Is AI Our New Best Friend When It Comes to More Surgical Inventory Management...???

I am a skeptic at heart.? I am not an early adopter.? So, I arrived at the recent NRF show not expecting the level of conversation around AI that I encountered.? I remained skeptical until I came across a specific use case:?

In-season inventory management.

I particularly like the “in-season” language because it is all about being data-driven in real time.? The product is sitting in the warehouse and in the stores, selling at highly variable rates by sku/store/region.? The question becomes…is every unit sitting exactly where it needs to be??

I have long held the mantra that one of the huge keys to successful retail is 5R CONTENT:

??????????? The Right PRODUCT…

??????????? At the Right PRICE…

??????????? At the Right PLACE…

??????????? At the Right TIME…

??????????? In the Right QUANTITY.

Notice how much of that list is about design.? One bullet point out of five.? Which in no way minimizes the importance of design.? Without Right PRODUCT, it is game over.? And most brands and retailers do a decent job of delivering on the aesthetic and attitude portion of their Brand Promise.? It’s forecasting demand at the style/color level that is the hard part.? And that is at the macro level.? At the micro or store level, the opportunity for variation in sell-thru rates can be enormous.

But wait, no apparel retailer allocates 100% of any style’s inventory out to the stores in the beginning of the season.? There are allocations for initial floor sets, and then stores are filled in by rates of sale by sku.? Sounds simple.? How wrong can it get?? Well…wrong enough that the whole allocation function needs help and guidance to provide the kind of real-time accuracy today’s market calls for.? And this is where Onebeat comes in.? After listening to an overview of Onebeat’s attributes I was becoming a believer.? But when I read part of a recent press release my attention was fully engaged.

“Onebeat's innovative AI algorithms are designed to learn from similar products, making intelligent adjustments to current trends. This unique capability is particularly advantageous for new SKUs lacking historical data, ensuring retailers can adapt to a multitude of market parameters and stay ahead in their planning.”

“…designed to learn from similar products...”

“…advantageous for new SKUs lacking historical performance…”

Sound familiar?? How many SKUs in the apparel business are new each year?? Exactly.? A LOT. As in MOST.

Now Comes the Hard Part:? SEASONAL CONVERTION

It is that time of the year.? Christmas is in the books, and post-Christmas clearance is in full swing.? Retailers are in the process of selling their way out of Fall/Winter product and starting the process of seasonal conversion.? Except…we still have 60+ days in which we will experience the full brunt of winter weather.? So seasonal conversion at this time of the year happens to be particularly difficult, especially here in the Northeast.

It turns out that Christmas could not be more poorly timed when it comes to executing seasonal conversion.? Wouldn’t it be great if Christmas was February 25th instead of December 25th? Retailers could keep selling Fall/Winter products through the depths of winter, use the last gasps of winter in March for post-Christmas clearance sales to clear out any remaining products, and wake up in April with fully converted spring product…!!!? Perfect!? OK…that’s not a high probability event.? So now we have to solve seasonal conversion with a major holiday and a weather pattern totally out of sync with one another. ?Conversion from Spring/Summer to Fall is a layup.? The whole country converts to Fall at the same time.? Conversion in Chicago and Boston is just a lot more dramatic than Atlanta and Miami.

First rule of seasonal conversion:

??????????? Sell down and out of your prior season inventory on a TIMELY basis…!!!

That does not sound like something that needs to be said out loud, but judging by end-of-season inventory levels I have witnessed several years in a row, both pre and post pandemic, the TIMELY part of that equation is a real challenge.? And it’s not just a question of buying less.? I have to believe that if it was that easy, retailers would do exactly that…buy less.? So, if the planning and the buying are as accurate as they can be, why is there so much residue inventory?? It could be a fashion problem.? The product was not sufficiently on trend to get the planned sell through. But isn’t that always going to be the case?? I mean, it’s impossible to predict fashion sell thru with 100% accuracy, so the retailer always must expect some reasonable level of residue inventory.? The operative word being “reasonable”.

Or, it could be an allocation problem.

