Demand Planning – Product

I have been feeling uninspired and mystified lately with what I am seeing on the retail floors.  It looks chaotic, helpless, and lifeless, I wonder how these companies maximize their profits?  I believe they should have planners (budget, operations, supply chain, and demand) but it doesn’t show on their retail floors.  Is business that good that they can afford to ignore the obvious.

IMG_1588

I believe retailers are losing thousands, hundreds of thousands or millions dollars a month based on the presentation of products on the retail floor.  In this post I will cover the basics of demand planning, analytics and collaborative workflow to provide solutions for future product demand trends, patterns and may even touch on complementary areas of business that will elevate the company, the brand, revenues, and profits (ROI).

6sigmaImage

Who really has a grasp of product demand planning initiatives? Can it be done through software, or does it require a human touch?  A person who understands the trends, the market, and the opportunities beyond software.  Or is it a complimentary pair of the two.  Great to hear what everyone else is doing in demand planning for product.

For me I like the challenge of demand planning, being responsible for the style, the color, and the size on the retail floor for required number of selling weeks. How changing a few variables can increase demands and how easily you can grow revenues and profits.  Seeing the company, division, department, and individuals blossom by improving the work environment, tools to analyze, manage, and plan for success (aka job satisfaction).

Throughout this report I will look at a few cases with famous retailers who should have staffing in place for planning (demand, product), but obviously have issues with product demand planning and beyond (buying, merchandising, and strategy).

Case Study A

Fitting whatever you can on the shelves (racking). mixing styles, colours, and sizes (merchandising) or having one style but not understanding your essential and fashion colours for the season. Having too much or too little of what your consumer wants in their style, color, and size.

For fashion, I first categorize by two types of products, essential and fashion (style and color), some like to further dissect, but it makes it more complex than needed.  Unless there is a good reasoning.

With product there is usually is an 80/20 rule, 80% of your products make up 20% of your profits which in turn means that 20% of your products make up 80% of your profits.  This can vary to a 60/40 or 70/30 rule but is usually favoured by a successful product(s) or category(ies).

So find your 20% (30%-40%) and manage them under a microscope, and let the fashion compliment the runners (essentials).  Its team sports with product, you need a good collection to support your star players.   An article on Team Sports in Business, which can also be applied to products.

Case Study B

Having too much of the same on the retail selling floor, one style, one colour, and only a few sizes, allot of lost sales.  The first photo, 1xs, 2s, 2l, 1xl… In a perfect selling curve there should be 2 0r 3 size “m” on the floor, but it looks like they forgot to replenish and allocate so there is none available, which translates to lost sales.   The second photo, there is 4L and 1XL on the floor, I guess they sold out of size xs, s, and m, looks like a problem with purchasing, replenishment, or allocation.  The third photo, there is 2-29, 9-30, and 1-31, the fourth photo, there is 5-28’s, and the fifth photo, there is 7-30’s .  As I only looked at one retail store is this the same at all their stores?   How can they not consolidate style, color, and size to show a full offering?  For all the above these are all multi-national retail chains with hundreds of stores, so this kind of inventory issues should not be happening.  Understand for some styles it maybe clearance so the inventory is limited but there are obvious issues.

For me it’s about supply and demand and meeting the needs of the consumer.  Understand the consumer psychology of what they buy, how they buy, and when they buy.  I will leave this for another article.  Below I look at three important elements of demand planning:

– Initial purchases – How much are you buying, what, why, where, who, and when?

– Store allocation – How much do you allocate to the store, do you allocate prepacks or individual styles, colours, and sizes

– Replenishment – How much do you replenish and how frequent

Case Study C

Style, color on the floor, but not a full size range available for the consumer to purchase.  I am seeing essentials colors on the floor but the retailers are lacking a full size range, fashion colours dominating the shelf but with holes in the size range.  All these products relate to lost sales, poor buying, allocation, or replenishment.

