A recent Reuters article headlined “U.S. department stores tap brakes on stocking for holiday season” points out that “Macy’s Inc, J.C Penney Co Inc, Kohl’s Corp, Nordstrom Inc, Dillard’s Inc and Hudson Bay Co’s Lord & Taylor are among the retailers buying in smaller batches with shorter lead times this year…” This trend is not limited to the retail stores. With fluctuating demand patterns, retailers, ecommerce companies, manufacturers, and distributors alike are actively addressing the relationship between inventory and customer service in their quest for operational excellence and profitability. And that has a dramatic impact on planning and execution at all nodes of the supply chain.
For suppliers, the message is clear. Expect your customers to demand more from you this year and in the future. They will want faster re-supply in smaller quantities. And they are placing orders much later (expecting shorter lead times). For example, the above-referenced article says: “Traditionally, retailers lock in most of their purchases nine months to a year in advance. This year, retailers started placing a large portion of their holiday orders three to four months before the holiday season, and are refreshing fast-selling items within as little as six to eight weeks.” These dynamics are requiring suppliers to work more closely with their key customers.
It would appear that businesses are just transferring the inventory responsibility from their own storerooms to their supplier’s/distributor’s warehouses, by demanding more—shorter lead times and smaller quantity shipments more often. These moves are quite pragmatic. They are effectively reducing their own inventory investments, along with risk of excess and obsolete inventory. The first sentence quoted above finishes with this: “…and relying on a more dynamic demand forecasting process than in the past, according to sources familiar with these companies’ practices.” Businesses, in fact, are conducting their supply chain planning with vetted assumptions and data-driven insights.
Reading between the lines, many of these businesses are balancing between forecast accuracy, inventory policy, and customer service. More importantly, they are looking at their businesses more holistically and looking at sales across multiple sales channels that they have including e-commerce, retail stores, selling through partners such as Amazon, and more. Rather than just stock a lot of materials and products and hope they got it right, they want to proactively manage inventory and replenishment to optimize availability across locations and channels. And good for them! But this all places a significant burden on suppliers. Will suppliers simply hold more inventory in their own warehouses and distribution centers and shoulder the risk of excess and obsolete inventory or use this change as an opportunity to fine-tune their own supply chains?
Most suppliers and distributors are aware of inventory optimization initiatives—having the right products in the right locations at the right time and in the right quantity (the least amount to do the job) to satisfy customer demand and provide a differentiated customer service. This change in expectation at the customer end of the supply chain requires a change in the assumptions that drive inventory optimization all the way up the chain. The result will likely be a multi-faceted strategic change in supply chain planning and execution. Suppliers will want to get closer to their customers, to better understand their demand, and to reduce the impact of Bullwhip Effect. They will want to plan their own supply chains with data-driven decisions, have a sharp focus on customer and inventory segmentation, engage in a structured demand and supply planning process, update their supply chain plans with daily operational and sales fluctuations, and possibly have more inventory at the far end of the chain.
Inventory planning and optimization tools are fully prepared to respond to this change in demand. Suppliers need to refine demand plans to reflect what the retailers are expecting to do and the systems will develop the optimum inventory positioning to support them. Overall distribution costs might increase, but inventory optimization will minimize that increase and provide good visibility so sales and operations planners will not be blindsided.
Since businesses are now more focused on forecasting and a more responsive supply process, it is likely that they will also be more open to collaboration with their supply chain partners. Collaborative planning has proven to remove delays and reduce costs throughout the supply chain. When the business (retailer in this case) views suppliers as partners rather than vendors, customer service improves and the entire supply chain benefits.
The change in approach described in the article is presented as a solution to a holiday related problem. This could very well be the new way of doing business that redefines relationships, brings in supply chain planning solutions, and institutes processes that pays dividends both in the short and long term. This is supply chain 4.0, in action and signals the start of a new day in supply chain efficiency.
Contact us if you would like to learn more about DemandCaster inventory and supply chain planning software or would like to schedule a demo.
