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Adapting to the new retail market
How to balance the complex challenges of inventory planning,
assortment rationalization and localization
BY CHRIS ALLAN FOUNDER AND CHIEF STRATEGY OFFICER
QUANTUM RETAIL TECHNOLOGY
The current market is asking retailers some very difficult questions - questions that
their existing processes and tools do not have the answer to. The only certainty is that
consumers are less predictable than ever and buying patterns are changing at an
exponential rate. It takes the proper mix of science, retail intelligence and
merchandising art in order to ensure that every store in a supply chain carries the right
inventory, while maintaining a high service level and market share. In order to adapt to
the new market, retailers need to respond to the demands of the consumer and
rationalize their assortments at a local level.
THE MARKET IS ASKING NEW QUESTIONS
The retailer faces new challenges in the current economic climate
Assortment Rationalization - The single biggest challenge that retailers face is aligning their offering to
local market demand. Grouping stores together, based on size, shape or sales performance will only deliver
average results. Retailers need to monitor the changing demand at every store, so they can align their assortment
in the way that is most profitable and most strategic.
Localization - The current state of the economy has driven the desire to understand the needs of the market at
a lower level of granularity. It has caused a need to create local assortments and inventory fulfillment that reacts to
local needs. Most retailers' existing processes and systems were developed to meet the needs of the average, not
the individual. In order to increase demand in today's markets, the next step for retailers is to take on the challenge
of localization.
Channel proliferation - An increase in the number of ways that a retailer can reach out to their customers.
This is putting a strain on existing forecasting and replenishment processes, in many cases, significantly increasing
the inventory investment required to support the business, with each of the channels being operated semiautonomously and little to no sharing of information or consistency of customer experience.
Internationalization - In order to maintain growth, many retailers are looking overseas, away from their
congested home markets. This has led them into unfamiliar channels, with entirely new supply chain challenges
and constraints, from lead-times and delivery frequencies to a new customer that looks and acts very differently
than they expected.
Supply-chain complexity - The world is not so simple anymore. Whether it is creating new supply-chains to
be more reactive to the consumer or off-shore/near-shore sourcing, the supply chain is no longer a simple
hierarchy for moving product from vendors to stores. It has become a complex supply network with bi-directional
logistics, milk round deliveries and inter-store stock movement, serving franchise partners direct from overseas
suppliers and at the same time, ranging domestic product to them on a long lead time.
© 2009 QUANTUM RETAIL TECHNOLOGY INC. ADAPTING TO THE NEW RETAIL MARKET 1 How retailers can overcome these challenges?
Inventory is one of the most significant investments that a retailer makes and, in many cases, this
investment is a bet - will their offering be successful or not? The costs involved in placing those
inventory chips in the wrong place is substantial, so retailers are trying to get smarter about
understanding where products are likely to sell and why - this does not mean better forecasting, but
understanding how to deal with the uncertainty inherent in the retail environment. This is requiring
retailers to be more reactive to changes that they are seeing, which in turn places more pressure on the
people, processes and systems that are programmed to function on models from the last century. The
new retail market requires an entirely new approach - one that takes embraces and understands the
unpredictability of local demand.
There are two main areas that retailers should focus on right now
1. Assortment planning and rationalization - Looking forward in time and planning how to bring
inventory into the business based on localized customer demand is essential in deciding how to
rationalize a retail assortment. When a retailer can track customer needs in real-time, they can keep their
assortments flexible to monitor the profitability and performance of each product. In time, each store will
reveal its own patterns and tell the retailer how to best align with the specific needs of customers.
2. Localizing inventory - Removing the simplifications from the inventory planning process and focusing
on real-time local demand. Retailers need to create an agile inventory plan that is highly reactive to local
demand fluctuations, allowing the retailer to be flexible and respond to how their customers are behaving
now. This allows the customer to have product availability when and where they want it.
Some minimal things companies can do to stay competitive without
breaking the bank
Optimizing inventory: Retailers need to focus on optimizing their assortments and choosing their stock
based on the financial and merchandise performance of those products. Many retailers are focused on decreasing
their assortments, but less of the wrong products will not create more sales, it will only frustrate customers.
Investing in the right brands and the right products will ultimately bring new energy to the retail market.
Better placing inventory: Placing inventory that has already been purchased to the location where it can
best support the retailer in achieving their goals will allow them to increase their profits and create less markdowns.
Increasing availability: Focusing on which products need to be made available at what locations and when
is a difficult task. But when the right products are available, in the right sizes and colors and in the right amounts,
stores increase sales and increase customer service levels.
Focusing on the intelligent consumer: The market has shifted with the intelligence of consumers. The
economy has further focused the customer on seeking out the highest value for the lowest cost. The environment
has also brought to light new values and new criteria that the customer has begun to judge products on. Retailers
need to recognize the needs of their customers and give them products that meet these new expectations - and
remember, these expectations will continue to change.
Focusing on newness: If a retailer can continually have something new for the customer to see, it will
increase the frequency of customer visits and increase turn rates. This is especially important in fashion and
consumer electronics, where customers have become increasingly savvy and particular. If a retailer can keep up
with the pace of fashion, they'll be able to keep their inventory fresh and unique.
Focusing on inventory placement: Some of the best retailers have not scaled back on their investments
at all, but focused instead on where to place their inventory. In a recession, flat is the new 'good', but by putting
inventory where there is demand, retailers can increase their sales and profit, while better serving their customers
at the same time.
