Retail Inventory Management for Hard and Soft Goods: Challenges and Strategies

Forecasting: you’re going to need a bigger boat…

Forecast accuracy is typically much better for long-life items than it is for fashion items, for obvious reasons – you have a lot more history to go on and a more predictable seasonality, which lends itself to “lights out” automation. Short-life products turn over quickly and only a fraction of them return in subsequent years, so forecasting their demand has traditionally depended on merchant judgment to augment automated systems that use machine learning forecasting techniques.

These differences have led many retailers to assign these products to different inventory management silos. But the reality is, there is a lot of cross-over in forecasting techniques that can be applied by a team that is looking at the whole picture and can make intelligent tradeoffs.

For example, there are replenishment products that are on the shelves all year round, but which sell majority of their units in a handful of weeks during the holidays. These products can benefit from some of the forecasting techniques used for seasonal items when their peak selling period approaches. By the same token, other items may start out as fashion buys, but then transition to long-life replenishment. Managing that move effectively depends on a seamless shift in the forecasting process.

With different teams managing the forecasting in these situations, there is a greater likelihood of failing to use the best forecasting approach demanded by circumstances.

Maximizing profitability requires different methodologies

Short and long-life products have very different inventory management costs. For long-life products, the management costs are the ongoing carrying cost of the inventory held in stores on the one hand, and lost margin incurred when demand exceeds available store inventory on the other. Your replenishment system should be designed to find the “sweet spot” that minimizes the sum of those two costs.

For short-life products, the profit-optimal goal is to maximize the full-retail sell-through of the inventory purchased from the vendor. That is to say, you want to sell as many of the units you bought at as close to your original target retail price as possible. To do that, you must accurately determine the right number of units to buy, the best timing and placement of store allocations, and the optimal timing and depth of markdowns as the season progresses. This is best achieved with an integrated system that coordinates the buy, allocation, and markdown decisions to arrive at the most profitable solution.

The important thing is this: when measuring the profitability of your business, you should apply a different yardstick to your short and long-life products.

Competing for Space & Dollars

In reality, most retailers have a mix of short and long-life products, but the proportions vary based on the focus of the business. A fashion retailer will skew heavily towards short-life items, but will often sell some long-life products that complement the fashion assortment and provide a more predictable revenue stream. Similarly, a business that is predominantly long-life products will also sell some fashion items to boost visual interest and foot traffic.

These two types of products are often managed by separate groups that know how to maximize the profitability of their respective assortments. But this separation of responsibilities can lead to problems when teams start competing for floor space and purchasing dollars. Rather than looking at maximizing overall profitability, preference is often given to the type of merchandise that is predominant in the business, while the other is relegated to a “supporting” role whose profitability is not considered as important.

For this reason, it’s important for the management team to have a shared profitability goal, and work together to find the right stocking level for every product, whether it is short or long life.