THE NEW RULES OF RETAIL AUTOMATION

WHY RETAILERS SHOULD RUN – NOT WALK – TOWARD AUTOMATED FORECASTING AND REPLENISHMENT

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Barriers that in the not-too-distant past stood squarely in the way of retailers achieving fully automated store replenishment are gone. Now, moving to automated store ordering is not the dauntingly long, complex, and expensive journey that it was just fi ve years ago.

Yet, many retailers are hampered by manual or semi-manual pro-cesses, simply because they’ve been ill-informed, mis-advised, or underfunded. In a recent RSR Supply Chain 2012 report, demand unpredictability in an uncertain economy and consumer demand for the lowest price were cited as retailers’ two biggest supply chain challenges. Still, only 58% of retail supply chain executives surveyed for the 2012 State Of The Retail Supply Chain report from RILA indicated that demand planning

was fully deployed in their organi-zations.

In the new retail environment, marked by economic volatility and a transfer of merchandising power and choice from the retailer to the empowered consumer, manual or semi-manual merchandising sys-tems are a competitive disaster.

This paper will debunk some of the myths and old ideas that cause retailers to avoid a move toward full forecasting and replenishment automation.

The Road To Store Automation Just Got Shorter

Before the mobile revolution took hold, retailers and vendors held fi rm control of the retail experience – they funded the promotions,

managed shelf placement, and generally drove the entire process from supply to fulfi llment. Back then, an effi cient supply chain was focused entirely on a retailer obtaining all the vendor money available while maintaining as fairly balanced an inventory as it saw prudent.

Now that consumer demands are leading the way, the entire pro-cess is being reanalyzed from this evolved perspective. Mobile data access has placed empowered, fl exible, free-to-choose-from-any-channel consumers at your shelves. If you’re not focused on them, your competitors are. It’s this dynamic – not a technological revolution, per se – that’s driving the shift to a supply chain engi-neered to meet consumer needs, leveraging POS and shelf-level intelligence to automate supply chain processes.

In fact, the technology that enables automation of store-level sup-ply chain processes isn’t new at all. Computer generated ordering (CGO) capability has been here for twenty or more years. What is new is the process that must now sit at the nucleus of that capabil-ity. Consumer centricity can’t be realized if supply chain decisions continue to focus solely on deal making among retailers and ven-dors. Today, ordering, assortment planning, allocation, and merchan-

THE NEW RULES OF RETAIL AUTOMATION

Source: RSR Research

dising all begin and end with what the consumer does at the POS, where the transaction serves as the foundational data point of the modern supply chain.

The Limitations Of Manual De-mand Planning Processes

Of course, when the POS is the source of intelligence that drives supply chain decisions, CGO moves from an elective benefi t to an imperative. To effectively un-derstand what you’re selling now and to accurately predict what you’ll sell in the future, you’ll have to account for a host of variables that make sound manual analy-sis and decision-making virtually impossible. Promotions, events, seasonality, price changes, eco-nomic conditions, fashion and cultural trends are just a few of the factors within and outside of your control that contribute to sales and demand. To understand not just the trend, but also the all-important why behind the trend, intellectual capital can’t be left to the minds, spreadsheets, and intuition of you and your planners.

Beyond the obvious customer satisfaction implications of your in-stock position, forecasting and replenishment accuracy offers specifi c strategic value to retailers’ efforts to reach sales and profi t goals. For instance, in retail en-vironments such as grocery that

promote thousands of items per week, promotion execution fails all too often when store associates fi nd out an item has been promot-ed because it suddenly starts to sell. Because calculating the value of the promotion at the store level is guesswork if attempted manu-ally, retailers often compensate for the unknown with excess inventory in an attempt to avoid out-of-stock situations. A full 47% of out-of-stock situations are the result of inadequate store ordering and forecasting, according to the GMA and Food Marketing Institute. And, while the industry averages be-tween 2% and 3% out of stock, a recent survey of consumers found the customer perception is that retailers are out of at least 20% of their SKUs. While we know out-of-stocks are bad, excess inventory can be a silent killer, remaining a living, breathing problem long after the promotion ends.

