Retail Demand Forecasting and Inventory Management Applications: A Tool, Not a 'Solution'
For all of the capabilities that have been built into these applications, it still requires a merchant's touch to take the information, interpret it, and utilize it to generate sales and gross profit increases.
Over 20 years ago, when I started my career as a retail buyer, the industry was just beginning to transition from manual merchandise control systems to the first computerized systems. I remember the manual system well, for there was a lot of hand posting of sales information, and manual calculation of weekly open-to-buys, all in an effort to stay in stock on staple items, chase sales of the hot items, and not end up with overstocks that would obliterate our markdown budgets.
Back then, there were buyers who were very skilled at utilizing this manual system to maximize their sales while keeping inventories in line. On the other hand, there were also buyers who continually struggled to make their inventory and turnover objectives. I remember this well, because several of my assignments were to come in behind these buyers and pick up the pieces.
Come back to the present, and one of the things that strikes me as I work with retailers today is how much some things remain the same. Despite all the advances in retail information systems, many buyers and retailers are still turning their inventories too slowly, tying up critical cash in inventory, and taking heavy markdowns on excess and end of season overstocks.
This is not to say that there hasn't been remarkable achievements over the past 20 years in managing inventories more effectively, for clearly advances in retail information technology has enabled the leading retailers in all segments to continually establish new benchmarks for inventory efficiency and productivity.
Still, for all of the advances in retail demand forecasting and inventory management applications, inventory and merchandise management remains just as much an art as it does a science. For all of the capabilities that have been built into these applications, it still requires a merchant's touch to take that information, interpret it, and utilize it to generate sales and gross profit increases. It is critical for retailers to remember that these applications are tools, not "solutions" as they are frequently billed.
As these applications grow ever more sophisticated, frequently incorporating sophisticated sales planning and inventory replenishment modules in them, capable of producing very detailed information and sophisticated demand forecast and inventory management models, it still requires a skilled merchant to interpret the information and models, and act on it wisely. The applications can't do your thinking for you, and can't make the carefully considered decisions that need to be made day in and day out to effectively manage inventory.
For smaller retailers, who are using an enterprise-wide (ERP) package targeted specifically to the small retailer, the issue is compounded by the limitations of the demand forecasting and inventory management functions typically included in these packages. They almost universally have state of the art capabilities for capturing and reporting POS data in any number of combinations, but only basic capabilities for forecasting demand and managing inventory (usually in the form of a basic replenishment capability). The challenge for smaller retailers using these packages is to understand their limitations, and not to presume that the demand forecasting and inventory management functions are sufficient to effectively manage their inventory. Frequently, off-system forecasting and open-to-buy tools need to be developed to get the job done.
The basics of retailing remain unchanged: Understand your customers and their needs and expectations, utilize past history and current trends to accurately forecast future customer demand, plan inventory levels to meet that demand, flow receipts in a timely manner based on those inventory plans, plan end of season inventory levels to minimize markdown exposure, and keep your eye on the whole thing day in and day out, updating plans continually as the season progresses. And to do all this effectively, always keep in mind that the technology that helps you do this is a tool, not a "solution".
© Ted Hurlbut 2004. All Rights Reserved