The Importance of Seasonal Category Budgets
I recently participated in a strategic planning session with a major multichannel retailer's inventory planning professionals. The attendees represented various sales divisions of the company, and their combined expertise encompassed many years of inventory planning experience.
Our top challenge: How to capture accurate sales data and effectively manage its impact on merchandise and inventory planning when providing a quality omnichannel customer experience?
There was healthy disagreement in the room, but one topic everyone agreed upon was the need and benefit of establishing high-level demand plans or budgets at a product category level.
It's a rule of statistics that the higher the plan level (i.e., more data is included), the more accurate the resulting demand forecast. For retail inventory planners, this is a fundamental best practice. We see it time and again with our customers at Direct Tech. The ability to establish accurate product-level demand plans increases significantly when higher level, top-down planning also occurs.
For example, if a retailer has a 20-product category of polo shirts, it should be able to predict category sales, over time, within 5 percent to 10 percent of actual results, while the average forecast error for each product will be 40 percent to 50 percent.
This more accurate, higher-level forecast provides three important benefits to the business:
- Improved overall forecast accuracy. Accurate category-level forecasts provide a basis that directly results in more accurate product forecasts.
- The financial inventory investment for the business will be accurately spent in the correct relationship with product category sales. Think of inventory planning as an investment portfolio. You want to spend your inventory dollars in a thoughtful, balanced manner.
- Increased customer satisfaction. There will still be product-level imbalances, but when product "A" is out of stock, product "B" will still be in stock, increasing the likelihood of a sale and a happy customer. Remember the projected error rate! Without a category-level plan, more of the inventory investment would be spent in a product category that's of no interest to the customer.
Once you understand it, planning at the category level (in addition to normal product-level planning) makes sense. If you're not currently planning by category, I'd strongly encourage you to get started as soon as possible.
Joe is Vice President of Product Solutions at Software Paradigms International (SPI), an award-winning provider of technology solutions, including merchandise planning applications, mobile applications, eCommerce development and hosting and integration services, to retailers for more than 20 years.
Joe is a 34-year veteran of the retail industry with hands-on experience in marketing, merchandising, inventory management and business development at multichannel retail companies including Lands’ End, LifeSketch.com, Nordstrom.com and Duluth Trading Company. At SPI, Joe uses his experience to help customers and prospects understand how to improve sales and profits through applying industry best practices in merchandise planning and inventory management systems and processes.