by Ajay Chidrawar, Adam Hatch and Chuck Kramer
One of the biggest challenges that retailers face is keeping the right product mix on hand while keeping inventory levels as low as possible. This balancing act leaves little margin for error. Besides high carrying costs, too much inventory can lead to markdowns, waste or spoilage. But too little inventory can also be costly in terms of lost sales and disappointed customers. While one might argue that this balancing act has always been part of the retail industry, in the past few years, customer loyalty has been harder to come by in the face of fierce competition, and investor demands for operational efficiency have risen. These trends have made achieving this balance even more critical.
Most industry analysts agree that to remain competitive, today's retailers need a more sophisticated, demanddriven approach to planning. This approach can be found in the new generation of planning solutions. These solutions are designed to offer an integrated set of planning processes covering all aspects of merchandise financial planning, buying and assortment management, and allocation and replenishment. The goal is to ensure that retailers have the right products at the right price in the right stores at the right time—all as efficiently as possible and in support of overall strategic objectives.
Companies that have adopted new-generation planning solutions report sharply reduced inventories, fewer markdowns and increased sales. For example, a medium-sized retailer with over 200 stores in six countries was able to reduce markdowns by up to 10 percent and inventories by 20 percent.
Barriers to overcome
But companies pursuing advanced planning will run into a number of stumbling blocks related to the three key areas of merchandise financial planning, buying and assortment management, and allocation and replenishment. For instance, as AMR Research notes in its 2005 report on Advanced Retail Planning (ARP), financial plans related to merchandise are rarely aligned with those of other departments—or with supporting organizational and process areas. As a result, inventory is not aligned with strategic business goals. Moreover, most companies create manual forecasts based on educated guesswork rather than on detailed analytics on consumer demand. Also, current merchandise planning processes rarely scale to a level that supports key aspects of advanced planning, such as the ability to plan at the store level.
Buying and assortment management presents another set of hurdles. Most retailers make buying decisions based on gut instinct and spreadsheets, rarely applying sophisticated analytics to create market-specific assortments or to make other complex decisions for a better outcome. Also, most retailers are unable to manage assortments in-season based on point-of-sale (POS) performance—a capability that would let them respond more quickly to buying patterns. The buying process rarely connects to supply chain execution in a way that ensures more even inventory flows and —as a result—more efficient use of supply chain assets.
Finally, few retailers use insights from POS data or the buying and assortment management process to drive more efficient allocation and replenishment. For example, when allocating sizes to stores, few retailers know how to ensure that the right products or sizes arrive in the right stores at the right time. In a shoe store, for instance, since only a few pairs of the largest and smallest sizes are likely to be sold in a given assortment, it makes sense to stock these sizes at the start of the season to stretch out the selling period.
A number of IT challenges also stand in the way of advanced planning in the retail industry. Most systems are inflexible and focus on specific functions rather than on end-to-end processes, so retailers must force-fit their unique workflows. Since the systems lack a familiar user interface, they slow down and complicate work instead of making it easier. Also, most planning is done in an ad hoc manner on fragmented spreadsheets, resulting in a lack of alignment. There's also the challenge of managing the explosion of data from multiple channels, and using it to improve decision making.
Most companies create manual forecasts based on educated guesswork rather than on the detailed analytics of consumer demand that advanced planning requires.
Five key success factors
These barriers are daunting, but they can be overcome if companies take the right approach. Based on i2's work with a wide range of retail clients, we've identified five key factors that must exist for new-generation planning to succeed:
1. Combine art and science
Most retailers use a rudimentary logic for planning, mostly based on historical data and “gut instinct.� This may have worked in the past, when the industry was less complex. But given today's fiercely competitive global economy and the growing number of products and options, retailers typically outsource many aspects of their business, manufacture overseas, coordinate multiple channels— stores, catalogs, and the Web—and have to deal with rising expectations from fickle customers. Smart retailers are beginning to see the need to supplement the instinctual, experience-based “art� of planning with more concrete analysis and assistance from “science�—that is, analytic support tools that consider multiple factors such as sales profiles, store types and locations, regional and demographic variations, and such attributes as weather, color and style. Retailers can gain valuable insights and plan far more effectively by better leveraging all available data.
