So, how is that weekly replenishment process working out for you?

Weekly Replenishment Does Not Solve Out-Of-Stocks

What’s your success rate with your weekly replenishment process? How effective is your review, exception management, and reorder weekly (or bi-weekly) process?

• Do you experience fewer out-of-stocks?
• How many of your weekly replenished suppliers delivered 52 turns last year?
• Did you correctly buy into deals and price changes to optimize your gross margin?
• Did your accounts payable disbursements flatten out across the month?
• How much did you cut back on extraneous shipping costs (rush order costs)?

The real truth is the exact opposite! More times than not, weekly replenishment (reordering) results in out-of-stocks, lost sales, and additional costs for product shipping.

How did we arrive at the idea that weekly replenishment is a good thing? Look back a few decades to a time when inventory was managed by hand.  We used the term ‘stock cards,’ and we wrote down on hand information weekly on our stock-cards.  You walked the floor, reviewed inventory, wrote on your stock cards, and then went back to the office to build your inventory orders. Sales forecasting was also generated in a similar fashion.  It utilized a top down approach that forecast everything, with no separation of regular or promotional sales.  Today, many businesses continue to believe weekly replenishment delivers excellent results.  However, if history is a teacher, we need only look to our past pre-computer days to learn that some of our greatest minds in manufacturing knew this was a bad idea.

Weekly Replenishment is a simplistic approach, devoid of any economic analysis, and is a poor excuse for inventory management.  Henry Ford almost bankrupted his company with this simplistic approach, “People can have the Model T in any color–so long as it’s black.”

Why do bad things result from Weekly Replenishment?

Weekly Replenishment means you expect the order cycle to be 7 days. Some retail environments want to review the potential orders weekly. They set the replenishment software order cycle to 7 days without realizing how this impacts the amount ordered. If the system expects the shelf stock need to be seven days, then the result is you run out-of-stock if you don’t order every week.

Bad Demand Forecasting causes problems with weekly replenishment orders. Old legacy system forecasting often suffers from spikes in customer demand and slow or lumpy customer demand. This erratic demand causes orders to be placed early to maintain stock which results in overstocking. The legacy system does a poor job balancing the service requirements, demand forecasts, and can’t track the multiple product combinations to correctly balance the days inventory.

Weekly human review and intervention is believed by many to be the corrective action. In reality the human touch coupled with an excel spreadsheet often will create bigger issues. The ‘corrective’ action taken for this problem is purchasing the out of stock item by itself, paying an upcharge for a lower vendor bracket or paying additional freight for a smaller shipment.

Which of these sound like your business? All of these things cost your bottom-line while reducing the inventory service level seen by your customers.  There will be added freight cost, added management cost from weekly exceptions, additional work in accounts payable.  Each of these things are hurting your profits and shaping customer opinions.

Out-of-Stock due to Weekly Replenishment?

On average 80% of out-of-stocks are NOT due to the supplier. Several studies support this amazing and surprising fact.  In truth, buyer processes and old technology are creating most of the issues in your supply chain.  Many retailers are using push (top down) replenishment software and processes that are not accurate enough for the massive global market changes taking place via the internet and smart phones.

The root cause of out-of-stock is likely your demand forecast.  Demand Forecast accuracy, lack of trust in the demand forecast or lack of a demand forecast are the biggest contributors to out-of-stocks.  Start reviewing your Demand Forecast weekly, review the last four week across each department for collections of locations (stores or warehouses).  Don’t use all locations in the same forecast accuracy report, break the products and locations into groups to avoid normalcy of the data (averaging is bad). Test your lead time assumption, do you have enough inventory on the shelf to support sales while waiting on the replenishment truck?  Review your system order cycle is it optimized for service and profits or is it optimized to meet the plan?

We have another blog that will be released soon providing the research links and more details about why out of stocks occur. Subscribe to our blog so you do not miss the story.

Are you ready to ‘Tighten the Links in Your Supply Chain?™’

Stop accepting poor forecasting, out-of-stocks and expensive inventory operations. Contact us for a free review of your current replenishment and out-of-stock issues. We have the experience and tools to help you improve your business.  Also, request a demo to learn how our software can reduce out-of-stocks and increase sales, installed in 30 days at a fraction of the cost of legacy systems.

The post YES, Weekly Replenishment CAUSES Out-of-Stocks and Lost Sales appeared first on Data Profits, Inc..

• How to identify which methodology is used by your software (or software you are reviewing).
• The costs and goals of each methodology and how the differences impact each line of business in your company.

