company’s advertising. Ratner applies the same concepts of creativity and drive, just in different ways. For example, when his company has a sale, he will make personalized calls to the appropriate customers letting them know their favorite products are marked down.

Ratner offers some tips to encourage and achieve his mantra—you have to get customers in the door, then you have to make them love you:

  • Put merchandise on sale that people actually want to buy.
  • Don’t enforce too many limitations on coupons. Make them worth something to the customer.
  • Make sure your prices are competitive. Everyone has to have loss leaders.

Learn more about loss leaders and how product strategies can drive value for your
business here>>

It appears as if Ratner learned from the best referencing an anecdote about Walt Disney in which Disney was once asked why he continued to host multimillion-dollar parades in Disney World when he knew people would continue returning to the theme park even without parades. He responded that he did it to make his customers love him more.

It’s a celebration

Consumers are giving retailers so many opportunities to connect with and learn more about them. With so many different outlets and platforms, retailers should be thankful, taking advantage of what lies before them. Accessing technologies, whether it’s video, company websites, social media or mobile, retailers should be celebrating the new role of the customer and all the possibilities it brings.

At the session New Merchandising Strategies for Retailers at NRF’s BIG Show, executives from RiteAid, GlaxoSmithKline and ModCloth focused on six strategies to help drive in-store and online sales by engaging with their customers. Here are their recommendations:

  1. Be relevant, personal and solution oriented. Approach merchandising from the customer’s point of view. Forget SKUs and subclasses and instead group products along lifestyle themes that resonate with shoppers. To add more value retailers should offer personal advice for common human experiences and help solve customer’s problems – even if they are unaware of the problem.
  2. Turn traditional behaviors into digital habits. Take an offline, traditional behavior such as couponing and create a habit for the digital age. Rite Aid aggregates coupon offers from all around the Internet on a special landing page for members of its loyalty program to use.
  3. Coordinate and plan in advance. Work with other departments such as retail merchandising and promotions to coordinate calendars and campaigns. Plan new initiatives upfront and in advance with vendors, also.
  4. Add value to content. GlaxoKleinSmith recommends positioning a discount as a reward for customers that have watched a video or accessed an article, for example. It keeps content fresh and encourages repeat customers.
  5. Use data as information for strategies.When looking at data, ask questions and engage with it beyond product and price, sales and basket spends, and abandonment.
    Discover more about turning data into actionable knowledge here>>
  6. Listen to your customers. Train everyone on your team to be customer-oriented in which they constantly listen to and learn from consumers whether it’s via Facebook, in the store or in a survey.

Click here to read the entire entry 6 Strategies to Help Retailers Celebrate the Role of the Customer

Consumers have provided retailers all the tools they need in order to build trusting relationships and brand loyal customers. However, shoppers are continuously changing and, failing to understand them at any given moment, will put retailers even further behind. With that said, once a retailer earns a customer’s trust, that retailer needs to ensure that every channel in a supply chain carries the correct inventory to maintain a high service level.

Learn how Q’s allocation and replenishment capabilities can react to unique customer behavior in real-time across all channels>>

Don’t be afraid to embrace the new age of the shopper—they are giving retailers a chance to be creative and personal. Learn what customers want most, earn their trust and then sell it to them.

Look out for our next post on the tech trends that will define 2012

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Grocery Innovation – Part 1: Simplifying the Complexity in Grocery Retailing

In order to keep up in today’s competitive environment more and more grocers are beginning to resemble specialty markets in an attempt to lure customers with higher quality foods, expanding variety, including increasing amounts of perishable food including dairy, produce, and fresh meat that come from local vendors and farms. These areas often require new practices that increase the complexity of the supply chain that grocers already manage.

It’s clear that grocery has become more complex for retailers in the last decade. Not only have buying patterns shifted since the beginning of the recession, but customer preferences and eating habits have too. The huge demographic shifts that occurred extremely rapidly have greatly impacted the way grocery retailer’s look at buying and managing their inventories. Companies that had some success in understanding these changes were fortunate enough to have had the capabilities of seeing pertinent information in their data. Many others struggled.

Other contributions to the complexity of grocery include the multitude of suppliers and vendors that retailers are dealing with along with the growing volume of product that moves through the supply chain. Additionally, the speed at which a product moves through the supply chain has become increasingly complicated. For a typical producer, supplier and vendor of a grocer’s product, replenishment happens in very quick cycles, but varies widely for the different types of products.

To make matters worse, there is a huge difference in how to handle ambient (non-perishable) product compared to perishable product. There are many different logistical concerns from the time product leaves the supplier to how you get it through your internal supply chain and then to the store shelf within a retail location. With perishables, you can incur waste with tray sizes that are too large for some stores, but because you need to meet a certain service level, you might have to send the trays regardless.