Another feature of store-level CGO that contributes to profi tability is the minimization of manual inter-vention, which is another capability that has been revamped. Tradition-al systems have required a large amount of human input to realize results. When management is nar-rowed down to specifi c exceptions through automation, this lessens the number of people needed to manipulate the system in store or from the head offi ce. This minimi-zation of human intervention also

diminishes human error from the equation, eliminating the likeli-hood for bad data introduction. The technology now exists to allow the algorithms to complete the job with minimal human manipulation, which can be prone to errors.

When automation at the POS reveals data-backed item-level demand trends, stores are able to fi nd synergy between the satisfac-tion of customer expectations and the strategy of achieving sales and profi t goals.

Automated Store Replenishment Is For Everyone

There remains a perception among non-grocery retailers that automa-tion of store replenishment is only advantageous in grocery environ-ments. In fact, retailers across seg-ments – including fashion, season-al goods, and even cross-channel formats are fi nding success with POS-based CGO.

Where retailers carry short lifecycle and seasonal items, forecasting and replenishment accuracy is critical to profi tability. Increasingly, the relevance of the “push” model – whereby inventory is acquired in quantity, promoted, and pushed out to stores en masse – is being questioned in these environments. Instead, short lifecycle product management should be changed to enable the right assortments

for each store and deploy only the product necessary for merchandis-ing purposes. Consumer demand will then determine when to pull more products to specifi c stores. POS-level replenishment technol-ogy is enabling just-in-time delivery of goods to the store shelves.

Even in grocery, there is the per-ception that production planning for the random weight, fresh product, and short shelf life attributes of deli counters is out of scope for CGO, but that’s a profound misper-ception. In fact, because of loss suffered at the hands of shrink and spoilage, there’s more busi-ness case in these departments than any other. In recent years, no retail technology solutions pro-vider would attempt to develop a process for fresh item production execution. Today, there’s no rea-son not to.

There’s a consensus among all segments that the right forecast results in a well-planned supply chain. The closer any retailer can get to letting POS transaction intel-ligence drive inventory decisions, the more effi cient and profi table the fulfi llment of goods. Markdown strategies are almost nonexistent in a fi nely tuned, POS-driven fore-casting and replenishment model, and inventory is more effi ciently managed in warehouses where people are trained to handle it.

Is Perpetual Inventory A Prerequisite To CGO?

Another misconception is that it’s necessary to run perpetual inven-tory in order to achieve full-scale automation. While gaining visibility into precise, accurate store-level perpetual inventory was perceived as an early benefi t of CGO, we’ve learned that it’s nearly impos-sible for retailers to mobilize the resources necessary to maintain physical inventory in a 60,000+-SKU store, and the benefi ts are not worth the effort. Most retail-ers don’t see a tangible business benefi t to perpetual inventory, and without it, they assume they cannot get to automated store replenish-ment. This barrier, however, can be removed by demonstrating that retailers can gain enough visibility into store-level inventory without the rigorous, arduous, and prohibi-tively expensive process of man-aging perpetual inventory. While some level of precise intelligence into inventory visibility is needed, inventory visibility perfection is no longer a technological barrier to store-level inventory automation.

In addition to the operational ad-vantages of CGO, there are strate-gic global drivers as well. Recently, we have witnessed a profound change in the ethnicity of the US consumer base, driving intense change in the products custom-ers are demanding. Ethnic food,

fashion, and personal products comprise a larger volume of mer-chandise sales than ever before, demanding a reevaluation of inven-tory allocation, merchandising, and promotions, especially in certain geographies. POS-level computer generated automation is the most effi cient means of identifying and responding to these trends, which could lead to wholesale shifts in retailers’ vendor selection strategy.

Automated forecasting is also a means of combatting the implica-tions of changes in supply chain transportation. One large shipping company, for instance, has been refi ning the optimum speed of its oceangoing ships to maximize ef-fi ciencies, resulting most recently on a 5-knot-per-hour reduction in cruising speed. Decisions like these have a dramatic impact on time to market, and often, the only control levers the retailer has are the accuracy and timeliness of its forecast. In the aforementioned study from RSR, only 38% of retail-ers said their suppliers’ lead times have gotten shorter over the past three years.