Quick Review of Replenishment and Forecasting Replenishment

Webster’s Dictionary defines replenishment as ‘to fill or build up (something) again.’ When a store shelf or a warehouse space is re-filled with product that is considered replenishment. However, the future demand, or lack of demand, will impact replenishment so the word ‘replenishment’ alone is not an adequate description of the action desired. For example, would you replenish Christmas trees on December 26? Demand based seasonality, promotions, events, competition, and buyer trends all impact the speed of the products leaving the shelf or staying on the shelf un-needed. ‘Forecasting Replenishment’ is the act of predicting what products, what quantity, on what date, and location will be needed ‘to fill’ the shelf or warehouse space. Forecasting Replenishment also requires you have knowledge of the balance of inventory available at the end of each day.

Inventory Replenishment

Acting on the forecast, Inventory Replenishment is the process of replenishing inventory for the shelf or warehouse space. This process is the culmination of all the data points: demand forecast, lead time, safety stock, order point, available inventory, and pick quantity to build an inventory replenishment order. The key to understanding inventory replenishment systems is to understand the ‘flag’ that is used to tell the system to create an order. There are two methodologies inventory replenishment systems use: top down and bottom up.

Top Down Inventory Replenishment Methodology

A top down inventory replenishment methodology is based on a budget and calendar. Typically, soft-lines use a top down methodology for creating purchase orders. At some point in time, a review of the ‘plan’, current date, open to buy, sales, and receipts informs the buyer that it is time to write a purchase order for a product. You might buy a truck load of towels for your stores based on the sales plan or company plan. You build the truck according to a plan and will then allocate the goods when they arrive using the same plan or demand forecast. The top down methodology will cost more money due to the nature of the aggregations used to build the order. Markets and customers change constantly and the time between planning, implementation of the plan, and store sales can be 3 to 6 months apart. Markdown dollars are used and sales events promoted to move remaining inventory which then allows the process to repeat.

There is a trade off with the top down methodology. The financial side of the business has less risk initially and the markdown dollars when available, further reduce the risk. However, overstock is often purchased to cover the many unknown variables created by each location. The other potential threat to top down is the fact most companies do not alter a plan weekly or monthly based on demand changes. While the open to buy amounts will change, this is a reaction to the past and not an anticipation of future demand.

Top Down inventory replenishment will always cost more inventory dollars then bottom up inventory replenishment. These additional dollars are offset by higher gross margins and markdown dollars and allow you to change product mix 6 or more times a year.
If you are using excel and every individual product/ location does not have a row in your excel worksheet, you are using a top down methodology. If you use some form of this year / last year sales comparison that is a top down methodology. If purchase orders are created by a review of orders each week (any time frame) and budget dollars available, again this is a top down methodology.

Bottom Up Inventory Replenishment Methodology

A bottom up inventory replenishment methodology is based on the service goal and the amount of available inventory at each product/ location. Typically, general merchandise, hard-lines, and food companies prefer the bottom up methodology. A bottom up system can react to individual product/ location market changes rapidly to maintain a service goal. This individual approach costs less money to operate but requires a software program that in the past needed to run on large hardware like an AS400. The software system must evaluate every single product/ location combination each night and build orders to meet service. A company could have 300 stores and 40,000 products resulting in 12million combinations that need to be reviewed.

Some of the issues with a bottom up methodology include planning and demand forecast. While a bottom up inventory replenishment system reacts quickly to market factors, it is not tied to a budget directly. If sales start to rapidly increase, then the system will work to keep inventory flowing to the location where needed. The company plan may not have forecasted this event and the cash available for purchase orders may be constrained. The most common thing I have to remind people of is that replenishing occurs because of recent demand coupled with forecasted future demand. If you do not place the purchase order, then you will have lost sales – that is the nature of replenishment.

If your purchase orders are based on a software package that has the goal to meet service first (not plan or budget), then it is a bottom up inventory replenishment methodology. The key fact is to understand what the primary constraint is: [date and plan] or [service goal].

Which Inventory Replenishment Methodology is Right for You?

Bottom Up inventory replenishment systems cost less to operate, and studies show that service level improvements increase sales and provide a significantly higher ROI. For over 85% of products you carry, a service level increase will have a 2-4X higher ROI than an in-stock percent increase. The tradeoff for bottom up systems is they are primarily for use with products (or replacement products) you will purchase 3 or more times in a year. A new product with no similar product to use for a sales pattern can only use a top down methodology. A top down methodology has some benefits from a financial planning viewpoint, but these same benefits can also lead to disaster if exception management isn’t employed.

The process of inventory replenishment can be daunting; fortunately, there are systems available today to manage the math faster and cheaper than anything on the market 5 – 7 years ago. The two core inventory replenishment methodologies each have an important place in business. The key is for you to understand the differences, when each method should be used, and the tradeoffs in terms of costs, response time, and returns.