© 2009 QUANTUM RETAIL TECHNOLOGY INC. ADAPTING TO THE NEW RETAIL MARKET 2 Investments that will help retailers pull ahead
The best retailers are prioritizing their investments with processes and tools that will have the largest
impact on their business. While initially concerned with maintaining store comps at the expense of
margin, retailers have now turned their attention to being profitable. This has meant a focus on
inventory - one of their single biggest investments. Retailers need to find ways to better align the
inventory that they purchase with their customers.
Retailers need to look at some of the simplifying assumptions they are making in their supply-chain and
challenge them. They treat groups of stores the same because it makes maintenance quicker and
easier, but does it lead to a better result? Very few stores align with "the average", so does it make
sense to use a single pack configuration? It may seem difficult to allocate on local demand, but there
are tools that can help each store achieve this. In turn, this kind of process will increase sales by having
an offering that fits the space and aligns with the buying habits of each store.
Retailers also need to have the ability to monitor the profitability of every product in every store. It
comes down to building strategic financial and merchandising objectives for each product in their
inventory and empowering customers to drive the assortment, ranging and depth.
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Technology that helps retailers align their assortments with their customers
Technology that monitors local demand in real time
Technology that can track performance based on the strategic business goals
Positioning retail for an economic turnaround
The current economic environment is a gift for the good retailer. It does them the great service of
highlighting all the shortcomings of their supply network and giving them the opportunity to address
those challenges. This means removing the assumptions from their processes, taking away the
simplifications and dealing with the details. Retailers that embrace the fact that their customers have
changed - and that past trends are no longer relevant - will be successful. To do this, they need to align
their supply network with what customers are asking for now, not what the retailer assumed they were
going to ask for. Retailers need to have a holistic fulfillment process that reaches the length of the
supply network and to be built around aligning their inventory investment with local market needs.
Retailers that address these issues will make it through this downturn and position themselves as
strong, profitable, successful and reactive market leaders of the future. Those who do not take the
opportunity to address their issues will have a very challenging time ahead - whether that challenge
comes from the economy in general, or from the better, faster and more innovative competition that this
economy will create.
An opportunity for channel growth
The current environment is seeing a growth in retailers online businesses. While this is important and
aligns well with the customer, it is indicative of the broader trend of channel proliferation. It might not be
enough to have the products that a potential customer needs, but retailers may also have to align with
how, where and when the customer wants to make their purchase decision. This is currently being seen
in online growth, but the target market might have different ideas on how they chose to do business shopping center, web store, mobile phone, catalog, call center, kiosk, Ebay, Amazon, etc.
The real challenge is going to be in maintaining the brand promise across these channels in a
consistent way that addresses customer needs. In addition, customers have little regard for the
boundaries between these channels. If retailers want to keep their loyal customers, they will need to
blur the boundaries too. This will mean an increasingly complex supply network environment to fulfill the
brand promise to customers, regardless of how they choose to interact.
© 2009 QUANTUM RETAIL TECHNOLOGY INC. ADAPTING TO THE NEW RETAIL MARKET 3 Retailers that successfully align their supply network to support the complex multi-touch customer
environment of the future will reap the rewards of that investment. How does a retailer expect to
manage a supply network of this complexity if they have yet to master aligning to local market needs?
These two challenges go hand in hand.
TECHNOLOGY FOR THE NEW RETAIL MARKET
Assortment and Range Planning technology that keeps up with the
new pace of retail
Assortment rationalization and inventory localization sound great in theory, but how does a retailer
create a supply chain that is able to implement these strategies? The truth is, most retailers need better
information and guidance before attempting a complicated feat such as this. Because product demand
changes every day, retailers need to continuously monitor the behavior of the line in every store and
every channel. This will take more time and more analysis than a retailer has available to make a
substantive impact. Unless retailers want to hire hundreds of expensive analysts to scour over sales
data, they need to seek out the right technology to help rationalize their product offering.
Quantum's newest module, Q: Assortment and Range Planning is running on the award winning Q
platform. This will enable retailers to optimize the way they approach the art of assortment and range
planning, financial reconciliation and product exit management.
The software has the smarts to perform all functions of product forecasting, assortment rationalization,
intelligent store clustering and behavior modeling. The module also offers advanced size, pack and
markdown optimization, focused on giving the retailer the highest return on the inventory they are
buying. It does this by analyzing the demand of each store individually and rationalizing the product mix
in each department to make recommendations to buyers as to which stores are over or under assorted
and identifying which products are holding back the category from reaching its goals. In turn, it has the
know-how to calculate the best strategy to manage a product exit and phase-in a new set of inventory.
The system is configured at implementation to a retailer’s specific merchandising goals and metrics,
enabling them to make strategic decisions on their assortments and letting them see the big picture —
things like profitability, sales and service levels.
When retailers align the breadth and depth of their merchandise offering with the localized demand of
their customer need, it increases full price sales and product availability, and ultimately lowers
markdown spend. Q: Assortment and Range Planning ensures that a retailer can create a product
range that will meet both the merchandise and financial objectives, simplifying the complex art of
merchandising.
Quantum: Adapting to the new retail market
At Quantum, we know that retail is changing. You can either change with it, or stick with the same solutions that everyone else
is using. We happen to understand that innovation leads to growth and growth leads to profit and success.
In the last three years, Quantum Retail has grown by 976.4%. That growth is in large part due to the trust that our clients have
invested in us. They know that we think differently.
Because we've worked with the big companies like Retek, Oracle, JDA, SAS and SAP, we know exactly what their solutions are
capable of. That's why we started a company that approaches retail merchandising in a radically different way, one based
on your strategic business goals, one that gets you up and running at the pace of the new retail market.
© 2009 QUANTUM RETAIL TECHNOLOGY INC. ADAPTING TO THE NEW RETAIL MARKET 4