The strategy must be: Popular products are always on shelves throughout the season, and slow movers disappear from shelves early in the season. (The opposite of what often happens today!)
Products must be replenished regularly and according to the rate of actual sales. Using actual sales to steer production (and inventory in the supply chain) results in near 100% availability of stocks to support sales of popular items and the reduction of stocks and discounting of slow moving items. We know it can work; the only thing against the retailer is common industry practice.
Common practice is to order huge batches for the entire season and hope that the forecast was correct. Common practice stems from the need for the lower costs big batches promise – production units don’t see the cost of discounting and shortages. Production units with their pressure on cost and their distance from the market can see only the demands (low price) of their clients and their big batch solution to cost (switching a production unit from one product to another costs ‘Chinese’ money and possibly set-up time). Apologies to China – what is meant is the fact that switching costs are a function of how a business allocates costs. Fixed costs do not change just because of some additional set-ups for product changes. There will be some cost in material losses due to more frequent changes.
Production units have to fill their capacity. A big batch now is better than a lot of promised smaller batches some time in the future, if sales are good. Better the bird in hand versus the two in the bush is the normal reaction that prevents a proper partnership to replenish what sells and avoid production of unpopular items.
Production units don’t realize that the majority of their production is not needed now – a lot of product they produce is wasted – discounted or even thrown away. Smaller batches make capacity available to service other customers at the start of a season. Smaller batches result in repeat business throughout the season – keeping the load on the factory high and much more stable. Smaller batches are more profitable for producers too – even if they don’t get higher prices from their clients. Capacity is used much more effectively throughout the year instead of in big peaks just before the selling season.
Frequent replenishment throughout the season has advantages for everyone – the retailer, the producer, the supply chain, the client and our environment.
Season-end sales are still desirable – but as a market segmentation tool and not to get rid of over-stocks. At this time we want to capture those people that cannot afford the higher prices – but by using a different product. Sales items should not cause consumers to delay their (full-price) purchase to get a lower price and they should not impact next season’s sales either. We really only want those customers that cannot buy at full price.
Modern ERP systems and modern telecommunications make it possible. A producer anywhere in the World can know today whatever his client sold in all his stores yesterday. Knowing that is the first step. With this information the producer can know exactly how much to produce of each product … a lot of the popular products and nothing of the slow movers. A little bit of sophistication will manage all inventories correctly, will manage the retailer’s shelf space and will manage the phase out period at the end of a season.
A high percentage of shortages can be avoided. Avoiding only half is already very powerful. Go for it!
