Retail TouchPoints: Conservative Ordering Makes Inventory Strategy Critical to Avoid Stock Outs This Holiday Season
By
Amanda Ferrante
Through
a special arrangement, presented here for discussion is a summary of
a current article from the Retail
TouchPoints website.
Fearful
of cautious consumers this holiday season, retailers may be setting
themselves up for failure in the critical Q4 period by keeping inventories
too lean. Recent survey data from Retail System Research (RSR) indicates
that retailers are not ordering enough merchandise to meet even last season’s
mediocre level of demand.
With
retailers running lean on inventory levels throughout the year, other
industry insiders suggest a critical variation between this season’s
winners and losers could be the merchants who have set up flexible
stock options and can respond quickly to shifts in demand.
“RSR
is concerned about this holiday season,” said Nikki Baird, managing
partner, RSR. “Several economists are predicting a rebound for the
second half of 2009 (whether it sticks around or not). When you match
that with a level of retailer irrationality that always seems to come
with the holiday season, you’ve got a recipe for high stock outs (and
disappointed shoppers) along with big discounts on what retailers do
have in stock (impacting retailer margins).”
Since
inventory management is so closely tied to the customer experience,
industry insiders indicate retailers will use preemptive tactics to
create and satisfy consumer demand and maximize every sales opportunity,
while streamlining backend store operations.
“Monitoring
the floor is now more important than ever to optimize the flow of merchandise,” said
Doron Levy, president, Captus Business Consulting. “At the store level,
many chains have begun revamping their backroom processes to make sure
product makes it out on the floor in a timely manner.”
“We’re
seeing retailers replenish frequently, retrieve and analyze POS data
from stores multiple times during the day to get the earliest possible
insight into demand patterns,” said John L. Stelzer, director retail
industry marketing, Sterling Commerce. “We’re seeing retailers manage
inventory before it arrives at the DC or the store for supplier
drop-ships.”
Mr.
Stelzer said retailers who insist on more timely accurate order/shipment
status information are likely to better manage inventory before it
shows up at the DC or store. “Retailers are beginning to manage inventory
in the yard to reprioritize shipment unloading based on the items that
are needed most downstream,” he said.
Mr.
Stelzer also said there’s indication that endless aisle initiatives
are expanding rapidly. “The allure of being able to dramatically expand
assortment without having to carry additional on-hand inventory is
enticing more and more retailers to enter the direct-to-consumer model
with more of their suppliers,” he said.
RSR’s
Baird said there has been an uptick in interest in “save the sale” from
either in-store through endless aisle-type capabilities, or online
by providing visibility into store inventories, if not outright buy
online/pickup in store. “But the impact on safety stock has been slow
to manifest, because that is a significant change to both distribution
systems and processes, as well as the distribution network as a whole,” she
said.
Discussion
Questions: Are retailers being over-aggressive in reducing inventory
levels amid the downturn? What are some well-honed as well as less-used
strategies for avoiding stock outs in a lean inventory climate?
In my opinion, this could be a different type of holiday shopping season than when the recession first took a grip in the 2008 season. For one, I hope that retailers won’t shoot their profits in the foot by under buying, running out of stock, and resisting what consumers really want; variety, surprises, and “new things!”
The fourth quarter may not see positive comps but is also unlikely to see the kinds of double-digit declines suffered late last year and early in 2009. Unfortunately, many plans were made and commitments given during the darkest days of the downturn. Yes, many retailers run the risk of compounding what will probably be a soft sales environment anyway by running out of most-wanted goods and sizes.
A few broad-brush suggestions for solutions: First, make sure that your supply chain management does the best possible job replenishing the highest-priority stores and getting the right sizes and colors into the right doors in the first place. Second, if you are heavily dependent on private-label goods, make sure your sourcing teams are geared up for fast-reaction replenishment, especially from the Caribbean and Latin America, as an alternative to that “slow boat from China.” Third, partner with your domestic vendor network on some shared risk/replenishment strategies, so there are branded goods on the shelf available to pull if demand requires it.
Contrary to the wishes of many, this holiday season will be down 1 to 2 percent again. Apparel retailers are at the greatest risk. Their push replenishment model requires an accurate forecast, which no one can achieve. Their greatest problem is out-of-stocks on an item in one store and excess inventory in another that will require mark-downs. This year they should only push out 50 percent to the stores. Then go to daily replenishment of sold items. Quit trying to predict the consumer, focus on demand when and where ever it occurs.
In the grocery business, there are two general types of stock-outs: the seasonal and the year-round items. Stock-outs for seasonal items are desirable and targeted for that last guy in the store. Many year-round items see additional volume in holiday periods and systems are in place to quickly plug those holes.
