In today's fiercely competitive market, the biggest challenge facing retailers is to master the balancing act of keeping the right product mix on hand while keeping inventory levels low. We all know that too much inventory leads to mark-downs, waste or spoilage, let alone high carrying costs, whereas too little inventory may cost retailers lost sales and disappointed customers.
The urgency to address this challenge has risen significantly in recent years, as customer loyalty is getting harder to come by and investors demand higher operational efficiency. The new retail climate has made it imperative to finding that equilibrium point between the shelf availability of optimally allocated/priced products and the right inventory level of such products. The key lies in advanced planning.
The advanced planning we discuss here takes a new-generation approach. It is built on sophisticated solutions and driven by customer demand, and thus is truly helpful to contemporary retailers. 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 new-generation planning solutions will address the aforementioned challenge to ensure that the right products will be carried at the right price in the right stores at the right time.
Furthermore, the new-generation approach is intended to improve operational efficiency and support the retailer's overall strategic objectives. It is reported that companies that have adopted the new-generation advanced planning solutions see sharply reduced inventories, fewer mark-downs and increased sales. A medium-sized retailer with over 200 stores in six countries, for example, was able to reduce markdowns by up to 10 percent and lower inventory by 20 percent.
Ready to implement advanced planning? Not so fast. Retailers pursuing advanced planning should be cautious about certain stumbling blocks associated with the three key areas of planning: merchandise financial planning, buying and assortment management, and allocation and replenishment. Take merchandise financial planning for example. As AMR Research notes in a 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 hardly aligned with strategic business goals. In addition, most companies rely on manual forecasts drawn from educated guesswork rather than detailed analytics on consumer demand. Hence, the accuracy of forecasts suffers. Another flaw of current merchandise planning processes is its inability to support planning at the store level.
Buying and assortment management presents a different set of hurdles. For starters, most retailers base their buying decisions on gut instinct and simple spreadsheet data, instead of the application of sophisticated analytics to create market-specific assortments. Secondly, 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. Moreover, the buying process often fails to connect with supply chain execution in a way that enables even inventory flows and, in turn, efficient use of supply chain assets.
The trouble in the area of allocation and replenishment is that few retailers use insights from POS data or the buying and assortment management process to drive efficient allocation and replenishment. For instance, when allocating sizes to stores, few retailers know how to ensure that the right sizes for the desired product arrive in the right stores at the right time. More precisely, if a shoe retailer understands that only a limited number of largest and smallest sizes are likely to be sold in a given assortment, it makes sense to stock these extreme sizes at the start of the season to stretch out the selling period.