Are your ready to ‘Tighten the Links in Your Supply Chain? ™’

Understanding how your inventory replenishment system thinks can be complicated, but when you understand how it works, that can provide new opportunities to grow your business. We are here and ready to help. Contact us for a free consultation about your supply chain opportunities. You can also request a demo and see how things can really start to improve in your business in 90 days.

The post Differences in Inventory Replenishment Methodology: Facts and Myths appeared first on Data Profits, Inc..

Several documented events support these claims (click a link): a retailer achieved a 25% inventory reduction and a 3% same store sales increase in 90 days, the sales and inventory trend continued going forward (press release), Dr. Mentzer’s 3 page story concerning a collection of businesses that delivered an average 15% shareholder value increase via forecast accuracy improvements which directly impacted forecasting replenishment, and The Home Depot Chairman and CEO, Frank Blake, specifically stated in the 2011Q4 earnings briefing that supply chain investments continued to provide significant benefits including increased turns and same store sales.

Our supply chain investments continued to deliver benefits for the business, improving our in-stock rate and asset efficiency as we again improved inventory turns this year. As of the end of 2011, we handled approximately 70% of our cost of goods sold through central distribution in
the US. This compares to approximately 25% four years ago.

Key data Sources for Forecasting Replenishment

Forecasting replenishment requires performance indicators for reorder point, order up to amount, forecast accuracy, service level attained and automated/ configurable alerts and exception management to deliver significant returns for businesses. Data points needed for forecasting replenishment include: demand forecast, demand forecast error, Service level goal, lead time, optimized supplier order cycle (days between reorders), product order cycle, and supplier minimum pick quantity. To learn more about the forecasting replenishment performance indicators and data sources, including how they work together, visit this link: inventory replenishment

Key data Sources for Inventory Replenishment Processes

Some data sources needed for the inventory replenishment process but are not part of forecasting replenishment include: company rounding rules, supplier min to ship size, and shelf life. Each of these data points and some additional data points like inventory carrying cost should be used for inventory optimization. The inventory optimization software should deliver the optimized supplier order cycle which is the key contributor to days of shelf stock maintained, a key factor for accurate demand plans and purchase projections. To learn more about order cycle optimization via inventory optimization processes, visit this link: inventory optimization

Forecasting Replenishment and Demand Planning the Budget

Some people argue that building the demand plan and budget should happen before forecasting replenishment; perhaps this is old school methodology. We believe the budget is part of demand planning that should follow AFTER an initial Forecasting Replenishment process for your business. A root issue with many demand planning processes today is the acceptance of inaccurate forecasts. A study of planners revealed that 90% change the number their forecast system delivers. Additional research shows that most forecasting systems have a base technology that is old and dated, contributing to the inaccuracy. Worse, some companies use products like Excel for demand forecasting and aggregation. Since many people believe poor forecasting is inevitable and human intervention is the solution, it makes sense to build a plan and then run forecasting. Think about CPFR (collaborative planning, forecasting and replenishment) – note how planning is before forecasting.

• Buy for the non-replenishment plan first to account for promotions, ads, and events.
• Use the balance of the plan money for replenishment.
• If sales do not meet plan then cut receipts – often replenishment is the first cut.

Build Demand Planning with Replenishment Forecasting Projections

Assuming a your business has accurate demand forecasting (contact us for a free consult), then forecasting replenishment should be step 1. Demand Planning for the changes in the business like new product, replacement products, promotions and events would be step 2. Finally, forecasting replenishment again where promotions and events are planned in step 2 to complete the circle.

Replenishment Forecasting 1st then build Demand Plans

1. Demand Forecast each product/ location (include future events and promotions)
2. Calculate inventory optimization to determine average on hand inventory
3. Project sales, inventory level, open purchase order, and new purchase orders.
4. Use data to build demand plans
5. Where ‘new’ promotions and events are added- recalculate steps 1-3

Confidence in the demand forecasting accuracy when forecasting replenishment and even non replenishment products would encourage the ideas presented today. With an 85 or 90% forecast accuracy, your business processes would embrace the idea of forecasting replenishment first and use the forecasting projections as the starting point for the demand planning. Most Demand Planning tools and software today focus on the planning and not demand forecasting accuracy. The good news is that companies can buy software today that does take advantage of hardware and software improvements to deliver solid, dependable, and accurate Demand Forecasting. These new Demand Forecasting software solutions are making it much easier for accurately forecasting replenishment and non- replenishment products in your business. You can run forecasting projections to use in your Demand Planning and ‘Tighten the Links in Your Chain™.’

Are your ready to ‘Tighten the Links in Your Supply Chain?™’

We are here and ready to help. Contact us for a free consultation about your forecast accuracy and inventory management opportunities. You can also request a demo and see how things can really start to improve in your business in 90 days.