Traditionally, demand forecasts for seasonal items would have been determined months ago and purchase orders submitted. Suppliers would take on a little risk and add a little to the retailer forecasts, in hopes of driving sales gains.
This year, it is not simply that retailers have thinned inventory of year-round items to weather the downturn, they have also delayed purchase commitments on many seasonal items. And even when forecasts are shared with suppliers, they are very fluid. People are spending a lot of time re-forecasting.
At the same time, seasonal item suppliers face tight or unavailable credit. So, this year fewer suppliers will be taking the inventory investment/risk. Add to that scenario the year-long extreme discounting that consumers have seen and it is hard to predict anything except negative trends this holiday season. Will “Black Friday” become “Black Hole Friday”?
Proper control and forecasting will make or break retail this holiday season. I agree with the group of economist that say we can expect a rebound in the second half of 2009. That said shoppers will not spend like they did in 2006-2007. They will be more selective and buy less, but focus on higher quality items. Retailers will need to have in place strong inventory solutions that can help them better manage inventory, safety stock and overall assortment. In reality most of the ordering for the holiday season is already complete. The retailers that have created plans on how to restock and monitor inventory so they can receive shipments from their manufacturers during the season will be ahead of the game. The other factor that will impact this holiday season is the availability of credit. If retailers don’t have strong credit it will be tough for them to purchase stock for the holiday rush.
There are several strong solutions in the market today for dealing with safety stock and general forecasting. If you have not already started your search for a solution to use, I suggest you start now.
The primary message from this article is that retailers who closely manage their inventory with an eye towards customer satisfaction will achieve higher revenue and profitability. The recession has resulted in new buying behavior for consumers and retailers must accommodate the changes.
If inventory is kept in check while at the same time there is the flexibility to modify quickly retailers can meet demand…almost all the time. Quite frankly, the downside risk of some out-of-stock is probably not as great as it used to be. In fact, the alternative, too much unsold inventory has more severe financial consequences.
Having a dialog with consumers during the pre-holiday season as well as staying in touch during the holidays will enable the stores to maintain loyalty through understanding and satisfactory customer experiences.
This is an opportunity for an effective marketing strategy to align with efficient inventory control. If retailers embrace their consumers as partners in holiday shopping satisfaction, the stores will enjoy a great and profitable holiday season.
While the media and politicians are making a lot of “whew, glad that’s over” comments about the recession, the key continues to be the unemployment statistics. These statistics continue to be very high. The reality is that, as long as unemployment is high and consumer confidence is low, retail sales will be tough and retailers need to reflect this in their purchases and inventory levels.
Maintaining lower inventories while providing a powerful presentation on the sales floor has a lot of components. Some key factors include:
Focus on unit inventories as well as dollar inventories. This sounds obvious, but a lot of major retailers still don’t put enough attention on this critical component. Customers see units, not dollars.
Look at unit fixture capacity by category by store in relation to unit inventories. Reduce fixture capacity to reflect lower inventory levels. If this has been done, embrace the idea of “presenting” instead of “storing” merchandise–face-outs versus shoulders, shorter pegs, more in-line displays, more graphics, etc. This list is only limited by imagination.
Be aggressive at both ends of the assortment–key items with a demonstrated track record at one end along with a solid commitment to newness and fun at the other (even in this economy, Kindle will sell 500,000 units this year). Prominently display both these categories. Make the deepest cuts in the “but we’ve always carried this” categories. This is where most of the markdowns will be, come January.
Flow receipts as closely to need as possible. Front-end loading of holiday merchandise has never been more dangerous. Embrace the axiom, the later I ship, the smarter I am. It works.
These are just a few key principles, but they all work.
Doron Levy and John Stelzer have concisely captured what is, and what should happen. Merchandise buy has to be thinner, as the Consumer is NOT ready to have a packaged wrapped Christmas.
This is not the year for the Merchandise team to proclaim in September that “The Holidays are over, I’m looking at next year.” The Merchandise team has to stay engaged, work closely with Marketing, Store Operations, and Allocation to move goods around the store and areas of the country.
There is a great opportunity to make money this Holiday Season, as long as Retail organizations increase the amount of internal communication, stay focused on the Consumer, and play TEAM BALL in a more committed manner than ever before.
There is a huge difference between conservative ordering and smart ordering. Over the years as buying decisions have move farther and farther away from the selling floor and retailers have grown larger and larger, realistic input into smart buying has waned. Even with the advent of IT and the tools it brings, retailers’ buying philosophies have centered on buying more to always top last year or last quarter.
The buying objective should be to match each store’s customer demand with the initial inventory stocking. This can not be done on a national or even regional basis. Even a chain with 15 unique distribution locations can not effectively balance distribution to 7,000 stores without a mandate that each store has a unique set of customers that must be catered to. It should be totally unacceptable to be OOS on an item in one store and over-stocked in another.