Ambient product, on the other hand, has to accommodate to specific shelf display requirements particularly special fixtures during promotional periods. Non-perishable inventory may need to be brought in earlier ahead of a promotion. Overall, each delay or error in the process can lead to waste, shrink or a missed selling opportunity. It all comes down to getting the right product to the right store at the right time.

With that said, some retailers have neglected business strategies through all these changes in terms of waste vs. profitability specifically in a sense that certain product is critical for customer satisfaction. Therefore, having a higher availability, even if it means more waste and less profit, is critical. Establishing and maintaining strategies can help ease decision-making with perishable and non-perishable product.

Challenges in managing inventory with grocery

There are many inventory challenges brought forth from grocery’s new supply chain complexities.

One such challenge is the data dependency in tracking inventory successfully through the supply chain. For example, a grocer may receive an item from three different suppliers making it difficult to track their inventory. To overcome this challenge, some retailers benefit from having all of their suppliers manage to their specifications. Essentially, those suppliers would be contracted to put the same SKU number on that item.

For branded product, part of the challenge is that the manufacturer may actually have a number of different UPCs across regions for what is the exact same product. This can be driven by either change in the product over time or how the product is managed regionally particularly when production or preparation of those items is subcontracted. This is where you get into a lot of data complexity; if you don’t have a good handle on the data that represent a moving item through your supply chain, you’re going to have a hard time keeping track of it.

Multi-level distribution systems add to the challenges of tracking inventory successfully because a product can follow many different paths through the supply chain. Products often follow a lineal path from supplier to national distribution centers (NDC), NDC to regional distribution center (RDC), RDC to store.  However, some retailers also have supplier direct to store or NDC direct to store and other combinations of movement that complicate inventory tracking, including lateral transfer of inventory between stores or between distribution centers.

Many grocery retailers work with antiquated systems that do not allow them to process item level receiving at store back door. At some point, these retailers will lose sight of that inventory because of the system’s limitations. In order to deal with these challenges, many retailers are in the middle of significant ERP programs where the primary goal of these programs is to get a better grip on managing inventory.

Technology to simplify the complexity

Ineffective inventory management can add to the complexities grocery retailers are combating. A simple solution lies within technology. Next generation supply chain solutions are key to managing the right amount of product at the right time. In turn, helping grocers to move forward in resolving inventory complications.

The ability to generate draft order plans that forecast demand should be an essential component of inventory management technologies, especially when it spans across the entire supply chain. This ability enables retailers to share order plans with suppliers who can then take the information and do a much better job of planning what they are going to be asked to produce and deliver in the future. Better yet, this helps suppliers with the purchasing of their own input materials that go into distributing product. Forecasting and demand planning also determines the right amount of product on the right days, which aids in quick replenishment cycles. A quick replenishment cycle increases product freshness and the usable life to a customer not to mention helping suppliers and vendors along the way.

It can prove difficult to get the right product to the right store when dealing with a multifaceted multi-level supply chain. With that said, it is crucial to have a tool that has a good distinct view of what product is moving through the supply chain, not only what has been delivered to the supply chain by the supplier or what is sitting in the store, but having the ability to pass the demand of a product appropriately through any distribution level to get that product to the store regardless if its from a national vendor or a local farm. A new technology solution that factor into the order planning and allocation processes what product is moving to the store, from the supplier and where it is going to hit would eliminate such issues.

3 things grocers can do to maximize profits

  1. Incorporate product strategies: It is important to have good product strategies in place especially for those perishable items with rigid pack or tray sizes. Depending upon your pack size, this can be a brute force decision creating two entirely different choices and sometimes missing the boat and incurring a little too much waste or perhaps losing sales. Defining product strategy goals is a proven tactic to maximize profit.
  2. Collaborate with suppliers: Managing ordering and replenishment properly is difficult with complex supply networks. By building a connection with your suppliers not only are you generating trust, but also you’re increasing your profit by reducing time and overlap within the supply chain. This holds true for both perishable and non-perishable products.
  3. Invest in new technology: Antiquated systems are not successful at overcoming data complexities or changes in buying patterns nor are they successful at getting the right amount of product to the proper store at the correct time. Solutions that are strategic, profit-aware and automated should be utilized.

Just like consumers have transformed, so has the grocery industry to keep up on the challenges produced from customer’s new wants and needs. What once were miniscule constraints now are made of multiple levels and large volumes. In order for retailers to flourish and be advantageous in overcoming these changes, next generation supply chain opportunities need to be adopted. Retailers need to employ tools that provide order planning and forecasting, track inventory successfully, and handle ambient and perishable product properly to avoid being left in the dust.

The Profit Lab: Determining need… what’s your strategy?

