Optimizing the Supply Chain for a Successful Holiday Season
With the holidays upon us, retailers are preparing for a successful season in the midst of a trade war. Given the volume and velocity of sales during this season, supply chain decisions will be make or break for many retailers. As consumers start seeing targeted holiday ads, retailers will need to ensure highest on-shelf availability (OSA) and online availability (OLA) at an optimal cost to earn a piece of the $1.1 trillion holiday retail sales predicted by Deloitte.
This massive number creates an opportunity for business growth, and retailers need to capture their share by optimizing product flows through their supply chains. While it can be a daunting task, there are specific areas retailers can focus on to have the most impact.
Understanding and Accounting for Demand Drivers
Retailers must understand the drivers of their forecasts. Factoring in external causals and how they influence forecasts gives supply chain managers a clearer picture of how to flow inventory to prevent costly mistakes, such as under or overstocking items. To be effective, retailers must blend supply chain data with price, promotions, consumer preferences and macro conditions data to identify patterns and to plan for and shape demand.
Relying on historical data alone and failing to account for the external causal factors leads retailers to miss the mark on forecasts and creates stockouts or obsolescence risk. When companies combine external and internal data, it's not unusual for forecasting accuracy to improve by 10 percent to 15 percent. Data helps retailers identify and understand which factors shape and drive demand, ultimately improving their ability to forecast.
Decisioning Based on Cost-to-Serve
Retailers must also consider the total cost-to-serve — i.e., the sum total of costs associated with getting a product into the customer's hands, from manufacturing and sourcing all the way to transportation, warehousing and last-mile delivery. Many retailers operate in functional silos, only focusing on costs within the functional domain. However, the cost of purchasing inventory, shipping it and storing it are all key for supply chain managers to consider when setting price. For example, switching a vendor just based on the cost of acquiring the product can be myopic. If vendors A and B offer similar products, and vendor B charges less but takes twice as long to deliver, the cost of carrying the extra inventory in the system downstream of the buy decision can adversely impact the total cost-to-serve. The current tariff wars and Brexit call for retailers to be prepared with a range of scenarios to optimize cost-to-serve. Without a clear understanding of what the total cost-to-serve is, retailers risk promoting behaviors that result in excessive costs or lost revenue.
Monitor and Optimize Product Flow Paths
During the holidays, retailers offer specialized promotions such as free returns, deep discounts, BOGO offers and specialized packaging. While these promotions are great for consumers, retailers must ensure that they understand the full impact of these promotions, as they could result in significant shifts in demand. Omnichannel delivery choices complicate product flow paths. Retailers will need to optimize their flow paths by bringing together the aforementioned recommendations of accounting for demand drivers and decisioning based on total cost-to-serve.
Sourcing priorities, ordering policies, inventory policies and transportation policies will need to be re-optimized in a holistic manner and the flow paths need to be adjusted. The product flow paths designed for nonholiday periods may not be optimal for the biggest selling season of the year. Given the high degree of uncertainty associated with promotional peaks, retailers will need to run “what if” scenarios to prepare for a range of possibilities. These flow path optimization practices must also extend to any returns. CBRE predicted that online retailers faced $32.1 billion worth of returns on items purchased during the 2017 holiday season, a number likely to rise in 2018. Retailers must understand the total cost of their returns process before deciding to run a returns-focused promotion.
Understanding what consumers expect, the total cost-to-serve, and optimizing product flow paths help make the holiday season the most wonderful time of the year for retailers and shoppers alike.
Dr. Madhav Durbha is the group vice president, industry strategy at LLamasoft, a supply chain management software provider.
Related story: The Value in Having a Digital Supply Chain