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Why Individual Retail Stores Shouldn’t Order Their Own Inventory

By Jeff Bodenstab19 Jul 2016

In the old days, each store knew best what inventory it needed to keep shelves stocked and customers satisfied. But with today’s product proliferation and demand complexity—including now often the need to operate as a satellite fulfillment center for orders rung up online—it’s more difficult for individual retail sites to create accurate forecasts and optimize their inventory and replenishment process.

Years ago in some organizations, central planning got a bad name when companies blindly enforced the same policy on disparate stores in diverse markets with different needs. But modern centrally organized supply chain planning (SCP) now combines the best of both worlds—a unified approach to sensing local demand, generating forecasts, optimizing inventory, and triggering replenishment, along with the ability to “decompose” that plan down to each store’s individual stock-keeping items and locations.

In fact, today centralized supply chain planning is each store ordering its own goods to stock its own shelves—albeit via automated means, by continuously sensing demand and translating those signals across the supply chain. This replaces store-initiated orders with a centrally run, demand-driven model that automatically suggests replenishment plans for the localized assortment each store seeks.

This “algorithmic SCP” approach goes beyond what each store could possibly factor in their own forecasts, incorporating market trends, seasonality patterns, promotions, new product launches, projected product and store lifecycles, and returns and substitutions. It does a better job of understanding these signals and analyzing daily store-level demand, generating in-store and upstream inventory targets that ensure a company maintains its service level and avoids stock-outs and obsolete inventory.

Mobile telecom provider Ois a good example. The digital communications company was manually planning inventory for products like smart phones and other gear that was growing overall at 60% annually. According to Nicky McGroarty, head of supply chain, “Customers always want that latest gadget so supply can occasionally be outstripped by demand. It’s really important that we have the right demand tools that enable us to make sure we’re putting that scarce resource in the right place so we really maximize the customer experience.”

The company centralized supply chain planning around a single, unified model that enabled trading teams and suppliers to collaborate in a demand-driven process. The system fine-tunes the forecasts and supply plans with demand sensing. This enables Oto do things like maximize availability for constrained supply items—by understanding which stores need more of those goods based on the likelihood of sales, rather than simply sending the same amount to each store. Oimproved forecasting accuracy by 10%, improved handset availability to 97% in the warehouse and 95% in the retail stores (while minimizing inventory value increases), and decreased days of stock by nearly 30%.

We have seen similar scenarios and results at a range of other retailers such as pharmaciescoffeehouse chains and automobile dealerships. In each case, stores ordering their own goods was leading to inferior results and the retailer realized they could do better. In some cases, they knew they had problem, but needed to transition from thinking of it as a merchandising and assortment issue to a supply chain problem. In any case, retailers had to rethink how they forecasted and positioned and replenished inventory.

This trend towards centralized planning is even visible in organizations that one would normally not think of in terms of retailing. For instance, at the UK’s National Health Service (NHS) each hospital was ordering and managing its blood supplies separately. The NHS centralized planning for holding stock, manufacturing product, and what it needed from donors. Their new automated SCP system collects demand data every 15 minutes from all the hospitals. They have lowered delivery costs by 20% and reduced component wastage by 30%.

Centralized SCP merges the facts on the ground with wide-ranging optimization to tame growing demand complexity and ongoing change.

Click below to view a 2 minute video about O2 centralizing their supply chain and inventory replenishment.

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