The post Critical Steps to Forecasting Replenishment for Demand Planning appeared first on Data Profits, Inc..

• When do I buy?
• What quantity should I buy?
• When I buy, how can I balance inventory levels?
• A vendor has offered a discount, how much more, if any, should I buy?

Inventory Optimization is only part of Inventory Replenishment Success

Inventory Optimization increases your profits, calculating the most economical way for you to flow inventory (EOQ) and minimize costs. Inventory Optimization, in conjunction with a strong Order management module provides you an inventory policy that balances your service level targets and inventory levels while minimizing inventory carry. If you have purchased and implemented an inventory optimization solution, then you can answer these first 3 questions confidently.

If you have such a solution in place, congratulate yourself, TAKE A DEEP BREATH, and realize the fourth question has not been answered. With most solutions and companies the 4th question is not properly addressed and this last question is somewhat counter intuitive:

Do you EVER hear: ‘Go buy more inventory’ any success stories?

When shopping for yourself, if a discount is offered do you buy additional units or use the savings to buy something else? A supplier (vendor) offering a discount may not increase your profits. Today, retailers and wholesale distributors operate in an intensively competitive environment. Increased competition and a slowly recovering economy have put increased pressure on sell prices and profits margins. To help margins, suppliers and retailers are investing in price optimization solutions to identify margin opportunities to generate more profit. The supplier (vendor) then offers the customer a discount price. Buying additional units at a discount price can be an advantage so long as the carrying costs don’t absorb the additional gross margin dollars the discount offer delivered. When you are advised by the supplier of a future price increase, buying more at the lower price gives you an advantage over the competition. The key is the buy the right amount to carry that doesn’t impact shelf life or gross margin after the impact of carrying costs. This methodology helps you grow customers and increase margin dollars.

Investment Buying: Generating Margin on the Buy Side

You, as a supply chain professional, need to look also look at the buy side, where another margin opportunity exists. Your future price increases, related to ending vendor deals or general price increases, are your margin opportunity to further optimize the inbound supply chain. Hedging against price increases with sound INVESTMENT buying decisions provides you with an opportunity to make significant contributions to your company’s success and bottom line profits.

If a supplier suddenly offered you a 25% discount on a few of their items, it would only make sense to buy an additional quantity, if you have available cash, warehouse space, and c-level management approval for an investment or forward buying purchase. That purchase will increase inventory and lower your inventory turns; it might take you 3 months to sell through that inventory instead of the usual 30 days. However, because you bought it at a discount and the sell price is based on the higher cost value, the difference goes directly to the bottom line.

That decision, of how much, requires input from many people in an organization. It also requires a company to look at people, processes and tools from a different perspective and make the right investments to realize those bottom line results.

Sound Investment Buying decisions are Organizational

Sound Investment Buying (forward buying) decisions are based upon sound financial judgment utilizing the company’s cost of money and desired return on investment along with space and cash availability. Investment buying decisions balance the difference in product costs, and the lower acquisition costs against higher inventory holding costs. To succeed, a company needs to develop an investment buying policy and develop organizational buy-in so that investment buying becomes accepted as part of everyday routine and measured performance. It might take a few quarters of increased margin to achieve full buy-in:

The concept of more inventory of any kind being good takes most organizations a while to accept.

Additionally, you need your investment buying decisions integrated into regular replenishment, optimizing service and inventory while taking into account other factors such as available shelf-life. Investment or forward buy programs can be executed in Excel with a talented macro programmer but your company will never realize inventory optimization and balance benefits without integrating those decisions with normal replenishment ordering.

For each available investment opportunity you want the right buying decision made; generating the right quantity and right delivery date for your regional warehouse, warehouse, or store. Success comes by placing a new emphasis on the buying department, hiring the right people, instituting the right processes, and supplying the right technology and tools, to support profitable buying. Click here to read more about our investment buying solution.

Inventory optimization and investment buying together benefit your inbound supply chain.

Utilizing the company’s cost factors; product costs, acquisition costs and holding costs along with the service level requirements, the system generates sound inventory buying decisions, minimizing your costs, contributing margin dollars, along with delivering a high level of service to your end customers. Click here to read more about our inventory optimization solution.

Is Investment Buying in your Inventory Replenishment Solution?

The most in-depth inventory optimization systems balance demand forecasting, lead-time forecasting, order optimization, location-SKU service level strategy, replenishment, planned promotion buying and investment buying, all within a multi-echelon network that enables buyers to generate the optimal profit for their inventory investment.

Together these capabilities reduce cost, increase sales, improve margins and raise customer satisfaction to give your company a competitive edge.

Are your ready to ‘Tighten the Links in Your Supply Chain?™’

We are here and ready to help. Contact us for a free consultation about your forecast accuracy and inventory management opportunities. You can also request a demo and see how things can really start to improve in your business in 90 days.

