How efficient Forecasting and Replenishment can increase margins
by Mark Everson
One of the most difficult aspects of high street retailing is managing in store availability in order to minimize lost sales while reducing overall inventory, especially where regular or in season replenishment occurs.
As a retailer, we would always want to satisfy the customer and also ensure that we do not have inventory taking up valuable shelf space and tying up working capital. Therefore we have a delicate balancing act to do between these different demands to always get the sale without having stock rooms the size of the store itself!
Ideally we would like to have the least stock in store at any time, only just enough to satisfy customer demand and replenish when the last item is about to be checked out! This would also translate into reduced warehouse stock with smaller safety stock margins for the inevitable unknown demand.
Historically, we had pretty rudimentary tools to project what demand may look like and usually factored in some leeway to come up with what was believed to be the sell through for the product ranges. This was converted into the supplier orders where some rounding up would have occurred to generate a quantity that would typically put more stock on the shelves than would ever sell.
It is closing the gap in a way that allows us to maintain higher sales while also reducing inventory levels with tools that are accurate and reliable that is a key focus for today's 'bricks and mortar' retailers.
This is where SAP's Forecasting & Replenishment for Retail solution comes in as a dedicated retail only solution of very clever specific algorithms that consider all types of causal factors such as promotions, price changes, weather effects or the results of the store replenishment. Allied to this its ability to self learn from the results of its replenishment forecasts, we have a tool that can positively affect lost sales while also reducing inventory levels.
A UK retailer found during a pilot that the suggestions from F&R would ultimately lead to increased store availability near 25% while reducing overall stockholding for the sampled range by over 50%...remarkable figures in any ones book! In the highly competitive hard goods market where margins are low and under increasing pressure, this difference can be worth millions.
Other benefits of this accurate forecasting are that collaboration with suppliers has a greater element of certainty leading to reduced changes on both sides, transportation can now be leveraged to greater advantage booking more cost effective transport routes well in advance knowing that fluctuations will be less volatile than earlier and how you manage the warehouse/supply network can be refined to reduce waste or over capacity.
Ultimately one has to trust the solution to deliver the results, as it is often found that human intervention in any sophisticated planning solution typically leads to inaccuracy. The key thing that the stock controllers can do with F&R is to ensure that it is fed with accurate data with at least 12 months history and the solution will produce the results. No matter how intelligent we believe we are, this solution's black box is far more sophisticated and quicker at crunching the numbers and analyzing the data to produce results and can lower costs and maintain your margins.
The biggest challenge a retailer faces with SAP F&R is just leaving it to churn out the results and let it transform your business from one that is dealing with excess stock issues to one that is looking for new ranges to sell!
About the Author
Mark Everson is a Principal Consultant with the Retail CoE. He has more than two decades of rich experience in Business and IT, with 15 years of SAP experience. Mark is the ramp up coach for SAP F&R projects in the UK and Head of SAP Retail consulting, UK. Mark will blog on SAP Retail.