THE PROFIT LAB // Top 10 Ways to Pull Profit from Allocation

Strategy #8: Create product strategies to understand each store’s true need

OK, you’ve spent the time and effort to select the perfect historical activity criteria. You now have the best possible representation of future activity you can get, now what? How will you support that with inventory?

Let’s start by taking a look at traditional approaches. Once you have an idea of how an item will sell, what do you do next? The common assumption is that if all stores have the same time supply (i.e. weeks of supply) of inventory all will be well. Alternatively, many systems use the premise that a store’s inventory need is equal to its contribution percent of the forecast or historical selling. Unfortunately these assumptions fall short in a few ways.

First, we never have the perfect forecast or criteria for all stores. As such even if we give the same time supply of merchandise they won’t sell through equally. In addition to understanding the accuracy of the projection or forecast, it’s also valuable to understand the inaccuracy. A store with a need of six units because it sells one every day is different than a store that needs six because every once in a while it sells four or five. Understanding this may cause you to make a different decision regarding how (and when) to support the need with inventory.

Second, most of us are constrained to some extent based on packs. So if a store needs 9 units and we have a pack of 6 we send either 6 or 12. We’re now under or over stocked. Which is the right decision? What if I have most of my stores on the cusp of this rounding point? I can’t treat them all the same because I don’t’ have enough inventory. Now what?

Third, we haven’t considered the true economic impact of the decision. If I send three percent of my inventory to a store that generated three percent of historical sales what is the likelihood and cost of some of those units going to markdown? How does that compare to the likelihood of missing a sale? What’s the cost of that? The answer will be different for each location.

Fourth, what is the relationship of the time supply to the presentation? What if presentation represents six weeks of supply in half your stores, but you only have four weeks of supply at the DC? If we constrain to presentation some stores will get less than three or even two weeks of supply.

Finally, we haven’t considered the role of the item in the assortment. Chances are you’re treating all items the same. An item that is in the assortment to drive traffic has different inventory requirements than an item whose role is to round out an assortment. These are different from the profit generators, which are different from your core assortment and key items etc. These roles vary by product but can also vary by location for a given product. Considering this “role” of the merchandise will lead to different inventory needs.

What you can do now

Starting with the assumption that you’ve chosen a good base of data, most conventional allocation systems are then limited to the calculations and constraints to determine the inventory need by store.  We need to manage these based on what we’re trying to achieve with the merchandise. Here are some things to consider:

  • If it’s a slow mover, ratchet down the presentation requirements and let your allocation system drive who gets the inventory.
  • If it’s a traffic driver, make sure you don’t short-change small stores with too conservative a minimum. If you do the larger locations will take everything.
  • If it’s a high margin, profit item, don’t be as concerned about chasing opportunities that may look like over stocks. Select more aggressive pack rounding options (round up) if you have the choice. The larger profit margin can quickly cover the impact of markdowns if you sell a few more units.
  • If it’s a low margin item, DO be conservative about chasing opportunity because sending markdowns may be devastating to profit. Select more conservative pack rounding options (round down) given the choice.

Ideally you’re already looking at opportunities to improve your presentation requirements and pack sizes. I’ve always felt that presentation should never be more than 1/3 the demand for any location over the lifecycle of short life merchandise. Pack sizes should be reflective of the smallest multiple you’ll need to ship. This is especially true if you’re constrained to 1 pack configuration. Consider setting a minimum of zero on fringe sizes outside of very core assortment apparel. Let demand drive that activity. If you include the core in your historical base of data you’ll capture changes in demand for fringe sizes.

One more note: If you’re spending a lot of time manipulating the recommendations your allocation system is providing you probably need to spend more time on fixing that upstream. Multiple examples have shown that effort spent in good criteria and constraints then left alone produce better results than intuition and manual overrides. In fact, based on personal experiences I’ve taken to referring to such manual intervention as “de-optimizing”. Challenge yourself and your team to see how much final intervention they can avoid by spending more time in the criteria up front.

What you should consider when looking for new capabilities

Advancements in technology and in science have enabled the most modern of systems to consider all of these things simultaneously when recommending allocations. The best systems generate regularly updated forecasts which can be used for new and existing items. The forecast shares not only the end unit need, but also the learning that went into deriving that need so all of that understanding can be used in solving the inventory side of the problem as well.

This understanding together with defining the role of the product can give these sophisticated systems the information they need to focus on how much inventory is required to meet your financial and strategic objectives with the product. The role reflects most of the complicated data metrics and parameters.  Traditional systems used to require merchants to understand, interpret, define and manage these settings manually.

This process actually simplifies merchant interaction with the system despite advancing sophistication and management of the more complex problem solving necessary to get incremental improvement in results.

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Learn more

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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