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The Little Inventory Mistakes that Closed a Successful Retailer

Stuart Dunkin, Data Profits Inc.

Data ProfitsAre You a Demand Driven Retailer?
How connected is your inventory replenishment process to your consumer demand signal? For many companies the goal is to plan first and then calculate a forecast. Companies use age-old top-down assortment planning processes and software that is based on slow market place change, fewer consumer options and a less "aware" consumer. Based on the advancement in technology over the last two decades, more advanced companies have started to focus on the demand signals, holding the belief that forecast accuracy alone is the key to success.

Your Inventory Issues are Screaming a Warning
Unfortunately, the majority of the systems in use today are a top-down, push methodology. These systems may have product/location forecasting but their core system is driven by a push methodology. Some systems have moved to product/ location forecasting but still do the buying based on plan, that's a top-down push. Lately we see companies have an emphasis on markdown software, but isn't that the cart before the horse? If service level based pull inventory replenishment and buying were effectively used, there wouldn't be a large volume of inventory that needed drastic markdowns. Call us old school, but we think product, quantity and price still rule the retail market space.


How to "Tighten the Links in Your Chain™"
How do we bring all the pieces together to have an effective inventory replenishment process? What is the connection between the topics this summer and this idea of "MIOE Maturity"? Let's first review where we have already been this summer. Our focus is on demand forecasting, inventory replenishment, supply chain visibility, and technology. When approached by RVCF to outline a series of articles this summer, it stemmed from the questions that RVCF members were asking in regard to their demand forecasting and inventory replenishment processes. We decided to write about some of the basic demand forecasting and replenishment issues that occur today - both what occurs and why.

Our series included:

June - Demand Forecasting & Planning - common ideas and misconceptions
Why Planning and Sales Forecasting are Bad for Replenishment

July - Misconceptions about Plan & Demand Forecasting that drive bad behavior and cost increases
The 5 Most Expensive Mistakes When Managing Inventory

August - Elements beyond the Demand Forecast that matter, Lead Time and Seasonality - spun with a little fun using a sci-fi summer hit.
Did Sharknado Chew Up All Your Lead Time?

September - The basic inventory issues: overstock, out of stock, bumpy cash, and lost sales - all are caused by only four basic problems?
Four Familiar Inventory Troubles - Which Do You Want to Overcome?

The Future Success of Retail Depends on Successful MIOE Maturity
An understanding of the basics of demand forecasting components and clarity on what your current software does and doesn't do is important for you to effect changes and deliver more profitable results in the future. What is MIOE you ask? Merchandising, Inventory, Operations and Execution Maturity Model (MIOE). MIOE Maturity was first published by Mike Griswold with Gartner in February 2012. MIOE is a replacement for S&OP models that are manufacturing oriented. MIOE is all about aligning inventory and execution activities with better process management and better processes.

MIOE has three key components:

  1. Merchandising - assortment planning what products, what space, what locations, what price, strategic direction and messaging of the company brand to consumers.
  2. Inventory - demand sensing, demand shaping and profitable responding to the signals. Inventory management and inventory policy drive actions and profitability.
  3. Operations Execution - The activities responsible for delivering the merchandising and inventory decisions.

While each of these is important to overall success, our focus is on the inventory portion. How do you create processes that are effective at demand sensing, demand shaping, and profitability? How do you then align the processes in a methodology that has a clear operational agenda that can be viewed across the supply chain by company and partners at all levels with one source of the truth?

The Missing Inventory Steps that Closed a Successful Retailer
Demand Sensing is using Demand Forecasting to understand your demand by type in the future. Demand Sensing uses analytical sales and supply data downstream with more forecast algorithms to create dynamic near real time demand forecast. The accuracy of demand sensing can often be 30% better than legacy systems. Real demand sensing is a pull model and today 98% of supply chain solutions use a push model. While the forecast can be at a product location level, if the buy signal doesn't originate at the product location, rather the buy signal comes from a Plan or Open to Buy or a Re-Order Schedule (every 2 weeks for example), then the tools are not optimized for demand sensing and are not consumer centric. Demand Sensing is the ability to see downstream of the supply chain to the end consumer and accurately forecast the product/location demand for regular, lost, promotion, event, and closeout sales.