There are a lot of layers in the process of trying to execute and allocate to 5R CONTENT.? And the process involves cross-silo communication and partnership.? It’s complicated.? It’s messy.? It involves both objective and subjective input.? It’s Data + Design.? Left Brain + Right Brain.? Let’s look at the layers.

Plan ?- ?OTB? MACRO? ??Establishes overall boundaries and guidelines for the business in total.? It’s a macro demand forecast.? It establishes a ceiling on inventory purchases and levels.

Plan ?-? Scorecard? MID LEVEL? ??The Scorecard breaks down the macro OTB to the category and style level.? It’s a style count by category, not units to be purchased.? It’s a guideline for Design to embrace in developing products at different levels of risk.? Basics.? Seasonal Key Items.? Fashion.? Trend.? It’s a guideline for balancing the portfolio of products early in the process.? It understands the range of seasonal and regional variables necessary for a broad based business, especially a North/South strategy for Fall/Winter/Spring.? The importance of timely seasonal conversion is essential and is considered every step of the way.

Design ?-? Executes to the Scorecard.

Merchandising/Curation ?MICRO ?-? The merchandising team, in collaboration with Planning and Design, does a final edit of the Design effort.? Initial floor-set is finalized.? Flow at the style/color level is finalized.? Regionality, seasonality, and seasonal conversion are top of mind every step of the way.

Orders to factory MICRO? -? Details of the merchandising/curation efforts are finalized for all floor set, flow and seasonal conversion considerations.? Factory orders are placed at the style/color/size level.

Allocation ?MICRO - ?Initial Floor set ???These details were previously finalized, but can be amended based on any new changes in trend at the store level.

Allocation ?MICRO - ?In-season Flow??? Now the business is finally able to allocate based on real time selling and inventory data, at the store and sku level.? Consideration is given for rates of sale at the store and sku level relative to planned exit dates and seasonal conversion.

• Price point management w/r to promo calendar? -? Price points and levels of discount were previously planned, but can now be amended based on real time data, especially for slow sellers.
• Price point management w/r exit date? -? Regardless of the promotional calendar, every style must be monitored for rate of sale w/r to a planned exit date.? Best sellers can hold off on planned levels of discounts.? Poor sellers probably need more aggressive levels of discount…OR…they may benefit instead from being transferred to another location where the rate of sale will support such an action.? It’s a function of cost and margin efficiency.

Balancing for season end? MICRO? -? Any Fall/Winter inventory still sitting on the floor at the end of January will have lived thru multiple promotions and discounts.? And it is still sitting on the floor.? The discount required to finally liquidate it is going to be deep and very expensive.? So it makes sense throughout the season to continuously evaluate the PRICE/PLACE/TIME/QUANITY metrics for an ongoing balancing of inventory to get it to the locations where the overall gross margin dollars are maximized.? The costs of moving the inventory must be measured against the higher gross margin dollar contribution that will be realized thru the reduced markdowns.? And the costs must include the expenses and markdowns that will be necessary to sell end-of-season residue inventory to liquidators and discounters.

Going back through all of the MICRO steps, we can see that there are multiple opportunities for the allocation process to miss a step or two.? Tracking and managing the rates of sale of hundreds of sku’s across a national chain with multiple regions means tracking and managing an enormous amount of data.? What seems to be manageable at the start of the season becomes crushing at the middle and end of the season.? And so we have a number of retailers that have inventory issues at the end of January.? Thankfully, there are new tools available.

I said at the beginning that I was a skeptic.? And I’ve since read that AI was over hyped at the NRF show…that retailers should be taking care of the basics.? I agree on all counts.? And managing inventory is about as basic as it gets for retailers.? We might as well be using the best tools available.? It’s abundantly obvious while walking the mall during January that many retailers could have benefitted from better buying and allocation of inventory.? It’s an old problem, a decades old problem.? AI is providing us with new tools that will enable a more surgical execution of inventory allocation and management.? That’s not hype.? That’s progress.? Onebeat is offering progress in inventory management.

#inventorymanagement #seasonalconversion #ai