Rocket Science Retailing Is Almost Here

Rocket Science Retailing is Almost Here Are You Ready? Fisher, Ananth Raman & McClelland

Right Product In the Right Place At the Right Time For the Right Price Risk-based Inventory Planning Accurate Available Data Supply Chain Speed Forecasting The Holy Grail of Retailing

Dept. Store Markdowns

1971: 8 % of Sales

1995: 33 %

Forecasting Canons: 1. Update forecasts based on early sales data

World Co./ Fashion/ Japan 300% Gr Mgn on Inventory Investment

Zara/ Fashion/ Spain

CompUsa/ Computers

Borders/ Books/ USA

Example: Apparel Catalog Company

Forecasting Canons: 2. Track & predict forecast accuracy

World Co. >>> Obermeyer Method

(Display new products to 30 store employees representing target customers – estimate likely success of each product)

Forecasting Canons: 3. Get the product testing right

78% retailers test new products – but shoddily

Selection of stores greatly affects quality of forecasts

Forecasting error for each style and color reduced from 30 % to 9 %

Forecasting Canons: 4. Use a variety of forecasting approaches

Old Navy ( fashion) uses both bottom up AND top down

Bottom up: by merchandizers & planners based on:

Current trends in market

Products ‘fit’ with target customers

Complimentary products that also need to be offered

Top-down by planners

Macro-economic factors

Forecasting Canons

Update forecasts based on early sales

Track & predict forecast accuracy

Get the product testing right

Use a variety of forecasting approaches

Supply Chain Speed World Co: mfg + deliver in 2 weeks design+mfg+deliver in just 3 weeks

World Co stores fabrics & fittings (buckles, zippers etc)

Reserves prodn capacity in anticipation of demand

Factories have a separate debug area to arrive at “design for manufacture”

Employees empowered : product design, merchandising, operations , stores etc.- co-location helps

Supply Chain Speed Problem: Efficiency Mentality

11 month lead time of an Apparel Retailer

Transportation costs and Inventory carrying costs down

but….

Limited ability to react to market signals

(packed in same mix of sizes vs. packed as per store’s needs)

Supply Chain Speed Vicious Cycle

Logistics & Procurement Officials say : reducing lead time won’t help because co. lacks good sales data and tools to analyze data

Merchandizing & Planning Official respond: being able to store & analyze sales data won’t help retailer since logistics & procurement can’t respond fast enough to those signals

Supply Chain Speed

As retailers adopt new software tools for forecasting and planning supply, they can use these tools to measure the impact of a shorter lead time and better match supply and demand.

Inventory Planning

At home :

Medicines & batteries stocked for many months

Bread & milk daily

Inventory Planning

Lost sales are endemic among retailers

Retailers don’t track stockouts and resulting lost sales

Estimating Lost Sales (Accuracy of 2 %)

Underlying demand rates for a product based on sales patterns that occurred when product was in stock

Combine estimated demand rate with the duration of the product stockout at a particular store to derive lost sales

Accurate Available Data Error in Inventory Data 30 % at Store Level Sources of Errors:

Apparels: improper handling of returns ( medium/small mix up)

Grocery:

Checkout lemon yogurt/ vanilla yogurt

Sales of medium tomato 25 % higher than actual shipment

Distribution Systems:

Small Shirts vs. Medium

144 units/ pack vs. 12 units/ pk

“ Zero Balance Walk” Staples

Stockout Card records events causing stockout:

Demand surge

Computer data error

Stocked in wrong aisle

Data for 10 years or 10 weeks?

Informative data can be stable from year to year:

Seasonality

Promotion

Differences in patterns in different stores

Research Shows….

One out of three consumers who entered a clothing store intending to buy something, leave without buying because he/ she can’t find the size in stock

Lesson: have data on style AND color AND size

Vicious Cycle

An inflexible supply chain justifies bad data, which justifies an inflexible supply chain.

(e.g. size mix packing problem)

Measure What?

Measure:

Forecast accuracy

Stockouts

Lost sales

Gross Margins

Markdowns

Inventory Carrying Costs

But, also measure:

Drivers of these measures shown on the left

Data Accuracy

Many retailers don’t know if their information is inaccurate, because they don’t track data accuracy

Costs Customer Satisfaction Morale Be aware of the effects of one element on others!

BUYER < > PLANNER divide Rt Brain Left Brain MIS < > Merchandising divide “ Always” means 100% vs Always = 75% Literal minded -------------------------------------------------- “ Men are from Mars, women are from Venus”

Software

Most inventory planning software is designed for products that have long life cycles and is thus inappropriate for products that have an economic life of just a few months.