The post Expert Investment Buying Tips for your Optimized Inventory Replenishment appeared first on Data Profits, Inc..

Promotions are Vital for Greater Revenue and Reduced Inventory

In-Store trade promotions are the lifeblood of the supermarket industry and discount retailer. Trade promotions include products featured in ads and in-store circulars, products displayed on end of aisle caps or away from their normal shelf location, and products with temporary price reductions. They create Trial and Repeat Purchases AND create all important Impulse Sales. You know impulse sales; they are all of those items you purchased that were not on your shopping list!

According to a recent study from The Nielsen Company, 42.8% of grocery purchases are sold on promotion, up from 40.8% a year ago. Drug stores, too, sell a significant portion of products on promotion, with 40.4% of sales linked to displays and/or features.

Steps for Successful Promo Planning

With grocery sales on promo items approaching 50%, staying in-stock on the shelf and during promotional events is critical to winning the first moment of truth with retail shoppers. The first step for successful promotion planning is having a demand forecasting system that properly segregates lost, promotion, and event related sales from regular sales. It must also support the integration of future promotions into your replenishment planning.

If you are not segregating in your demand history, then you won’t be able to measure the effects of promotions and utilize that information for future use. In my mind this step is fundamental and reminds me of a famous quote on insanity:

Insanity: doing the same thing over and over again and expecting different results.

Albert Einstein

To read about this in detail, please take a look at one of our more popular blogs on the subject of demand forecasting and replenishment: Why Sales Forecasting Systems are Wrong for Inventory Replenishment

The second step to success in promotions is the monitoring of promotions and events after they start and the determination of if your replenishment plan meets the demand at the store level, mid-flight.
 

Is your Execution stuck in a Promotion Planning Loop?

Alerts and Automated Messaging: Keys to Successful Execution

Utilizing integrated alerts and automated messaging from a cloud based solution, you can increase supply chain visibility and collaboration inside your company and with your trading partners. This provides a demand sensing feedback loop of information and recommended actions. Increasing a supplier’s or planner’s visibility to real time, granular store data can result in earlier store deliveries, generating greater sales and promotional lift along with higher customer satisfaction. By providing your planners and suppliers with real time alerts and promotional scorecards, you can transform your promotion execution.

With demand sensing information such as sell through percentages, you can quickly identify runaway promotional events. You can collaborate with less effort, make your supply chain more responsive, and execute additional replenishment orders, allowing you to maintain on shelf availability throughout the duration of the promotion.

Additionally, you can provide baseline days of supply information and identify inflated inventory levels relative to expected demand post-promotion. This would allow you to slow replenishment orders and minimize inventory overstock.

A demand sensing feedback loop with promotional scorecards and real time alerts can transform your promotion process, aligning your inventory and execution activities. The results are maximized market opportunity, profitability, and customer satisfaction.

What’s Next?

Our next blog: The other side of promotions: supplier price changes

How do you forward buy to hedge against a price increase? The cost of money, shelf-life, and percent price increases are all factors your inventory optimization solution should manage, but what if it doesn’t?

Subscribe to our blog for free today; you really don’t want to miss a thing!

The post Is your Promotion Planning and Execution Process Out of Date? appeared first on Data Profits, Inc..

What is Lead Time? Why Is it Important?

Lead Time is the length of days between when an order is placed and the date the goods are available for use. The largest impact to lead time accuracy is found by comparing expected receipt date to actual receipt date for each purchase order. In simple terms, the variance is calculated as the absolute value of the difference [expected or requested receipt date - actual receipt date] for each line on the purchase order. These variances in days across multiple purchase orders establish the need for lead time accuracy testing and lead time forecasting.

What is the Impact When Supplier Lead Time is Not Accurate?

Suppliers provide an estimate of lead time, but these numbers are not always accurate. The differences between your expected receipt date and actual receipt date can become expensive from the resulting unplanned over stocks, out of stocks, and deflated consumer opinions. Lead time tracking and lead time forecasting are mission critical to the success of your supply chain. Lead Time Forecasting, like Demand Forecasting, should use a set of math algorithms to calculate the correct lead time days to use in planning purchase orders. Also, like Demand Forecasting, the Lead Time Forecast should move up and down according to changes in market, business influences and seasonality of product.

The ability of Lead Time forecast to be accurate and dynamically updated decreases the amount of safety stock needed in your inventory. The resulting lead time forecast is then multiplied by the daily demand forecast for each day moving forward to determine how many units will need to be carried on the shelves to maintain service level in between orders.

Do Lead Time Forecasting Variances Impact Inventory Optimization?

