The Consumer Can Be Predictable! The Question Is: "Are you listening?"
As a kid growing up in New Delhi, I remember that every Saturday morning at around 10am we had a vegetable hawker come by our house. He would bring every vegetable my mother wanted. He would always have sufficient quantity and the right quality.
The hawker was the supplier for our street which probably had close to 30-35 families.
When I think about it now a few things jump out at me:
(1) The options available were limited. The hawker did not bring 4 different varieties of potatoes OR 3 different varieties of peppers. Even under these limitations my mother was a happy consumer!
(2) The quality was predictable. He knew that his products had to meet the highest quality standard for a guaranteed business.
(3) The quantity we bought from him was predictable. Unless we had guests coming over, we would always buy a predetermined amount of vegetables from the options available. Furthermore, he always carried safety stock.
(4) If he did not have something, he would take down the request with the guarantee that it would be there next week.
Sounds simple enough... Right? The guy had guaranteed business every week from all the 30-35 families he serviced. Imagine how simple his demand forecasting model would have been! (...a simple Moving Average maybe?...flat line...no seasonality...) How many of us would love to have predictable demand like that?
So how was he able to provide approx. > 95% Service Level by carrying minimal inventory? How was he able to turn his inventory faster than most of us can imagine?
Here are my takeaways:
(1) Offering options and wanting to satisfy every demand for every customer has almost an exponential effect on the inventory that you are going to carry. Surprisingly, not every consumer is really looking for an alternative for a product you already carry.
When you think about the development of Big Box Retailers – one of key ideas that led to their development is the fact that they did want to offer variety to the consumers - both in product as well as price points. Think about how much inventory they carry. I am confident that you can apply the 80-20 Rule on their inventory and quickly see that approximately 60-80% of their Inventory does not turn as quickly as the 20-40% of the inventory. The reason is simple – the slow turning inventory is intended for the “just-in-case” consumer!
If resources are not a problem for you then you are probably OK with the holding costs that come with holding this additional inventory for the "just-in-case" consumer. You have probably already done the math to understand the impact of a "potential" lost sale vs. the holding costs. And if your strategy worked well in the recession OR periods of slow demand - you my friend have a great business model!
(2) Retailers do like and do want predictability in demand. It helps in reduction of the safety stock they need to carry.
(3) Listen to your consumers. Listen to what they want. In most cases, the consumer is already telling you what they want through their Demand Patterns. And yet, we choose to ignore signs because we are not willing to accept them.
Here are some examples – I surveyed 30 friends of mine and asked them certain questions. The results did not surprise me at all:
(a) 100% of them agree that the DVD sales are declining because of people switching to digital media. Only 10% of them were going to buy a DVD in the next 6 months. (Yet you will find Stores with rows and rows of this!!)
(b) 90% of them agree that they use only the Word Processor and the Spreadsheet from a commonly sold Office Suite. (Yet you will always be forced to buy the whole suite!)
Your buying decisions on the products you want to stock on your shelves should not be exclusively based on the wisdom of the few but should also be influenced by the collective wisdom of the actual consumer demand. (Refer to my earlier post on “Bullwhip Effect”) Easy ways to determine this is through Consumer Surveys, Data Mining demand patterns on styles/categories/products/etc..
(4) The variability in Consumer demand can reduced by offering fewer options! A simple way to controlling inventory is offering fewer options. (Think about why Car Manufactures mostly offer Dealer Based Customizations) Do not try to satisfy every possible consumer need. Think about the 80-20 rule I mentioned above. Invest time and evaluate the Cost-Benefit of Lost Sales vs. Holding Costs.
Feel free to post comments below. I look forward to hearing from you.
Until my next post!
Best regards,
-AS
When I think about it now a few things jump out at me:
(1) The options available were limited. The hawker did not bring 4 different varieties of potatoes OR 3 different varieties of peppers. Even under these limitations my mother was a happy consumer!
(2) The quality was predictable. He knew that his products had to meet the highest quality standard for a guaranteed business.
(3) The quantity we bought from him was predictable. Unless we had guests coming over, we would always buy a predetermined amount of vegetables from the options available. Furthermore, he always carried safety stock.
(4) If he did not have something, he would take down the request with the guarantee that it would be there next week.
