Three New Ways Retailers Can Improve Inventory Performance
Many retailers consider competing against Amazon their biggest challenge. While the impact of Amazon is real, it is only a thread in the larger retail competition tapestry. Amazon offers breadth, but brick and mortars offers “now”, and a tactile consumer shopping experience is still a retailer’s greatest asset. That is because shopping is an emotional experience, and brands like Nordstrom, Guitar Center, and Apple are becoming increasingly savvy about tapping into that experience. Going forward, successful brick and mortal retailers can capitalize on the element of “cash and carry”, giving consumers a level of instant gratification that the "click-and-wait" world of Amazon cannot match.
Offering the immediacy of “now” is good, but it doesn’t solve another key dynamic of consumer behavior – an increasing demand for choice. The ability to serve this demand is foundational to the success or failure, but the challenge doesn’t hinge on strategy. It depends on the ability to execute. The supply chain planning team needs to think beyond current processes and functions to incorporate technologies and concepts that allow them offer more choice and be more nimble and forward looking. Here are three ways that retailers can align strategy and execution.
- Revitalize your assortment
Shoppers want options, and a constantly changing array of them. Pop-up stores, fast fashion, click-and collect, and proprietary products are new methods that retailers use to keep their assortment fresh. In able to support these models, supply chain teams have to be strong on two fronts – managing assortment expansion and contraction.
The traditional merchandise planning model consists of deciding what to carry and then calculating what will sell. But omnichannel retail is causing retailers to revisit this practices and explore a new approach that flips the sequence, using analytics to first determine what is likelier to sell, then deciding what to carry. Employing machine-learning based forecasting tools, retailers can predict potential sales at the front-end of the assortment planning process. By using data to stock items with higher forecasted demand, they can reallocate cash that would normally be tied up in poorly performing inventory, avoid margin erosion from markdowns and dead stock, and increase overall on-shelf availability.
At the back-end of the cycle, planning must identify poorly performing SKUs and transition these out of the assortment. The analogy is pruning a garden. By cutting back on unhealthy and dead wood, a plant becomes healthier and more robust. By pruning away unhealthy items in an assortment, stores can utilize their shelf space to carry better performing items, increase turns, and increase margins.
- Future-proof Replenishment
In retail, the governing axiom is having the right amount of stock in the right store at the right time. Yet paradoxically retailers front-load inventory to the store, based on the belief that goods must be on the shelf to sell. The challenge is that once inventory is forward-deployed, it's not always cost effective to re-position it. By adhering to this legacy belief, retailers cause both lost sales and markdowns because the stock is poorly positioned to fulfill channel demand.
To combat this, retailers are beginning to shift to demand-driven inventory deployment for all SKUs. This means the traditional push allocation process commonly used for seasonal SKUs and one-time buys is merged with replenishment into a single process that's based on a forward-looking forecast. A holistic forecast has been the "white whale" in retail planning for decades, but with emerging technology – machine-learning, specifically – it’s now feasible. Inventory planners are able to see specific demand streams and hold back inventory at the DC, deploying it to stores with the greatest likelihood of selling that item based on early sell-through patterns, i.e. demand sensing.
- Engineer Profit
In an industry with thin net margins, finding the right inventory mix to maximize profit can be difficult. Retailers have relied on an “Open-to-Buy” budget as a way to both control spend and determine what inventory to purchase. But this process limits agility and responsiveness because it places too much emphasis on a short-term horizon, without incorporating the real time impact of item supply and demand.
Innovative retailers are moving away from “Open-to-Buy” towards a more holistic planning process, or what Gartner Research calls Sales and Operations Execution (S&OE). This is a retail-oriented version of Sales and Operations Planning (S&OP), but with a shorter 12-week planning horizon. While S&OP has traditionally been a function more commonly used in manufacturing, retail-centric S&OE allows retailers to identify gaps earlier between budget and sales projections. These early indications give retailers time to develop a strategy to close financial gaps by taking corrective actions, such as running a promotion or canceling upcoming orders of slow moving items. Equally important, retailers can manage sales plans against working capital, physical capacity and transportation constraints. Essentially, S&OE provides operational guardrails for retailers by understanding holistic inventory performance, improving cost and revenue decision making.
A recent webinar, Escaping the Land of the Lost, outlines areas of focus to get the most out of supply chain processes. It includes a case study presented by Thomas Snowden, VP of Supply Chain and Analytics at Express Oil Change. Snowden describes how his company restructured their operations to incorporate new locations, new products, and new processes while simultaneously improving profitability.