Cash is king. Yes, cash transactions are important but today we are specifically talking about working capital cash. In any retailer, cash is a function of how much inventory is in the business, where it sits in the supply chain and how quickly it is sold, and therefore turned into cash. Having a light, agile business where your cash (in the form of stock) is in the right place, at the right time, in the right quantity is vital for strong retail performance.
The biggest impact on working capital is stock management. Stock management can be greatly improved by taking a smarter approach to planning replenishment quantities and implementing agile allocation methods which allow retailers to sell stock more efficiently.
Poor stock management adds pressure and cost into a supply chain, it is often caused by basic tooling applying a one-size-fits-all approach to every product. This used to be seen as a time and efficiency benefit but in today’s competitive retail market is no longer suitable.
We see many retailers calculate their target stock by applying rigid levels of cover across all SKUs, regardless of their performance. TPC advises against this “one parameter fits all product” method and instead, we recommend that the target stock units should be the sum of demand stock target (forecasted demand) and safety stock (stock buffer). Safety stock acts as an availability guard against under forecasting. Flexing safety stock based on 3 factors allows for smarter, more accurate replenishment calculations.
The 3 factors impacting safety stock are:
SKU importance – through product segmentation based on volume, value and margin, TPC attributes each SKU a segment grade from A to E depending on its performance within its product category. Assigning each segment grade an ambition service level, we can flex safety stock so higher-performing SKUs have a larger stock buffer.
Demand volatility – through the weekly measurement of historical forecast accuracy, TPC can derive how volatile a SKU’s demand is. SKUs with high demand volatility, and thus lower forecast accuracy, require more safety stock than a SKU that sells consistently every week. This allows us to increase service level on highly volatile SKUs and reduce stock holding on highly stable SKUs.
Lead Time – the longer the lead time of a SKU, the increased chance of change between the point of order and the point of delivery. Thus, SKUs on longer lead times require a higher safety stock quantity.
Smarter replenishment increases overall service level (weighted availability through a customer lens) by up to 5%pts whilst reducing total stock holding by up to 35%
Good stock management allows retailers to have more control over their merchandise by keeping stock as high up the supply chain as possible. Firstly, warehouse space is almost certainly cheaper than store space, allowing for smaller store premises. Secondly, it allows the allocation to react to sales in an enhanced, agile manner. Once stock reaches a store, it is stuck there until it eventually sells – reducing store stock and holding an increased proportion of goods in the warehouse allows retailers to allocate more stock to the top-performing stores. This releases two benefits:
Increased full-price sales
Reduced markdown spend
By decreasing store stock and keeping a higher proportion of goods in the warehouse, we can reduce the volume of stock allocated to slow-selling stores. This allows more stock to be allocated to high performing stores to react to and fulfil customer demand and take stock out of stores that do not have demand and would require a markdown to create demand costing sales and margin.
Improved allocation management can reduce store stock by up to 50% causing an increase to full-price sales of 15%
In a retail world of tightening trading economics, managing inventory more tightly is rapidly rising to the top of the “to do” list. Having the right amount of stock where and when the customer wants to buy it is critical. Optimising this requires far better demand forecasting and greater structural agility to respond accordingly. Less “nice to have” and increasingly essential.
At TPC we have completed multiple projects for both fashion and general merchandise retailers helping them improve their stock management, delivering real-life benefit. If you wish to get in touch, please contact us through our website or LinkedIn.