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Why Accurate Stock Forecasting Is A Top Priority
Achieving the right stock level is a delicate balance, and there is a huge pressure to get it right. Despite being a top priority, forecasting often falls short, which results in avoidable losses and waste.
The cost of inadequate inventory forecasting is a growth-killer, and hard-won margins are quickly eroded by markdowns and lost sales. These situations usually result from stock redundancies, overstocking, and shortages.
Quite simply, when the flow of products doesn’t match the demand, overstocking or understocking is the result, and this has a negative effect on both profits and brand image. So, how can we preserve our margins better? What tools are available to help better achieve this balance?
In case it wasn’t challenging enough already, the fashion retail industry has become ever more complex at both ends of the supply chain. Customers today demand that brands demonstrate ethical credibility as well as being able to predict consumer trends, while simultaneously accommodating the shifting landscape of market dynamics and supply logistics. Being able to ensure that the right products are in the right place – and at the right time – is essential to reduce waste and preserve profit margins.
But how can we ensure this happens in our increasingly challenging and complex retail environment?
In this article we will:
- Look at the issues surrounding understock and overstock
- See how reducing waste can improve customer trust
- Demonstrate that stock forecasting usually doesn’t work
- Realise the hidden costs of outdated legacy systems
- Understand how the advance in technology can assist in achieving better inventory management
- See how tasks can be automated with powerful data-driven algorithms
What Happens When We Rely On An Accurate Forecast
In the summer of 2018, newspaper headlines were awash with stories of big-brand fashion retailers who were stuck with large quantities of overstock.
Luxury brands were widely criticised for the widespread industry practice of destroying tens of millions of euros worth of stock in order to maintain brand position and pricing structure. Mid-market fashion brands were similarly highlighted as carrying many millions of euros worth of overstock, which would need to be marked down or destroyed.
While investors became worried by the erosion of profitability in the sector, the general public was equally disgusted by the waste from the fashion industry.
If concerns about profitability aren’t enough for any business, the public attitude to brands seen to be ‘wasteful’ must be a top priority.
According to the 2019 Edelman Brand Trust Survey, some 64% of consumers want brands to ‘deliver on societal issues’, not just products, and significantly more (81%), say that the ability to trust a brand to do what is right can be a deciding factor or deal-breaker.
Too Hot? Too Cold? Or, Just Right? Optimise Your Product Flow
The Undesirable Effects Of Inaccurate Inventory Forecasting Are:
- Lost sales (due to understocking)
- Overstock (leading to waste)
- Markdowns (loss of profit)
Why Understocking Happens
Why Overstocking Happens
Overstocking is also undesirable but is generally seen as being slightly more preferable to understocking, as long as a tight enough error margin is adhered to.
Overstocking is a ‘safer’ hedging option where the retailer is committing themselves to a more certain margin of loss, in exchange for a guarantee of sufficient stock. While it is still a problem, positive aspects of overstock include:
- Shoppers are likely to have a more positive experience when everything they want is in stock.
- Overstock can become marked-down ‘loss-leaders’, which can draw in bargain-hunters who otherwise would not enter the store and become buyers.
- Marked-down overstock is still technically a sale, and some capital is therefore recouped (although the elevated costs of selling and repricing still apply).
- Not missing out on sales by avoiding the understock ‘scenario’.
Markdowns are the ‘evil twin’ of overstocking.
Eventually, shelf space needs to be cleared, out-of-date seasonal ranges need to be off the shop floor, and capital needs to be recouped.
As a result, the laborious process of marking-down commences. The stock is often manually re-priced, and store staff spends time re-handling and re-shelving marked-down stock. This leads to a double-sided loss: a waste of valuable time, and an erosion of profit margins via reduced takings.
Sales data on marked-down items is also often incomplete. Markdowns are, therefore, to be avoided.
It can be hard to accurately gauge the costs of inaccurate demand forecasting, as overstocked and marked-down products are frequently poorly tracked by sales data, and labour costs are aggregate. The loss of sales from understocking is also hard to estimate. However, there are some figures available that show the scale of this problem:
- Discounted selling of overstocked non-grocery items in the US accounted for marked-down products losing $300 billion (USD) in value during 2018.
- By another measure, when looking at aggregate revenue averages, overstocking is estimated to cause 2% in revenue loss, while understocking is estimated 4.1% in revenue loss.
These are significant costs – but where exactly do they come from, and how can they be prevented?
Tracking The Origins Of Forecast Inaccuracies
Unfortunately, overstocking and understocking are a chronic problem for retailers and especially for retailers in the fashion industry. There are many drivers behind this, but one study revealed that 69.7% of all avoidable losses are the direct result of just three factors:
- Outdated, legacy systems or inadequate processes used in stock management
- Personnel-based decisions, errors of judgment
- Inadequate measurement or use of data (both pre- and post-sales)
Outdated legacy systems and inadequate processes alone are responsible for around 26% of avoidable revenue losses resulting from overstocking or understocking. Depending on how much automation you already use, the figure for your company could be much higher.
Why Inventory Forecasting Just Doesn’t Work
Inventory and purchasing specialists are usually experienced industry professionals, who possess an awareness of seasonal and local variations in demand and a deep understanding of supply-chain dynamics and lead times.