Demand Shaping is the use of Demand Sensing and downstream data to select the products for the assortment. This brings a whole new light on things like who owns the inventory management for new product, the initial buy. With better consumer forecasting of product attributes you can select what the consumer will buy next and start to guide the consumer at point of sale. Demand Shaping is both assortment planning and also deciding the quantity of product to send to a location. Demand Shaping sits between demand sensing and profitability. The critical piece to Demand Shaping is the ability to guide consumers to the product/location and have an efficient supply chain that has the right inventory waiting for the consumer. Right Product, Right Quantity, Right Location.

Profitability is derived from effective management of the supply chain with one owner of the inventory. The results are lower inventory, better service levels, lower markdowns, lower operational cost, and higher sales.

Alignment of demand sensing, demand shaping, and profitability is achieved by aligning all the pieces into one source of truth and action across the supply chain. Note this sounds a lot like a portal that is easily configured and shared to users in the corporate office, DC, stores, and suppliers with full supply chain visibility, business workflow guides, and exception management. True alignment needs one source for the truth and one person to own the entire inventory management process. Today many companies have the merchant bonus tied into the inventory, creating split goals and split ownership. These types of behavior block profitability and create inconsistencies in the supply chain that cause additional issues. One owner of the inventory management can align and manage the inventory processes and effectively streamline responses with fast and profitable action.

Unusual but Achievable Demand Forecasting and Inventory Results
Effective Demand Forecasting and Inventory Replenishment require evaluation of the role your supply chain has in delivering business strategies. This evaluation will be closely linked to discovering the maturity of your supply chain software and inventory management team. You need an honest assessment of where you are today to enable you to determine how to get to where you want to be in the future. What are your current demand sensing and demand shaping software technologies? Are they old code or new technologies? Do your systems use demand or sales methodologies with end-to-end connection of your supply chain? Today, your competition is already moving to new technologies with bottom-up pull inventory management processes that are automated, dynamic, and super smart. Many companies will fear change and ultimately leave the marketplace; your goal is to be one of the companies that embraces new opportunities.

Demand Forecasting and Inventory Replenishment have new technologies available today. Their rapid install and low costs can improve your demand sensing, demand shaping, profitability and alignment. Assessment of where you are today and the role of your supply chain will aid you in writing out some initiatives for next year and building an action agenda to attain your new supply chain initiatives. Connecting all the pieces will enable you to react quickly to changing markets with lower inventory, higher sales, and higher profits because you will have a tight supply chain.

We've enjoyed providing this series on demand forecasting and inventory replenishment. My personal thanks to the retail executives who reviewed our articles and added insight. A big thank you to Evie Hooper at RVCF for her hard work and patience with us when we were behind on deadlines and her careful, yet insightful edits.

Where you find value in our articles, please let RVCF know. If you want to read more on these topics visit our website for articles, free downloads, subscribe to our newsletter (starting October 15), and our blog, all free.

Stuart Dunkin, CEO of Data Profits Inc, is a strategic visionary who leads by calling on his broad range of experience as a former retail executive, consultant for top retailers, and work for E3/JDA software. Data Profits delivers forecasting, replenishment and collaboration supply chain tools to our customers. Data Profits interviewed over 100 retailers who outlined - the disjointed relationship between supply chain data, people and business goals. This influenced our software designs. Data Profits Software connects people, meets service goals, increases profits and provides a highly visible supply chain across a retail network. The user configurable software installs in less than 30 days at more than 50% less than legacy solutions.

Stuart attended Auburn University for a Bachelor of Science degree in Business Administration. He continued his education at Emory University, pursuing a joint Masters of Divinity and Masters of Business Administration. Stuart writes almost weekly for a popular retail supply chain blog found here. Call Data Profits at (770) 574-4100 or visit Data Profits website to learn more about their software and vendor portal. Now "Tighten the Links in Your Chain™."

Finally my thank you to each of our readers; without your comments, suggestions, and business Data Profits wouldn't exist. I wish you well this holiday season and hope you will each continue to "Tighten the Links in Your Chain™"