Sounds simple enough... Right? The guy had guaranteed business every week from all the 30-35 families he serviced. Imagine how simple his demand forecasting model would have been! (...a simple Moving Average maybe?...flat line...no seasonality...) How many of us would love to have predictable demand like that?
So how was he able to provide approx. > 95% Service Level by carrying minimal inventory? How was he able to turn his inventory faster than most of us can imagine?
Here are my takeaways:
(1) Offering options and wanting to satisfy every demand for every customer has almost an exponential effect on the inventory that you are going to carry. Surprisingly, not every consumer is really looking for an alternative for a product you already carry.
When you think about the development of Big Box Retailers – one of key ideas that led to their development is the fact that they did want to offer variety to the consumers - both in product as well as price points. Think about how much inventory they carry. I am confident that you can apply the 80-20 Rule on their inventory and quickly see that approximately 60-80% of their Inventory does not turn as quickly as the 20-40% of the inventory. The reason is simple – the slow turning inventory is intended for the “just-in-case” consumer!
If resources are not a problem for you then you are probably OK with the holding costs that come with holding this additional inventory for the "just-in-case" consumer. You have probably already done the math to understand the impact of a "potential" lost sale vs. the holding costs. And if your strategy worked well in the recession OR periods of slow demand - you my friend have a great business model!
(2) Retailers do like and do want predictability in demand. It helps in reduction of the safety stock they need to carry.
(3) Listen to your consumers. Listen to what they want. In most cases, the consumer is already telling you what they want through their Demand Patterns. And yet, we choose to ignore signs because we are not willing to accept them.
Here are some examples – I surveyed 30 friends of mine and asked them certain questions. The results did not surprise me at all:
(a) 100% of them agree that the DVD sales are declining because of people switching to digital media. Only 10% of them were going to buy a DVD in the next 6 months. (Yet you will find Stores with rows and rows of this!!)
(b) 90% of them agree that they use only the Word Processor and the Spreadsheet from a commonly sold Office Suite. (Yet you will always be forced to buy the whole suite!)
Your buying decisions on the products you want to stock on your shelves should not be exclusively based on the wisdom of the few but should also be influenced by the collective wisdom of the actual consumer demand. (Refer to my earlier post on “Bullwhip Effect”) Easy ways to determine this is through Consumer Surveys, Data Mining demand patterns on styles/categories/products/etc..
(4) The variability in Consumer demand can reduced by offering fewer options! A simple way to controlling inventory is offering fewer options. (Think about why Car Manufactures mostly offer Dealer Based Customizations) Do not try to satisfy every possible consumer need. Think about the 80-20 rule I mentioned above. Invest time and evaluate the Cost-Benefit of Lost Sales vs. Holding Costs.
Feel free to post comments below. I look forward to hearing from you.
Until my next post!
Best regards,
-AS
Hey Anupam,
ReplyDeleteThis is Aditya Gupta(PESIT). Interesting post.
WOuld like to know how I can build such intelligence in our jewellery store. Are there readily available tools(preferably SaaS types) to help manage inventory and bring out that intelligence.
Hello Aditya,
ReplyDeleteThank you for your note. It’s hard to provide the “right” answer without understanding the underlying data structure.
Let me try to give you some pointers -
(A) Before you start on the path of aquiring a tool – my first recommendation would be to make sure your data is accurate. Often companies spend much of their time making sure all the data definitions and sales history information is accurate.
(B) I would start by looking at the sales history for each category and understand if there is any underlying seasonality. For example, you probably see a bump in sales around November through March of every year due to the Indian Wedding Season. You can use this to plan your sales and inventory. (In the US, retailers often will see a bump during Black Friday and plan for this inventory as early as July of that year depending on lead times.)
(C) You could also estimate the sales lift you get when you put a product on promotion. There are multiple ways to do this and different softwares may handle it differently. A simple approach could be by using the closest non promoted data points as a reference.
(D) I have always been curious about tools out there that perform price elasticity computations. It probably affects your industry more because of the fluctuations in price of gold and silver.
Since it is difficult to nail the sales forecast 100% of the time, it would make sense to research tools that get you the most accurate forecast. I would research tools that can provide some assistance on (D).
Once you have your sales forecast taken care of – managing inventory in any tool is a piece of cake!
Let me know if you have any further questions.
Good Luck!
Best regards,
-AS