These qualities enable them to create strategies and campaigns that maximally leverage their seasonal product portfolios and manage inventory levels on the larger scale.
Managing these variables across multiple sites and geographic and cultural zones however has become a serious challenge for larger retailers who need to maintain optimal product and inventory flow in a global and dynamic market environment.
As the requirements become increasingly more granular, the ability to predict inventory levels and to ensure stock allocation and timely replenishment at smaller scales (i.e. for each store) becomes increasingly difficult.
To synchronise product flow so it is perfectly in tandem with consumer purchasing, you either need to be a psychic or have crystal ball. But now, there is the possibility of managing inventory without an absolute dependency on forecasting. This requires a lot of data, however, and the ability to process this data into actionable insights.
Is It Time To Ditch The Spreadsheets?
Many retailers and brands still use ‘legacy systems’ to run many of their key processes. These often consist of familiar ‘old friends’ such as spreadsheets and specialised software to collect and handle data on stock levels. These are used in combination with proprietary Enterprise Resource Planning (ERP) software to coordinate business activities. Many of these legacy systems have grown up with the business from an early stage, having been adapted or revised over time to meet new challenges.
These systems, however, are becoming increasingly unsuitable in our modern information-driven world. The use of such ‘manual’ tools in a digital world has become untenable.
Managing increasingly complex data using only basic spreadsheets and software can swiftly become labour intensive, and leads to bottlenecks in workflow, as well as errors of judgement due to outdated information or forecasting.
Manual systems also require regular manual attention. This means regular updating and synching of sales data; sales forecasts are therefore only completed and updated only monthly or weekly basis, and can quickly become out-of-date. They are also less able to cope with changes in distribution models or production parameters.
Although many of these systems worked well in the past, they do not compare well to the modern, cloud-based systems now regarded as an industry standard. Instead of being installed separately on individual PC’s, cloud-based solutions offer instantaneous insights (and options for action), 24 hours a day, 7 days a week – from anywhere in the world.
Solutions are now available that combine data from all these sources, and enable management through a single dashboard. Automation is here to stay, and it is easier than ever to implement and use.
How Does Automated Replenishment Work For Retail Stores?
Automated replenishment enables brands and retailers to get the right products, at the right place, at the right time.
Automated replenishment is one of several tools available for retailers to optimize their retail portfolio. It works by collecting data in real-time, to track sales and stock levels of each product line. Using powerful, smart algorithms developed by experienced retail industry experts, the automated replenishment software is then able to provide multiple actionable insights and other assets, including the dynamic adjustment of re-order points, and provide data-driven demand forecasting.
Because the entire system runs on real, regularly-updated data, it is possible to demonstrate to users precisely how quickly their return on investment is realised. The potential losses resulting from the continued use of current legacy systems are also avoided.
Using this data, the automated replenishment system enables brands and retailers to get the right products to arrive at the right location, at just the right time.
The Key Benefits Of Automated Replenishment Software Are:
- Detailed reports for all Key Performance Indicators (KPI’s): including availability, rates of sale, understock/overstock, and all updated daily.
- Re-order point planning: dynamically adjusted and sent as a min/max value to your current Enterprise Resource Planning (ERP) system, or directly to your suppliers as an order.
- Demand planning: predicts sales projections and incorporates manually-forecasted events (such as new launches and promotions).
- Open to Buy (OTB) management: Keeps control of your (provisional) budgets, while ensuring adequate stocks, especially for ‘never out of stock’ (NOOS) items.
addition to the functional improvements, automated replenishment solutions provide better data-backed insights and automate many of the time-consuming manual processes. This enables inventory management specialists to focus their talents on more worthy tasks.
The benefits therefore, are two-fold: Profit margins are preserved by avoiding overstock or understock scenarios, and experienced retail industry professionals spend less time nurturing legacy systems, thereby unlocking more of their professional potential and the value of their expertise.
And, additionally, there is a significant drop in waste. This has implications for the environmental impact of the business, but also on the way the public perceives the company. Are you a business they want to support? By cutting waste, more consumers will feel confident when shopping your brand.
Setting Up Automated Replenishment For Your Retail Business
Retailisation’s automated replenishment solution is designed to be easy to set up, and easy to use. To start with, it can work in tandem with existing legacy systems and can work with practically any Enterprise Planning Resource (ERP) software or file format.
Later on, a full ‘onboarding process’ can be implemented to bring the entire inventory management system together and make the process completely future-proof.
Going Beyond Automated Replenishment
Retailisation offers a complete solution including automated replenishment, but also additional modules that further increase efficiencies and reduce waste. Currently, Retailisation is able to provide powerful software solutions that enable stock allocations across multiple stores and store clusters. Another option exists for a versatile planning suite, which enables the visualisation of sales planning, including seasonal ranges, across multiple store clusters, locations and product ranges. All of these solutions are able to automate key functions and processes, and are seamlessly integrated to provide total control, backed by data.
Interested in unlocking your potential with increased efficiencies from automated replenishment and other smart solutions? Click here to find out more.
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