Inventory Allocation: How Retailers Can Find the Perfect Balance
Retailers face a real conundrum. On one hand, everything from the costs of raw materials to commercial retail space is always getting more expensive. And on the other, customers can quickly check dozens of options for any purchase so retailers must ensure that their traditional brick and mortar stores add value to the overall shopping experience. For anyone looking to minimize operating costs while maintaining margins, inventory allocation is one area that simply cannot be overlooked!
Succeeding in today’s complex omni-channel environment means striving to achieve the perfect inventory allocation across multiple locations at a time when it has never been more difficult or costly. With pressure from customer to provide exceptional choice and availability, how can retailers achieve a balanced inventory allocation across all channels?
Inventory Allocation Explained - Why You Need a Strategy
Put simply, inventory allocation encompasses all of the decisions made around how inventory should be distributed throughout your supply chain. The problem for many retailers is that their network is comprised of a complex mix of centralized and decentralized locations and channels. Consequently, generating and implementing an optimal inventory allocation can be a truly mind-boggling exercise.
In complex retail environments - with many warehouses, stores and multiple e-commerce channels - it is vital that the retail allocation strategy is both well considered and communicated effectively across the wider business. This is important because even if you have dozens of retail stores, the allocation of available inventory to any one of them can have a profound impact on overall sell-through rate and waste.
What Does Ineffective Allocation Strategy Look Like?
Before we cover how to determine the best strategy for your business, let’s first take a moment to look at what bad strategy - or worse, no strategy - looks like. (Note – If any of this hits too close to home, you should give us a call!)
When allocation strategy is not well aligned with overall business strategy, this can have a huge impact on the performance of the business as a whole. Some of the resulting issues are very visible, such as empty shelves at some locations while others have cluttered aisles and backrooms bursting with stock. Poor allocation can also have a profound impact on sales and margins as the business is hit with avoidable supply chain costs and missed sales opportunities.
Tell-Tale Signs of an Effective Vs Ineffective Allocation Strategy
Optimized Allocation Strategy Ineffective Allocation strategy
😊 Consistently high levels of availability ☹ Cluttered stores
😊 Minimized inter-store transfers ☹ Excess stock across the chain
😊 Maximum product sell-through ☹ Availability issues across online channels
😊 Days of stock on hand minimized ☹ High rate of in-store stockouts
😊 Excellent customer satisfaction ☹ High rate of markdown
Inventory Allocation Rules: What Parameter Should Be in Place?
Every business is different. As a result, the parameters for effective stock allocation must be built with the intricacies of the operation in question. For example, in environments where demand is steady and easy to predict, allocating all the stock may be the best way to minimize supply chain costs.
However, in industries where the demand per location is highly uncertain, e.g. fashion, allocating 100% of the available inventory on day one could be a risky decision. Instead, it may make sense to allocate 50% of the available inventory to stores in the first instance and then allocate the rest to the best performing locations further down the line. Therefore, the inventory allocation rules must reflect this.
When determining inventory allocation rules, the following are examples of things which business leaders may want to consider:
• The risk of stock outs Vs. the risk of waste
• Ease & speed of distributing inventory from DCs to stores
• Available warehouse space at the DC
• Available shelf space in-store
• Cost to re-distribute stock
• Level of available inventory
Inventory Allocation in a Multi-Channel Environment
Though all retailers are different, there are a number of points to consider so that your inventory allocation will satisfy both the demands of the customer as well as deliver value to the business.
1. Get your allocation right first time, every time
For many retailers, the initial allocation causes the biggest headache. This is not surprising given that a poor initial inventory allocation is one of the most common avoidable causes of obsolescence and waste. When rolling out a product to stores, the temptation is to allocate all inventory from day one. However, there is little point in allocating products to a store where they will never sell through.
Take, for instance, the inventory allocation of women’s shoes: demand will always be higher for size 6. So, while it makes sense to allocate these to stores, what about extremely large and small sizes?
Since these products are statistical outliers demand for them at any given store is likely to be far lower, and therefore the risk of excess and obsolescence is far higher. Consequently, it makes more sense to allocate outlier products to a centralized location in order to fulfill demand via the webshop or push to stores when required.
2. Presentation is everything
When it comes to the initial allocation, less is more. That said, there is always a minimum inventory amount that should be allocated per store. The goal here is to provide your stores with a sufficient amount of presentation stock to launch a new product as well as cover demand until the inventory can be replenished.
