“A ’moment of truth’ comes when you are making the pre-season allocation to your stores. Getting it wrong can lead to lost sales or the likelihood of huge markdowns.”
Building good forecasts and optimizing prepacks are two key steps towards having a successful season. But yet another “moment of truth” (or opportunity to mess things up) comes when the season is about to start and you are making the initial allocation to your stores. Getting this allocation wrong can lead to availability problems in some stores (resulting in lost sales), and overstock in others (with huge markdowns to follow). So how does one avoid this?
In the first instance our advice would be – whenever possible – not to allocate too much at the outset. Many retailers allocate their entire central stock before the season to avoid later deliveries. Of course it may be that they don’t have a DC to hold stock in. However by doing this they deny themselves the opportunity to react to the actual sales when they begin. All they can do is hope they got the initial allocation right. As it can never be perfect, the result is often a combination of availability problems, markdowns, and costly transfers between stores. As your sales begin (and you get sales data on which to base decisions) then move to store-driven replenishment. Towards the end of the season make a final allocation that clears out your remaining stock. This Push-Pull-Push approach generates good results. For shorter seasons you might have to skip the Pull phase but still the same principle applies – don’t over-allocate early in the season!
Building good forecasts and optimizing prepacks are two key steps towards having a successful season.
The next step is then to make the initial allocation. Where thousands of items and hundreds of stores are involved this can be quite an ordeal. Luckily today’s technology liberates you from putting most of your energy and resources into less productive tasks (such as data collection) rather than on actual planning. This is where good support from a modern supply chain planning system really makes a difference. The easier the process is, the easier it is for you to apply more sophisticated strategies.
So what to consider when deciding how to allocate stock? Let us suggest three areas to consider in executing the allocation, as the basic approach:
Three Key Areas to Consider for Successful Initial Allocations:
- Decide which allocation key to use – in other words which store-level measure or parameter is best used to decide on the split between stores: Forecasts are the obvious choice, although it is sensible to be mindful of their likely quality. Sometimes it is better to use sales from the previous comparable season, or sales figures or a forecast from a reference product – and if sales of a single line are too difficult to estimate then go up the hierarchy to vectors like category sales or forecasts.
- Apply different stock strategies for different stores – as they might have diferent priorities for the business; wanting to, for instance, allocate enough stock to a few flagship stores to ensure compelling displays, and less to smaller stores where sales are lower and the risk of end-of-season excess stock is clearly higher. You can prioritize accordingly.
- Understand your store constraints: The above strategies might be affected by other factors, such as having enough stock. You might, for example, need to ensure all stores get at least one case, or enough to build a good display or simply to fill a rack. So being able to account for such considerations is important.
After having settled on those factors you wish to take into account, you should form a view about the quantities of each item needed for each store. Then the final step is to decide on timing, at which point you should take potential capacity constraints into account. Keeping a constant watch of your planned allocations via your forecasting tools would be the starting point here – allocations should alert you, should potential capacity problems arise, such as with transport, DC picking staff or store staff. Many companies’ inventory includes perennial items that need continuous replenishment (e.g. underwear) and, obviously, that should be taken into consideration at this stage of capacity planning.