Reclaim Your Share of the $1.75T Retailers Lose to Stockouts and Overstocks

Grant WrightBlog

Grant WrightA Q&A with Logic’s Grant Wright, Global Managing Director, Merchandising

A recent study reports that retailers lose $1.75 trillion to overstocks and out-of-stocks annually. For the average retailer, overstocks are responsible for 3.2% in lost revenue, and out-of-stocks are responsible for 4.1%. Not to mention the negative impacts of out-of-stocks on customer satisfaction and loyalty, and the damage to brand perception from excessive markdowns.

Grant, what merchandising process can have the greatest impact on combating out-of-stocks and overstocks?

Grant: For most of our retail clients, demand planning is really the big one for tackling out-of-stocks and overstocks. Demand planning is the activity that converts your demand forecasts into actions relating to how and when inventory needs to be in the retail network to support your demand forecasts.

When I work with clients on best-practice demand planning, we apply a number of techniques for creating plans that are as accurate as possible. These include:

  • Demand sensing. Listening to demand signals from your internal and external data sources and using them to predict demand.
  • Demand shaping. Designed to help the retailers influence demand of a certain product in order to match its planned supply.
  • Demand orchestration. Determining the optimal solution for achieving a specific demand generation outcome. This involves making trade-offs to improve forecasts, reduce costs, minimize risks, and increase sales and profit.
  • Demand forecasting. Utilizing modern techniques to predict demand by taking historic sales and overlay causal factors—price, events, product families, assortment, product cannibalization—that influence demand for each SKU in every channel.

Beyond improving in-stock position and inventory efficiency, what’s the value of doing demand planning well?

Grant: Providing the most accurate demand plan makes it possible to meet customer expectations for merchandise selection and fulfillment options. It also improves your profitability by having the inventory at the nearest point of fulfillment for each transaction.

Some of the benefits our clients are seeing when the implement more effective demand planning include:

  • Increase in sales leveraging improved product availability
  • Increase of inventory turnover by reducing safety stock across the supply chain
  • Improved margins through higher sell-through at full price as well as proactive, optimized markdowns
  • Higher capacity utilization and improved fulfillment reliability through higher visibility into capacity requirements and proactive supply chain issue resolution
  • Reduced personnel costs through forecast-based shift optimization in stores and warehouses

Demand planning has been part of retailers’ merchandising processes for a long time—why is focusing on it more important now than ever?

Grant: Merchandise is your largest investment, so it’s always been the place where improved operations (through demand planning and other approaches) can have the biggest positive business impact. But retail has undergone dramatic changes recently that have our clients taking a new look at their demand planning processes.

Over the past few years—and accelerated by the impacts of Covid—consumers have come to expect buy-anywhere and fulfill-from-everywhere (within hours or days) experiences.

Additionally, the clients I work with have been introducing many new products to capture a higher share of demand from customers who have ever-changing tastes and preferences. Most of these products have limited sales and demand history, and an increasing share have low and intermittent demand especially at the product-location intersect.

The typical approach of using one or two forecasting methods for all products—millions of SKU-location combinations—can no longer produce the best results.

What other aspects of demand planning can be challenging for retailers?

Grant: Some fruitful areas of demand planning where I often see retailers struggle include:

  • Forecasting for new product introductions
  • Forecasting promotions and promotional lift, especially for businesses where promotions are a significant driver of demand
  • Sales volumes challenges that must be solved with a combination of statistical forecasting methods and the planning team’s market knowledge and experience

What do retailers need to put in place to up-level their demand planning processes?

Grant: Scale is one of the most critical factors for modern demand planning. You’ll need solutions, tools and processes to support the large volumes of data related to SKU, location and channel combinations. Your solutions also need to incorporate granular historical data, have the ability to model sparse historical demand patterns and take in signals from your enterprise systems as well as external data sources.

Turning all those data signals into actionable analytics can’t be done manually, either. Your solution will need to employ the latest intelligence and AI/ML techniques to help identify the largest problems and opportunities your planning teams should focus on.

Then, your solutions need to be able to use advanced intelligence and knowledge engineering to help your planning teams take action—allowing planners to select like-product patterns for new products, use fill techniques for sparse history at SKU-location and allow for effective price planning, including anticipation of the demand that promotions will drive.

The latest tools have so many incredible capabilities including intelligent selection of the best forecast methods for specific product-location combos, multivariate segmentation, collaborative workflow—if I go on, it can make your head spin. Of course, my team at Logic can help you make sense of what techniques and solutions make the most sense for your business.

How long does it take to see benefit from a demand planning project?

Grant: When we set a strategy and roadmap, and start scoping out projects for clients, we always aim for a steady set of wins on the road to hitting your longer term goals. With this kind of approach, a typical demand planning project can deliver its first ROI in weeks. A pilot demand planning project focused on a small assortment, for instance, can drive sufficient increases in full price demand, reduced delivery fees and reductions in overstocks to self-fund extending the project to all relevant product types.

What does a great consulting partner bring to help retailers get the most benefit out of a demand planning project?

Grant: A great consulting partner will take time to understand your goals, and the distinctive aspects of your retail business. They’ll then use their experience and understanding of the retail technology landscape to recommend the optimal products and solutions to get you where you need to be. Your partner will also bring a tried and tested approach to implementing and deploying your solution, including the methodology to ensure user adoption. Lastly, a great consulting partner stays on board post-implementation to monitor and measure success KPIs, partnering with you to achieve your desired business outcome.

Grant Wright is the Global Managing Director of Logic’s Merchandising practice. He is a strategist and change agent who defines and executes large-scale, complex implementations that transform client organizations and build value. Grant’s experience as a retailer includes serving as a VP of market insight and strategy, as the VP of merchandise planning for Harvey Nichols and Bloomingdales, and as the enterprise architect on large, complex programs.

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