Lead time forecasting accuracy heavily influences your inventory optimization success by impacting both safety stock and consumer opinion of your customer service capability. When to place the inventory replenishment order or when to place the new product order should be based in part on lead time days.

While some companies use a single lead time forecast number for all vendors, the reality is that all vendors and products are not the same. Start reviewing how many products have a bad lead time that is to short, which means you run out and have lost sales. Calculate your lost sales for those out-of stock days (you do have a method to calculate lost sales, right?) and sum the total lost sales across six months to see how much money you are losing. Now look at all those skulocs that had overstock where the actual lead time was less than the expected lead time across the last six months. Sum the cost of the excess inventory and, multiply the result by 10%, and then you have a conservative estimate of your overstock carrying cost. In reality, your actual costs are probably double that number. Finally, add the overstock cost and the lost sales cost together to see a six month total. How much profit did you lose this past year due to poor lead time forecasting?

Join our Blog, share your thoughts today: How does Lead Time impact your inventory, is it optimized for profit?

For more information on how Data Profits can ‘Tighten the Links in your Chain™’ click here.

The post Why Lead Time impacts your Inventory Optimization and How To Fix It appeared first on Data Profits, Inc..

Key Limitations to Sales Forecasting

Sales Forecasting, by its very nature, doesn’t know why sales rise or fall and cannot connect events to sales behavior. For example, when sales were down 20% four weeks ago, you probably knew this was due to constrained supply which created out of stock issues. The sales forecasting system will react to the 20% drop by lowering the forecast. The resulting inventory replenishment orders from the new forecast will be low, creating a repeat scenario of lost sales again next month.

Demand Forecasting with Sales Type

Demand Forecasting systems will break out the sales by type with some methodology. While both sales forecasting and demand forecasting could be using the exact same algorithms, the sales input data can be different. The sales types used in demand forecasting might include:

• Regular
• Lost Sales: Lost Sales occur when a product is active, has a positive forecast and inventory is unavailable
• Promotion – Sales due to promotions: news ad, smart-phone, price, BOGO
• Event – Sales due to events: competition, manufacturer coupon, and store placement, etc.
• Close-out – sales due to closeout pricing, mark-downs, etc.

Any of these sales types should impact a demand forecast and your inventory replenishment system should be able to respond correctly to the different sales types.

Modern Rules for Demand Forecasting

Understanding the type of sale and the resulting sales impact is critical to determining the inventory levels needed in the future. In a previous blog series, we discussed that lost sales are the sum of daily sales forecast for the period in which there was no inventory available to service the customer. An inventory replenishment system will have some methodology to allow you to backfill manually the lost sales. Some systems like our iKIS have automated analysis tools that calculate the amount of lost sales for you and save the number as demand history. That’s important because now the lost sales can be included with the regular sales in updating the DEMAND forecast at the end of the period. If this did not occur, then the system would lower the forecast.

As another example: imagine you place a product on sale at a great price, and total sales increase 25%. When the product goes off sale next month, a sales forecasting system will raise its forecast, but a demand forecasting system will know what sales were regular and what sales resulted from the promotion. The sales forecast system would see and react to the increase by generating orders for too much inventory next month, and you will have overstock. Demand Forecasting systems have technology that analyzes the sales by type and event so that as things repeat, the system can calculate the correct demand forecast in the future for both regular and promotional sales.

Gain your Competitive Edge in Strategy, Cost Control & Performance Tracking

Demand Forecasting provides additional benefits of strategy, controlling costs, and performance flags. With accurate demand forecast, you can maintain lower inventories, follow just in time (JIT) methodology, and channel promotions where you have the largest ROI. Your ability to predict demand accurately is a critical difference between you and the competition. Demand Forecast accuracy can be tracked and recorded each month to help validate the suggested inventory. With accurate demand forecasting, inventory replenishment costs – inventory costs, acquisition costs, and carry costs – can be rapidly reduced at the same time increasing service levels which will raise sales. The performance data can be used as a confidence guide to further your success and focus attention on the products to improve.

Sales Forecasting for Financials not Inventory Replenishment

Sales Forecasting Systems are great for financials and for some planning processes. You need demand forecasting to manage your inventory to the most profitable point in your business. The impacts of constrained supply, out of stock, promotions, events, mark downs and closeouts are not seen in a sales forecasting system. You need a Demand Forecasting system that can separate and measure the different demand types and provide analysis that correctly impacts the demand forecast and recommends the right amount of inventory to purchase. Most legacy systems use a sales forecasting methodology. Unless you can find where a system is breaking sales out by type and using the data to impact inventory orders, then it probably utilizes a sales forecasting methodology. Don’t let yourself be fooled by the words ‘demand forecasting’; now you can test the claim! New software technologies can move you ahead of the competition in sales and profit.