However, there is still a risk that the level of presentation stock is excessive. Presentation stock is typically driven by the planogram in place, which is why we highlighted the importance of communicating your allocation strategy throughout your company at the beginning of this piece. In this case, it’s vital that supply chain teams are well aligned with the visual merchandising team to minimize the risk of excess and obsolescence.
3. Make automated replenishment work for you
As stated in Point 1, it is not advisable to allocate all of your inventory straight away. Instead, retailers should rely on their replenishment processes to regularly top up in-store inventory levels. But how do you know when it’s the right time reorder for a new item?
Establishing automated replenishment rules for new items can be tricky given the dearth of item-specific historical sales data. Instead, set initial automated reorder quantities at a level equivalent to similarly selling items at that location, and institute weekly manual reviews. By doing this, you can be assured of a specific minimum inventory level, with the option to order more as needed using the manual review. As adjustments are made after the roll-out, the review time-frame can be pushed to bi-monthly and then monthly once more data is available. While this process is more labor intensive than standard automated replenishment it works to ensure that stock is allocated correctly while also providing that reassurance that a base level of product will always be available.
Businesses must grab every opportunity they can to improve margins. By implementing a cohesive allocation strategy, retailers can realize increased sales from levels of availability across the entire supply chain.
Slimstock has been helping companies like yours lower inventory costs while increasing customer satisfaction for 25 years. Our inventory management software is used by over 900 customers worldwide to free up capital and simplify the ordering process. Chat with one of our friendly customer service reps today to learn how we can help optimize your inventory.
Monthly vs Weekly Forecasting
Which forecasting method is best for your business?
The goal of Slim4 - Slimstock’s inventory optimization software – is to predict the future. Specifically, how much of an item you’ll need to meet customer demand. Predicting the future is hard work even using historical data. With our ever more interconnected world, the number of data points available is almost limitless, so the challenge is getting the right data and using it in a way that increases predictive accuracy.
When preparing to order inventory, two approaches are typically used – monthly forecasting and weekly forecasting. But which method works best? The temptation to default to weekly forecasting can be understandable because on the surface it can seem timelier and thus more accurate. If 12 data points are good, then 52 should be better, right? This isn’t always the case.
In 25 years of helping customers get the right product in the right place at the right time, we’ve seen that most products can be predicted and ordered more accurately using monthly forecasting.
Monthly Forecasting
In plain English, monthly forecasting means that sales data is captured daily and bucketed into months to produce a forecast. Similarly, weekly forecasting involves bucketing daily sales into weeks to create a forecast. This creates 40 more forecast periods in a given year.
Monthly forecasts work best for most products because they tend to generate lower forecast errors. While there is variation in how many units are sold week to week within a monthly forecast, if we’re doing our job correctly, you’ll still have the right amount on your shelves whether it’s 1st, the 15th or the 30th.
The three primary reasons monthly forecasting is more reliable are -
- Monthly forecasting’s larger bucket better absorbs changes in customer order timing. If a customer who normally orders a part from you in the first week of a month instead orders it in the second, this can disrupt your order data. However, this potential disruption is nearly four times as likely to be absorbed by monthly forecasting, leaving your order data unaffected.
- Monthly orders reduce the number of zero entries in your data, meaning the law of averages works for you. If a customer places an order with you for 100 units every two weeks, it results in a simple average of 50 units per week. But, the forecast error relative to this average will always be wrong because the order quantity is never 50, it’s either 100 or 0. Taking a monthly view of this order pattern makes correct forecasting easier because it shows consistent usage with fewer zero entries.
- Monthly timeframes handle seasonality better. Months are predictable – they’re in the same order every year. Weeks, however, are a little squirrely – they can move around +/- 4 days in either direction. The relative unpredictability of weeks makes them more difficult to use when factoring in seasonality, especially if there are only a few years of data to base forecasts on. Monthly timeframes more reliably allow general tendencies to develop and be represented in your order data.
Weekly Forecasting
Even an accurate forecast amount isn’t much good to you if it doesn’t show anticipated demand over the right period of time. If this happens, you’ll have stockouts and falling customer service goals will be soon to follow.
As stated earlier, weekly forecasting requires more effort than monthly, but is appropriate for items that have an observable repetitive pattern of usage within each month.
Here is an example of an item that meets this criteria.
With 60% of sales coming in the first week of the month, this product is good candidate for weekly forecasting.
Items with short lead times and consistent sales work best for weekly forecasting. By identifying these opportunities, the product can be ordered close to when it is needed, which helps improve inventory turnover and the overall profitability of the company.
