Friday, September 10, 2010

First Run at Forecasting

This is the first in a series of articles discussing the art and science of forecasting. A 'science' with regards to the mathematical formulas used in determining needs, and the 'art' of applying assumptions that defy all attempts at computerization.

Forecasting may consists of multiple systems addressing multiple objectives. For example, merchandise planning, labor management, planograms, replenishment and allocation – each deserve a slightly different approach. In short, forecasting should be a single objective driving multiple actions.

Grocery stores, having huge categories, may use forecasting to forecasts categories in a non-product specific environment. Small retailers, such as convenience stores, who often have smaller categories when subdivided into types such as chips, cookies, candy, etc., are more suited to forecasts by specific items. Although Category Management (CM), with regards to convenience stores, may be important in determining and maintaining product mix, once the proper mix has been established, CM provides no help whatsoever in forecasting. This type of forecasting is called 'demand forecasting' as opposed to forecasting at the category level.

Demand Forecasting uses three major sources of history. The first consisting of orders generated for the stores and/or inventory receipts. The second is the scanned data from the Point-Of-Sale (POS, or cash register). The third source is frequent and timely audits. In order to be accurate these functions must be networked in real time, else the disposition of the inventory will always be a wild-guess and contributes to over-stock and out-of-stock situations. Suppliers have a bad habit of replicating the last order with no regards to the actual stock on hand in the store, oftentimes selling the store operator inventory he does not need. It's estimated that the average convenience store has invested in 100% more inventory than needed to meet customer demand. Given a limited amount of space, this means the average store could operate in 50% less space or double its product lines.

Items that move less than once per week are called 'slow movers'. Discounting items that are 'dead', slow movers probably occupy 50% of your inventory. If you invest a dollar in something and it takes a year to sell it, it's costing you money. It makes no sense to display a box of twenty-four candy bars that will take you eight months to sell. One of the primary reasons for overstock can be accredited to minimum order levels imposed by suppliers. Redistribution of slow movers might save you a bunch of money. You don't need a bunch of delivery trucks to redistribute. Put them on the store supervisor's desk and have him drop the products off when he makes his rounds. Other reasons for slow movers include out-of-season and cannibalization by other products.

Items which are classified as 'good sellers' in the morning may become 'slow movers' for the rest of the day. Dropping the price later in the day can put more money in your pocket. This is difficult to do if you don't have an intelligent pricebook linked to your POS.

Not having an efficient way to notify suppliers that you want to discontinue certain items can be another big drain on your cash. I once worked in a store that had 1,000 days of Orbit Wintergreen chewing gum stashed under the cigarette display. The last time I looked, the pile was still growing. If the supply doesn't know what you're selling, he assumes you're selling the inventory because your store manager simply puts the order in the stock room or hides it under the counter. The lack of communications between your convenience stores and your suppliers may be killing you.

Seasonal items are one of the greatest contributors of excess inventory because a supplier will generally deliver too much of it to every store. If it concerns only one store, the situation is manageable. But if you have fifty stores receiving the same amounts of inventory, it can lead to disaster. Out of season inventories should be warehoused so they can be used to restock the store(s) when the season comes around again.

Cannibalization of products can wreak havoc on a Category Management system because the little savages are difficult to identify. You may notice a category's sales have suffered, but that's all you know. If you don't have a way to audit individual items, I would suggest you have someone physically revisit the category and pull or re-price items that appear to be priced too low. Of course the obvious remedy would be to switch to an item-level method where you could monitor the effects of cannibalization in real time.

Here's another neat trick that can put extra dollars in your pocket. If your supplier imposes a minimum order on you which will take you eight weeks to sell, ask him to deter payment until the following month. It won't take him long before he gets the message and cuts your delivery in half. In other words, sit down with your supplier and remind him, these are difficult time, and you can't afford to pay for items in June, when you can't get your money back until Christmas.

Some items don't sell well enough to justify their being on your shelves, but you have to carry them because customers expect them to be there. Quite often they will switch from being out-of-stock to "Oh my God!" On these items you will need to adjust your forecast to zero in on the best profit that can be gotten from those items.

Tracking the value of promotions is difficult if not impossible in a category management environment and the reasons for an increase or decrease in an item's movement may be ambiguous. Was it cold? Was it hot? Or, was there a local football game nearby? In addition, the life cycle of a promotion can be effected by the promoted product, a companion product and/or a cannibalized product. By having the ability to monitor promotions in real-time, it will be easy for you to identify whether the promotion was good or bad.

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