Are your ready to ‘Tighten the Links in Your Supply Chain?™’

We are here and ready to help. Contact us for a free consultation about your forecast accuracy and inventory management opportunities. You can also request a demo and see how things can really start to improve in your business in 90 days.

The post Why Sales Forecasting Systems are Wrong for Inventory Replenishment appeared first on Data Profits, Inc..

What is Sales Forecasting

Sales Forecasting is the easier of the two choices: you load your sales history into the sales forecast engine and the system delivers a sales forecast. Sales Forecasting is critical for the retail business to create financial plans with the banks, plan sales growth, and plan resource strategies. Sales Forecasting systems have a ‘vanilla’ approach that is clean and simple, and it works without issues for the most basic of products. Legacy systems often will pair the sales forecasting with their demand planning tools to determine inventory replenishment for the business.

Many types of events will create sales unit increases and decreases that raise or lower a sales forecast. However, a sales forecast engine may not react correctly.

For example, imagine a case in which sales are zero one week due to no available inventory. A sales forecast does not factor in the unavailable inventory all week, and the forecast will end up artificially low.

On the other hand, imagine a case where sales gain rapidly this week, but the price was marked down due to inventory overstock. Sales will obviously be high for that week, and the resulting sales forecast will be artificially high.

Sales Forecast Engines

A sales forecast engine is looking at total units or dollars to calculate a forecast. A recent trend has been to closely tie sales forecasting and demand planning. The reality is that the sales forecast alone often does not provide the right detail to run demand planning. Problems will occur when we confuse sales forecasting with demand forecasting.

Example events that potentially create bias (error) in the sales forecast and resulting plan include:

• Product Placement: Placement by the register or on a bottom shelf can dramatically affect sales.
• Product Price
• Promotions via website, smart phone, or print
• Changes to the competitive landscape: New Competition and Going out of business competition can impact a sales forecast significantly.

A sales forecast is what you believe a business or retailer can sell. The sales forecast doesn’t consider constrained supply, future events, pent-up demand, or bank money lending market policy. Today, some systems talk about collaboration tools that help improve sales forecast accuracy by adding a human element. However, the single greatest influence to a sales forecast is sales history; it’s the most reliable quantitative measure.

Demand Forecasting: additional data needed

Demand Forecasting needs demand history inputs and Sales Forecasting uses sales history. Demand History is created by scrubbing the sales history and at times adding to the sales history. Demand Forecasting uses demand history with events to calculate a demand forecast. One example: Out of stock days with zero sales may need a demand history correction to show what would have occurred if inventory had been available. The demand history can be auto-calculated by systems like iKIS using BI analysis tools to filter sales types regular, lost, promo, event, and close-out demand. For many legacy systems, this is a manual process that requires a trained and informed user to filter the data and calculate demand history for input into the forecasting algorithms.

Differences between Demand Forecasting and Sales Forecasting for Inventory Replenishment

The differences between demand forecasting and sales forecasting are subtle in some places; for example, they both use sales history. The major difference is in what history is input into the algorithms. Demand forecasting must correct for a variety of external factors (like promotional events) to calculate base demand. Planning inventory replenishment requires scrubbing the sales data of events that will not repeat. Likewise, it also necessitates the ability to buy inventory for future, new events.

Demand Forecasting and Sales Forecasting are different and their respective uses should not be the same for the many reasons highlighted today. Technology hardware and the resulting software runs faster for less money and more accurately than even 5 years ago. That means today you have better choices to pick and choose for your business need. These choices provide significant opportunities to improve your inventory replenishment practices and achieve higher sales, lower operating costs, and better service for your customers.

Today we discussed some of the differences between demand forecasting and sales forecasting with a focus on sales forecasting. We have hardly stepped into the discussion opportunities of the two systems. Stay tuned or better yet SUBSCRIBE to our blog to read our follow up article about the relationship between Demand Forecasting and Inventory Replenishment.

Are your ready to ‘Tighten the Links in Your Supply Chain?™’

We are here and ready to help. Contact us for a free consultation about your forecast accuracy and inventory management opportunities. You can also request a demo and see how things can really start to improve in your business in 90 days.

The post Differences between Demand Forecasting and Sales Forecasting for Inventory Replenishment appeared first on Data Profits, Inc..

Problems with Seasonality

The problem with seasonality is that it can change each year, and your current fiscal year may not map back to your seasonal index. Sales from the last seasonal event may impact your base demand forecast to create inaccuracy. Easter is in a different month and fiscal week this year. How did you account for the differences when purchasing Easter inventory for this year? Next year, Easter is again in a different month and will be several weeks different from this year. Thanksgiving is a holiday that based on the time of year can add or subtract a whole weekend of December holiday shopping. There are two issues that need to be reviewed and adjusted: the current year fiscal week seasonal index values and the base demand forecast.

