Relying exclusively on demand forecasting software and forecast error percentages can sometimes produce poor results. The trick is to focus also on the processes that support such software. A tightly run and integrated sales and operations planning (S&OP) process across merchandising, supply chain and store operations can enhance retailers' ability to tweak forecasts and reduce forecast errors. The key is to align metrics across processes and tailor these processes to specific demand and profitability characteristics. For example, items with stable demand, such as bread, deserve a monthly review of forecasts, while more volatile or promoted categories such as cereal or fashion apparel require more frequent review.
- Reducing lead time variability
So how does a retailer reduce safety stock without risking sales? Leading retailers use ruthless supplier management programs to de-list suppliers with erratic lead times or find an alternate and more reliable delivery channel. Such programs begin with internal controls to support supplier performance. Examples of best practices range from providing periodic feedback on late deliveries to setting penalties for missing agreed-upon order windows or delivering uncoordinated orders. External supplier management programs include monitoring detailed service-level agreements to include allotments for lead time and lead time variability, and offering bonuses for continuous improvement. Also, leading retailers perform semiannual or even quarterly reviews of suppliers' performance, examining the percent of orders they filled and delivered on time, the standard deviation of lead times, and whether suppliers took requested corrective actions.
- Managing pack mix
The pack-mix issue can be managed in two ways. First, merchants can work with suppliers to alter the pack mix. However, with complex demand patterns, this approach often results in too many pack sizes, which adds more complexity to the supply chain.
Alternately, retailers are exploring opportunities to "break-pack" the item at the distribution center. Although this also adds costs to the system, it improves inventory deployment. Some retailers use advanced inventory flowpath techniques at the store-item-week level to determine the best stocking and flowpath strategies. Such techniques, when based on a solid business case, provide advanced distribution capabilities with multiple tiers of facilities and handling techniques. For example, a portable radio with varying demand across geographic markets would be case-picked in some warehouses where the required inventory level is near the same quantity as a case and break-packed where the storage and handling costs are too high to send a case to the store. Additionally, in slow-moving regions, this high-value product could be stored in a stocking-only central warehouse that serves multiple geographic markets. Leading retailers are already implementing such capabilities.
- Managing merchandising presentations
Yet such presentations can lead to excess inventory. In fact, our analysis found that pack and presentation quantities can increase inventory over a base level by 15 to 25 percent for an average retailer. For example, if a minimum presentation is five facings, four deep, the minimum presentation quantity is 20 units. These numbers can be compounded if not aligned with either pack mix or order quantities. Consider: If orders are placed in multiples of nine, the retailer must order 27 units to keep the minimum presentation quantity of 20. Business managers can determine such a rise in inventory levels by using standard inventory algorithms to compare the visual presentation requirements to an ideal inventory level.
Special events and promotions add to the problem as retailers ramp up inventory to prepare for them and have to decide when to start pushing product into the store. This also applies to increasing inventory for seasonal products. For instance, demand for barbecue grills will spike in early spring or summer.
Merchants and supply chains must be flexible and coordinated to handle these situations in a cost effective manner. Leading companies use advanced inventory flowpath techniques to determine cost and service level trade-offs across merchandising and supply chains. This provides a fact base for supply chain managers to have a healthy discussion with merchants and make the right decisions in terms of revenues and profitability.