What is important to retailers? The obvious is answer is the customer. And it is important to customers that the correct merchandise they want is available when they want it. Ergo, having the right inventory at the right place and time should be retailers’ primary focus.
Regardless of having the best brand, merchandise and marketing (promotions and pricing) strategies, if a retailer does not have inventory at the right place and the right time, the customer will be negatively impacted, in turn negatively impacting brand loyalty, repeat sales and sales revenue. There is nothing worse for a retailer than demand that cannot be fulfilled – the proverbial “stock out.”
In today’s age of increasing transparency, customers want to have confidence that a retailer has the inventory they desire and the assurance their needs can be fulfilled. If not, they will jump to an alternative source – most likely, a competitor. At best, the result is a lost sale and poor customer experience, or it could be as detrimental as a lost costumer.
enVista recently engaged with a multi-channel retailer to evaluate their retail supply chain and to determine how their future supply chain must look to consistently deliver the best customer experience. It was refreshing to work with a client that focused on asking the right question first, versus jumping into deficit-based problem-solving.
Thank goodness they were not asking how many DCs do we need and where do we put them, and how do we squeeze five more percent out of transportation network and carriers. Rather, they focused on the right question – how do you improve in-stock percentage and increase comparative sales while balancing and managing total costs to service?
The project goal was to design an agile supply chain from their customers’ point of view, in order to ensure the right SKU was at the right store at the right quantity and right time. What a novel concept – working backwards and developing a supply chain by understanding demand patterns first. Future distribution centers and transportation strategy are contingent upon and figured out after you determine how to synchronize supply and demand to improve the customer experience.
The team identified that it was unnecessary to maintain high levels of inventory at the stores’ back storage rooms and DCs. Inventory levels did not reflect actual demand. In actuality, high inventory levels were an outcome of a series of supply chain variables that were not being managed and measured, causing lower than acceptable in-stock percentages and less than desirable inventory turns and orders cycle times.
As previously argued, the goal is to have the right merchandise, at the right location at the right time. For many retailers, this translates into chasing demand with bad forecast and buying unnecessary inventory (lumpy supply), when instead, the demand can and should be forecasted.
enVista’s team analyzed the inbound and outbound inventory flow between all nodes of the network (source to consumption) as well as the inventory levels at all storage locations throughout the year. The numbers proved that our client not only carried excess inventory, but also carried some of its excess inventory at the wrong time and the wrong locations through purchasing practices that were disconnected with forecasted demand.
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This disconnect was causing the retailer to carry the excess inventory for longer periods at the DC and stores. Beyond increasing working capital in the supply chain, it also caused store labor costs to rise, since extra safety stock (that was not required to meet demand) had to be received, and then later returned back to the DC.
Poor in-stock percentage was also due to a lack of forecasting and planning for new items (less than 50% accuracy, compared to replenishment items with an 80% forecasting accuracy). In addition, the retailer lacked the ability to create a bottom up plan with the appropriate assortment based upon SKU behavior by store. The outcome was incorrect inventory quantity at the retailer’s stores.
Many retailers will cluster stores based upon sales volume and forecast based upon an average sale through rate. In many cases, retailers use a standard demand curve, with a “C” store as the mean, and then establish an inventory position based upon the mean. The best practice is to forecast at the SKU and location level and aggregate the demand for all channels.
Retailers today require an integrated process, and an enabling technology platform that facilitates one financial plan (top down and bottom up), assortment planning, promotional planning, and allocation. This needs to be seeded by ONE forecasting engine rather than forecasting for replenishment and forecasting for new items independently across all channels. The challenge for retailers using multiple forecasting solutions is “reconciling” between items that are on replenishment and those that are not.
No one said retail planning across an enterprise is easy. Start with your customer first and understand your demand patterns, and then work backwards. Understand what shapes demand (dependent and independent). Unfortunately, the academics and practitioners in our space use the term “supply chain management,” when in reality we should call it “demand chain management.” After all, why allocate the resources (logistics) above and beyond actual demand?
Always in Motion,
Jim Barnes