Other advantages to weekly forecasts are:
- Compatibility: If your customer is communicating with you in terms of weekly forecasts or weekly Point-of-Sale (POS) information, generating your own forecasts in kind can provide an invaluable direct linkage with them. Getting that direct linkage with data closer to the retail customer may outweigh any potential internal forecast accuracy improvements.
- Medium Volume Items: If you are dealing with medium volume items, a weekly approach produces more accurate trend lines and better reflects shifts in demand.
Slimstock’s implementation team will help you identify which type of forecasting is best for your product array based on historical sales data. For items that fit weekly forecasting criteria, Slim4 distributes volumes from monthly forecast data to the appropriate week in the month using historical pattern references or defined business rules. This approach delivers the advantages gained from monthly forecasting as outlined above, while accounting for observable specialized demand needs within the month.
Monthly or weekly forecasting - the best way to decide which approach is right for you is to schedule a demo of Slim4 with our inventory experts. They will run your ordering data through our proven inventory optimization software to show you real savings opportunities that have delivered post-implementation ROI of 6-12 months for most customers.
Slimstock has been helping companies like yours lower inventory costs while increasing customer satisfaction for 25 years. Our inventory management software is used by over 900 customers worldwide to free up capital and simplify the ordering process. Chat with one of our friendly customer service reps today to learn how we can help optimize your inventory.
- Published in Blog, Manufacturing, Retail, Wholesale
Playtime is Over: Retailers Must Get Serious About Omni-Channel
One of the world’s largest retail toy store chains made headlines recently as the North American arm of its global operation filed for bankruptcy. While the news came as a surprise to many, the business in question did not fail because consumers stopped buying toys. Given that global sales of toys and games were up 3% in the first half of 2017, is the traditional brick ‘n’ mortar retail model still relevant in today’s omni-channel world?
The reality facing many retailers is that consumers simply do not shop like they used to. In 2016, an estimated 1.61 billion people worldwide purchased goods online. That same year, global e-commerce sales amounted to $1.9 trillion and projections show a growth of up to $4.06 trillion by 2020. However, retailers shouldn't close up shop on their physical stores just yet. After all, if the physical retail environment was indeed dead, why else would the likes of Amazon look to enhance their business with physical channels?
Although the traditional brick ‘n’ mortar retail model seems to be in trouble, physical retail stores will always remain a valuable channel for consumers. However, in order to establish an effective omni-channel operation, retailers must take steps to reinvigorate the in-store shopping experience and better integrate physical stores with online sales.
Omni-channel is all about experience...
Consumer habits are migrating towards internet commerce, but shopping patterns have not changed completely. Online sales of toys only accounted for 22% of total sales in 2016, with the majority of purchases still made in-store. So while traditional brick 'n' mortar locations still have a role to play, that role is rapidly evolving.
As highlighted in Forbes, most customers are now hybrid shoppers: when it comes to making a purchasing decision, they rely on both online and offline channels. While online channels provide more transparency over pricing allowing consumers to compare a number of different competitors, retail stores provide intimacy whereby the customer can truly interact with the product before they make a decision.
Take for instance the “Fur Real Roarin’ Tyler: The Interactive Teddy" that is anticipated to be one of this year’s best-selling Christmas presents. Although the online retail environment will provide a clear indication of price, even if the description of the product clearly states that the toy is “soft & cuddly,” you are unlikely to be convinced of this until you actually go to a store and experience it for yourself.
As a result, retailers must ensure that their operations reflect this purchasing behavior. After all, cluttered stores, filled to the brim with the wrong stock will never win over customers!
... But convenience will always be king!
Although the need to provide an intimate shopping experience cannot be understated, customer loyalty ultimately depends upon a retailer’s ability to provide convenience.
After all, imagine if you were in a toy shop and the product you want is out of stock. Or worse still, imagine you were trying to make the same purchase online via the retailer’s website: what would you do?
Although you may accept an alternative product, the reality for retailers is that failure to provide customers with the products they want, as and when they want them, is the fastest way to lose their business.
Regardless of the channel in question, customers expect the purchasing process to be as easy as possible. Given that out of stocks are the absolute enemy of customer satisfaction, retailers must revise their ordering and replenishment strategies to guarantee consistently high levels of availability.
Long live omni-channel retailing
Despite the recent struggles of other businesses, retailers must not be deterred: physical locations will always provide a valuable connection to the end consumer. However, in order to exploit the full potential from both physical and online channels, retailers must establish an effective omni-channel operation that fully integrates all channels around the needs of the customer.
Through enhancing supply chain processes to offer a more refined in-store assortment while simultaneously improving availability across all locations, retailers can offer customers the perfect balance between experience and convenience.