Demand Forecasting Success Stories
By Tom O'Reilly / November 2016Insights
For retailers, making better business decisions depends heavily on the ability to forecast demand accurately. By predicting demand at the store and SKU level, retailers can optimize order quantities, stock levels and store shipment allocations. Most importantly, retailers are better able to compete for shoppers’ attention and earn their loyalty.
Business management software provider, iVend Retail, describes the financial benefits of accurate demand forecasting that satisfy consumer appetite and extend profits over the long term:
- Return on capital – Too much inventory is a drain on capital. Monitoring consumer buying behavior and other factors in demand prediction allows retailers to have just enough products without high inventory.
- Cash flow – Detailed forecasts are critical to maintaining cash flow that might otherwise be tied up in extra inventory.
- Revenues -Forecasting helps companies with better revenue management by adjusting sourcing and distribution strategies and minimizing inventory.
- Earnings -Accurately predicting demand helps in precise supply chain decisions to avoid costly write offs that are created when inventory becomes obsolete and require costly disposal.
The objective is to maintain and control a sufficient but moderate inventory without being excessive.
Here are a couple of success stories about demand forecasting and retail inventory advancements from Erply, a firm specializing in point of sale and inventory management technology.
Clothing retailer H&M is popular for its high-trend fashions and budget-friendly prices. With 3,700 stores in 55 countries, H&M has no factories of its own but manages more than 700 suppliers, a massive supply network, warehousing and logistics.
Affordability is achieved because H&M manufactures 80 percent of its retail inventory in advance. Throughout the year, the retailer introduces the remaining 20 percent based on present-day market trends.
Flexibility and short lead times reduce the risk of buying the wrong items. By adopting a modern IT infrastructure, H&M has brought the average lead times down by 15 to 20 percent. This allows H&M stores to restock quickly with the best-selling products at economical prices.
Another success story is Spanish clothing and accessories retailer, Zara, which has 2,100 stores in 88 countries. The brand is renowned for its ability to deliver new clothes to stores quickly and in small batches. Twice a week at precise times, store managers order clothes, and twice a week, new garments arrive like clockwork.
Zara’s supply chain is its competitive advantage. In-house production allows the retailer to be nimble in the amount and variety of new products to be introduced.
Six months in advance, Zara commits to only 15 to 25 percent of a season’s line. The retailer orders only half of its line at the start of the season, which means that up to 50 percent of its clothes are designed and manufactured during the season.
If a style gains in popularity, Zara reacts instantly, creating a new design of the in-demand style, then gets new items into stores while the trend is still peaking. Demand spikes can be addressed quickly because the Zara factory usually operates at full capacity only four days a week, leaving flexibility for extra shifts.
Zara’s inventory management software lets the store managers provide customer feedback on the items shoppers prefer and what’s not selling. Zara’s designers keep sketching, based on the data. The constant tweaks to clothes give customers a sense of scarcity and exclusivity. This strategy allows Zara to sell more items at full price. There are fewer mark-downs and less inventory piling up in any part of supply chain from raw materials to finished products.
With inventory optimization models, the retailer can determine the quantity to be delivered to a single store twice a week. The stock delivered is small, so if the hastily created design does not sell, there’s no risk of high inventory.
The core of Zara’s success is a centralized inventory, product and logistics management system. Operations are monitored in real time and adjusted accordingly to empower demand forecasting.
A key reason retailers need to intensify their focus on demand forecasting is to achieve greater alignment across their organizations. Real-time visibility allows integration with merchandise financial plans, and to align location with assortment, category, space, and pricing. An enhanced demand forecasting strategy allows retailers to have the most accurate, up-to-date information and create their own success stories.