Seasonal Index Peak Weeks may be Wrong this Year

Last year, Easter was in the 4th fiscal month and the 15th fiscal week. Seasonal indexes you use this year that are based on last year will have the peak sales 2-3 weeks too late in the year. Seasonal Indexes are often set up into 52 weekly buckets and utilize 2 or 3 years of history.

Seasonal Index formula is (period sales/ total year sales) * number of periods

Sales that are Seasonal can create Inaccurate Demand Forecast

Sales from previous seasonal events will impact your demand forecast. Tools that analytically separate the sales into types regular, lost, promo, event, and close-out may help to decrease the impact to the demand forecast. Some software applications, like ours, provide tools to edit the demand sales data to be used in the demand forecast engine, and this can also help reduce error. The reality is that the demand forecast engine will forecast based on the data passed into the algorithms to create a base forecast. Sales that occur at different point in the past will have some impact when the system loads the history to update the base demand forecast. If the wrong data or the right data at the wrong time is included in the sales history, then the base forecast number will potentially be too low or too high. When an incorrect base forecast is multiplied by the seasonal index, the potential for errors can be significantly higher. The result will be missed service goals, lost sales, lower gross margin, and higher safety stock.

Seasonality can Impact Lead Time

Seasonality can impact lead time. If a supplier has a lot of product that is based on seasonal events, then the prep and ship days needed may be longer than other times of the year. Product lead time, for our discussion, is the time needed from when a purchase order is placed until the goods are available to pick, ship, or sell. Also, your shelf stock requirements to support sales while you wait for a replenishment order may be different due to seasonal demand. Product Shelf life is another issue that can mean products expire before they are sold due to poor lead time management and inaccurate demand forecast. If your demand forecast is not correctly adjusted, then the amount of inventory your system calculates to meet service while you wait for replenishment will be wrong. The result will be missed service, lost sales, and lower gross margin.

Are your ready to ‘Tighten the Links in Your Supply Chain?™’

We are here and ready to help. Contact us for a free consultation about your forecast accuracy and inventory management opportunities. You can also request a demo and see how things can really start to improve in your business in 90 days.

The post Seasonal Index Lessons from History appeared first on Data Profits, Inc..

Slow and Intermittent Product Demand Forecasting Myths

Test the Slow and Intermittent Product Demand Forecast Myth

Reviewing several retail software provider web sites, a visitor will see that many software companies highlight their ability to forecast slow or intermittent demand products.  Following that line of reason, the measure of success is found by testing the forecast accuracy for a given period of time and repeating the test regularly. Taking the results and calculating the mean and standard deviation will tell us if the forecast is accurate.  The problem is that forecast accuracy is not the ‘smoking gun’ solution to slow or intermittent demand products.

To manage slow and intermittent product demand, we recommend you avoid:

• Reviewing forecast accuracy within a single company traditional demand period
• Measuring in-stock
• Using incorrect forecast methods like Time Series, Exponential Smoothing, and This Year/Last Year. These fail to deliver the correct stock model. Some of these smooth or ignore zeros, which is a bad idea. Croston’s method may be used, but, without thoughtful implementation, then it, too, will deliver poor results.

• Review forecast accuracy over a window of time that includes multiple periods.
• Measure service attained – NOT in-stock. The focus needs to be on the inventory stocking requirements necessary to meet service level.
• Use inventory management software that correctly identifies slow and intermittent demand.  This software should not smooth or ignore a zero in sales history when calculating a forecast.  The software should deliver an inventory management solution that is based on service level and cost-effective inventory management models.

Service Attained = [Sales / (Sales + Lost Sales)]

Overstock, Shelf-Life and Smoothing the Zeros

Without a good strategy for slow and intermittent product demand, there will always be overstock.  The resulting overstock will force you to commit more inventory dollars to these products that could be used elsewhere.  Shelf-life issues will also be created by smoothing through the zeroes in the sales history. The pains of overstock and inventory lost due to shelf life expiration can occur at the same time without a strategy for slow and intermittent product demand.

Focus on a Combination of Service and Demand Forecasting

The key to managing slow and intermittent product demand is to focus on a combination of service and demand forecast accuracy across a wider selection of periods to avoid the common pitfalls listed. Identify the slow and intermittent demand products in your assortment and try some of these ideas for the next 45 days to learn how this helps to ‘Tighten the Links in Your Chain™.’

Are your ready to ‘Tighten the Links in Your Supply Chain?™’

We are here and ready to help. Contact us for a free consultation about your forecast accuracy and inventory management opportunities. You can also request a demo and see how things can really start to improve in your business in 90 days.

The post Slow and Intermittent Product Demand Forecasting Facts & Myths appeared first on Data Profits, Inc..