For example, most retailers use simple rules, such as “refill when only five remain,� to guide inventory restocking. But by using advanced forecasting and replenishment algorithms, retailers can restock each store based on its most current sales trend. Or, instead of using intuition to decide which products to carry in each store, merchandise buyers can analyze how similar products have sold in the past to come up with more informed numbers. Analytical tools also let retailers manage inventory based on product and store attributes, so that they can plan how a specific shirt would be sold during the summer in the southern United States, for instance.
2. Be process-centric
A formalized, consistent, disciplined and process-based approach is critical to success. By focusing on end-to-end processes rather than on specific functions, new-generation planning solutions deliver far more flexibility and allow for continuous innovation. Processes must be able to adapt to changing business needs and market conditions. The best systems can support each retailer's unique processes, instead of force-fitting them into the system's practices and structure.
Ideally, planning processes should integrate the knowledge of each user within the organization to institutionalize best practices. The system should also track process performance and provide feedback on needed improvements. A focus on end-to-end processes also helps to identify disconnects and value leakage that otherwise would be hard to detect and fix. So, instead of dealing with fragmented spreadsheets, users can centrally create, manage and align financial plans.
3. Manage complexity
A planning system that is hard to use adds another layer of complexity. An effective, new-generation, planning solution masks the underlying data and process complexity so users can focus on what matters—getting the right products to customers at the right price, in the most efficient manner possible. Complexity comes from the explosion of data as well as from the processes involved in coordinating across multiple groups within the enterprise and ensuring that everyone is delivering against a common set of goals. It becomes critical to get good, timely information to buyers and key managers so they can make better decisions throughout the buying and assortment management process. Moreover, retailers can automate inventory management by creating business rules (such as “always maintain inventory to cover two weeks of forecast�) and then focusing on responding quickly to exceptions, such as out-of-stock items, excess inventory or major changes in demand. These new-generation planning solutions can also generate accurate statistical forecasts for basic items that are carried over from season to season, so that buyers can focus on the more critical fashion or seasonal items.
4. Be iterative, not linear
Companies want a planning process that is iterative, not linear—where plans themselves are not static. As more information becomes available and new insights are gained, retailers must be able to revise and update their plans. It is important to remember that any changes will impact other plans, both downstream and upstream. For instance, a regional product promotion will likely increase sales in that region, which will result in financial and inventory changes throughout the organization.With good tools in place, retailers can update their plans and perform “what-if � analyses, and immediately see the impacts of changes across all affected plans.
5. Create end-to-end visibility
New-generation planning solutions must tightly integrate with the supply chain, translating plans into execution and operating within any existing constraints. With end-to-end visibility, retailers can see the effect of any decision on all aspects of the supply chain, from vendors and distribution centers forward to point of sale. For instance, few retailers ask their vendors to deliver inventory in optimal case packs so it can flow through the supply chain without having to be broken down and repacked for individual stores. Actions such as these make more effective use of supply chain assets and lead to better buying and allocation decisions.
Most systems are inflexible and focus on specific functions rather than on end-to-end processes.
Investing in the future
New-generation planning solutions give retailers the information they need to make more intelligent, betterquality decisions. By automating the basic elements of planning and inventory management, retailers can focus on responding quickly and appropriately to exceptions. Advanced planning is a journey. Few companies have achieved the total vision; most are tackling it one step at a time. But the benefits are well worth the investment. i2 customers report that having the right products in the right stores results in fewer markdowns, fewer lost sales, greater responsiveness to demand trends, greater supplychain efficiency and lower inventory levels throughout the enterprise. But perhaps most important of all, better planning delivers a better shopping experience and in turn, creates more loyal customers, which is critical in the highly competitive retail environment.
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Ajay Chidrawar is a director in i2's Solutions Marketing organization. Adam Hatch is director of marketing for i2's Retail industry group. Chuck Kramer is the senior vice president and general manager for i2's Retail industry group. For more information, contact supply_chain_leader@i2.com. |