Too frequently I have noticed specific styles sold out in key sizes in core colours well they had a full size range in fashion Colors or possible the item was being sold out to make room for future offerings.  if you have multiple stores and can recognize product strengths, it would be good to consolidate products for the benefit of the consumer, brand, and retailer.

DOing it right the first time, creating integrated operations.  All demands start with a budget which is based on previous years (seasons) sales, revenues, and analytics with a prediction for the future.

In order to get proper information (optimization) you will need to understand the product, the ROS, missing sales, and the size curve (possible more missing sales).

Also you need to take into consideration price optimization, your ideal retail price versus the ideal consumer price.  I have seen sales double with a price drop from $35 to $30.

Now imagine if you are selling (ROS) a hundred a week and it’s now two hundred.  This is a huge increase to revenues, profits, and sales per square foot (meter).  For those of you who understand numbers, let’s review below:

Scenario 1:

Product with a retail price of $35 x 100/week ROS x 16 selling weeks (regular price) + 8 x 2 weeks of sales (double sales as product is discounted 20%), 2 x 3 weeks of sale (clearance 50%), at every stage you are making a profit.  There is one week added for variables, this changes if the item is an essential or fashion purchase.  At full price you are making 85 points on this item with a landed cost of $5/unit.  Total revenue $111, 300 ($56,000 Regular, Sale $44,800, and Clearance $10,500). The above is based on selling 3800 units at an average selling price of $29.29 per unit. Looking at the product cost and the selling revenue, is a recognized margin of 82.93%.

Scenario 2:

Product with a retail price of $30 x 200/week ROS x 16 selling weeks (regular price) + 8 x 2 weeks of sales (double sales as product is discounted 20%), 2 x 3 weeks of sale (clearance 50%), as above you are still making a profit at every selling stage.  At full price you are making 83.3 points on this item with a landed cost of $5/unit.  Total revenue $190,800 ($96,000 Regular, Sale $76,800, and Clearance $18,000). The above is based on selling 7600 units at an average selling price of $25.11 per unit. Looking at the product cost and the selling revenue, is a recognized margin of 80.09%.

The margin loss is 2.84% on scenario 2, but the purchasing quantity is double, which means you can usually negotiate a better price, get longer payment terms, and split deliveries as per product demands.   You can also adjust inventories on future production orders based on your proven selling curve for that season.  This is one style imagine if you can do this with 20% (30-40%) of your essential products that are making up 80% (70-60%) of your revenue.   I promise you gains in the millions or billions if executed properly.

For both scenarios, you may have to take into consideration revenue per SQF (SQM) and stale inventory (product that did not sell at clearance), which maybe further discounted via liquidation or warehouse sales.   But not to self, liquidators are buying large volumes of new product inventory for their stores and making millions or billions of dollars.

With the above analysis everything changes based on your sell through, mark down, clearance, and liquidation strategies.

Once you determine your budget(s), style range(s), I would start to look product demand planning (initial purchases) by weeks, 13 weeks for a quarter and 26 weeks for bi-yearly. You can change the number of weeks you purchase to meet your business, product, and planning (this goes deep into the why, when, and where) needs.

An important factor in all initial purchases is knowing your consumer, the fit, and your selling curve, consumption of fabric and trims if you are buying in advance.  The more you know the better you are with planning and keeping your customers looking their best, getting compliments, and promoting the brand.

You can train someone to understand the above, or you can hire someone who is an experienced professional to help take your business to new heights.  Imagine the possibilities.

3 thoughts on “Demand Planning – Product

  1. The first and only photo was taken at the Sports Authority store back in February this year, they announced bankruptcy and that they are closing 460 stores, it doesn’t surprise me as there store was a disgrace, I wanted to write a full article on the Sports Authority operation, demand planning, and GTM strategy but I choose to limit it to this article, as it’s happening and the industry is approaching the “Tipping Point” with saturation of new brands and falling old brands. The next five years will be interesting to see who is in the game!!!

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s