Clearly it is the worst of all worlds, but the world where the majority of retailers live. The coming Holiday Season will produce no changes in this quixotic behavior.
Our work is in the high-value space of consumer electronics. These items have material cost, so controlling and managing inventory levels is critical at all times. Here, the similarity of shelf life to things like fruit is well worth looking at, as PCs and TVs are worth less almost immediately with the market. Retailers therefore need to be notably cautious with physical inventory. There are two options then available which are virtual inventory or substitution.
In effect, the first is what retailers like Amazon.com or Walmart.com practice. They do not actually stock most of the vast selection, but get it from distribution stocking only the fastest movers. This works fine in general as they both have leverage with distribution that usually will allow them delivery. Smaller retailers will need to look at the relationship they have to see if this path will work for them. This method will only grow in importance as we see the Systemax owned CompUSA using this hybrid method to keep store inventory low while selection expands. There is a lot to like in this model from a theoretical point of view so how this works needs to be closely followed. At the end of the day, this gives online the “long tail” strategy that often makes consumers loyal.
On the other hand, consumers in the CE space may be very brand aware, but not too brand loyal so this means that substitution can work as well. There are far more models and brands than space available. If planning to keep inventory levels low, then merchants should plan an alternate list of suppliers who may be happy for the business in this down environment.
Yes, there are issues of display and customer presentation, but inventory in the end is both lifeblood and poison. You need it, but it can kill you. Balance is the key here but free cash flow allows choices while unsold inventory does not.
The route to satisfying shoppers’ needs and desires (not the same) is understanding various stores’ shopper profiles. And it is providing more interesting and informative in-store messaging. Understand, the key point that 20% of shoppers provide 80% of sales, so where space permits margins add-ons and creative ideas. Note the very accurate fourth paragraph: sell more to your best, most loyal shoppers so they don’t have to go elsewhere to get the items they need.
Another question in the equation is: How many folks have already completed the majority of their “holiday shopping” by taking advantage of all the deep discounts and going-out-of-business sales presented in the past six months? I think a lot of folks have, and that is why I’m not going to be very concerned about “out-of-stocks” this year.
For smaller, independent retailers, many of whom focus on discretionary items, it’s very hard to imagine an increase this season over last year of more than very low single digits. Demand is just not there, and planning for increases before they actually materialize is simply not prudent. Cash remains king, and the financial imperative requires inventories to remain lean. That leads to the following strategies:
1. Stay liquid. Do not commit to goods until you are ready to ship them, and don’t ship them until you absolutely must.
2. Communicate continually with vendors. Let them know how you’re doing, and stay current with where you can get goods.
3. Negotiate fiercely for lower prices from vendors. With customers aggressively forcing retail selling prices down, you must demand lower unit costs down, to protect vital margins, and keep unit sales as strong as possible. Lower unit costs also allow for greater unit inventories, and better presentations.
4. Replenish more frequently, in smaller quantities, to link replenishment to sales as closely as possible.
5. Recognize that both breadth and depth of assortments must be adjusted to reflect weak demand. There is not enough demand at the edges of assortments to sustain previous presentations, nor enough demand to justify previous depths of core items and categories.
6. Physical merchandising must reflect a shift from inventorying merchandise to presenting merchandise. As noted above, there need to be more faceouts, shorter peghooks, more features.
If I recall correctly, there were a few articles earlier this year about Best Buy not selling as much as they could have late last year and early this year because they didn’t have the stock. Their suppliers’ suppliers had shut down fearing the worst. If other companies encountered similar issues last year, projecting this year’s sales may be even more difficult. If they could have sold more, how much more?
If, as Richard Hastings from Global Hunter Securities suggests in his Early Holiday Retail Sales Forecast, retail sales will be between +1% and -1% this holiday season, are there modifiers like the Best Buy experience that need to be considered? If so, perhaps some retailers will be shooting themselves in the foot if they ignore those modifiers and buy too little.
Increasing the number of POS samplings and more granular management of inbound product are excellent approaches, but there needs to be enough in the pipeline to fulfill consumer demand. Save for entertainment titles that can be produced practically overnight, there are few products that can fill a pipeline quickly once it is depleted–unless someone else is holding the stock. Does this mean brand owners and distributors might need to be second guessing their retailers “just in case”?
Managing inventory is extremely important. Too much costs money and too little could lose a company money. Understanding it and managing it correctly might be the difference in a company’s success or failure. It’s not enough to keep on par with your competitor, you have to maintain competitive advantage. Part of the customer experience is having the right product available at the right time. You could lose a customer if you don’t have an item in stock. You could also spend too much money on inventory and have to overcharge for your item if your costs aren’t under control. Forecasting and inventory management is critical to success.