Solving the Supply-Demand Puzzle
What a difference a year or two can make. During 2020 and 2021, retailers struggled to keep up with demand for many items, largely due to supply chain bottlenecks and labor shortages.
Shortly after the pandemic started and through last year, a significant reduction of markdowns and in-store promotions took place because retailers could leverage low inventory and high consumer demand to sell items at full price. Ships idled at ports. Unloading delays ensued. A truck driver and warehouse worker shortage slowed the movement of merchandise.
That was then, this is now. Today, retailers face a glut of certain merchandise and weaker consumer demand. Items once languishing in cargo ships in ports worldwide have made it to store shelves and warehouses. Simultaneously, elevated inflation and fear of a recession have caused consumers to tighten their pocketbooks.
With demand down and merchandise levels up, it’s a whole new ballgame. Retailers selling items such as consumer electronics, furniture, sporting goods and apparel are having to pivot their sales plans and adjust supply chain processes due to excess inventory.
From Shortage to Surplus
A drop in demand for discretionary goods is forcing retailers to face inventory pileups. After reporting a 90 percent decrease in profits for the second quarter of 2022, Target’s summer discounts will continue into the fall as it marks down inventory, including TVs, décor and clothing. Walmart recently released its annual top toy list and is offering more rollbacks than in previous years.
And Kohl’s, Gap, Carter’s and other chains are trying a “pack and hold” strategy on for size. Overstocked on apparel, these brands will put unsold items back in their warehouses with plans to reintroduce them with future clothing lines.
Hoarding excess merchandise provides an alternative to discounting or writing off items so retailers can try to resell at higher prices when consumer demand improves. But there’s a caveat. Keeping excess inventory takes up warehouse space and is costly. Plus, some discerning shoppers might turn their noses up at past years’ fashions when brands reintroduce them.
Predict and Plan Better
Demand forecasting is tough. During the pandemic’s onset, unforeseen panic buying caused stock-outs while other items gathered dust on the shelves. People couldn’t get enough food staples, toilet paper and leisurewear, while sales of business attire and cosmetics declined significantly.
Having the wrong product mix eats into retailers’ profits. Often, they discount or write off items or send extra goods to liquidators that sell merchandise at up to 70 percent off retail value.
To protect profits, retailers can bridge the gap between promotional activity and inventory management using a pricing and promotion analysis (PPA) solution that leverages machine learning algorithms and price elasticity models to create promotion-influenced forecasts.
Such a solution enables planners to perform detailed what-if analyses to better identify the impact of pricing and promotion on inventory. This helps them determine whether levels are adequate. A PPA benefits retailers wanting an improved way to model the price-sales-inventory relationship so they're likelier to get demand forecasts right.
Down With Discounts, Up With Profits
The pendulum has swung. Once short of inventory, many retailers now face an overabundance. Sure, shoppers are paying a premium for groceries like chicken, eggs and meat and on automobiles, but work-from-home loungewear or furniture? People aren’t biting like they were the past two years.
A PPA can help retailers come closer to getting the supply and demand equation right. It can help them adjust their supply chains and get the correct assortment of items on store shelves so write-offs and discounts decrease and revenues increase.
Mark Balte is executive vice president of supply chain innovation at Logility, a platform for supply chain optimization that uses machine learning to automate planning, augment performance, and accelerate decision making.
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Mark Balte is executive vice president of supply chain innovation at Logility. His leadership and creativity are crucial to driving innovation in Logility’s cloud strategy, product architecture, advanced analytics, and mobility. Mr. Balte has more than 30 years of experience in development, implementation and support of supply chain software solutions. Prior to leading the research and development organization, Mr. Balte helped customers configure and deploy Logility Voyager Solutions. Mr. Balte holds a Bachelor of Science degree in Mathematics from The University of the South (Sewanee) and a Master of Science degree in Operations Research from the Georgia Institute of Technology. He is a frequent guest lecturer for the supply chain management graduate program at the Georgia Institute of Technology.