Systems Integration Maximizes The Value Of Automation

POS-based CGO has dramatic implications for the traditional deal and production-driven distribu-tion model. As long as vendors need to move the products they

THE NEW RULES OF RETAIL AUTOMATION

produce without accurate POS-level sales data, there will remain confl ict between what the customer wants and what the vendor has to offer the retailer. CGO and the intelligence that comes with it are educating retailers on the costs and benefi ts of the deals they make with CPG manufacturers. A vendor’s excess production and unwillingness to spend money on outside storage might mean you can get a great quantity buy, but it doesn’t mean you’ll be able to sell it, or make a profi t once you’ve stored, distributed, and sold it.

A few progressive vendors have realized the shift toward the consumer, and they’re moving toward collab-orative processes that reward retailers for re-sponding to consumer demand and sharing that data. Only in a col-laborative environment can a demand-driven supply chain be cre-ated.

Another area ripe for collaborative improve-ment is within the four walls of the retail enterprise. There re-mains a glaring gap in interaction and process between the marketing,

merchandising, and supply chain departments . Promotions, events, and campaigns are most frequently managed using Excel and paper and infrequently communicated downstream, where stores rarely have visibility into events and promotions beyond a week out. The implications of the process breakdown reach far and wide, from logistics (how many trucks do I need?) to DCs (how much staff and space should I allocate?) to stores (how many associates? how

much overtime? How many end caps?) to operations (what’s being pushed off at the expense of this promotion?) and beyond. Deci-sions made by the category man-ager without regard to the capacity and bandwidth in the supply chain and stores have signifi cant, far-reaching ramifi cations on the profi t-ability of complementary depart-ments. Without stable integration of systems, fed by a POS-driven automated forecasting and re-plenishment engine, the merchant

Source: RSR Research

THE NEW RULES OF RETAIL AUTOMATION

reaches a misunderstanding that hitting sales numbers also helped the bottom line.Today, we have access to integrat-ed technology that creates visibility into the business-wide implications of merchandising decisions. We can automatically connect the dots of the relationships among deci-sions made by marketing and mer-chandising, and we can instantly see the impact of those decisions on promotion cost and net profi t-ability by store and SKU, among other things.

Managing Change On The Road To Automation

As technology that automatically connects store-level transactions to supply chain actions rapidly evolves, there’s a trend among retailers toward the establishment of the chief supply chain offi cer. This individual is responsible for overseeing the departmental and channel integration of the previous-ly-siloed data and systems neces-sary to run the modern end-to-end supply chain. CGO is a key piece of this infrastructure. While it was originally built to understand the consumer transaction and predict demand using POS information, the CGO engine has become a tool that can capture, analyze, and understand data from any trans-

action source. The technological barriers that existed fi ve years ago, such as a lack of processing power and unsophisticated algorithms, have disappeared. Today, accord-ing to RSR, 62% of winning retail-ers say collaboration with suppliers on costs and implementation is the biggest impediment to achieving supply chain success.

The Case For Automated Fore-casting And Replenishment

Despite our best attempts to illus-trate the relative ease with which retailers can achieve the benefi ts of store replenishment automation, these myths continue to propagate.

Meanwhile, SAP forges on with signifi cant investments in retail forecasting and replenishment technologies, which have resulted in the following:

• Fully automated store replenish-ment for optimized product avail-ability and advanced distribution center management• Sophisticated forecasting algo-rithms with robust, high-volume processing capabilities• Visibility throughout all stages of the replenishment process•Flexible deployment options with standard connectivity to SAP and an open interface• A set of related services for accel-

erating and fi ne-tuning operations, including pre-defi ned services for faster implementations and for guiding the logistics of a customer-driven supply network, such as package size, order cycle, etc.With modern and automated fore-casting and replenishment solu-tions from SAP, retailers are better equipped to meet shopper demand while optimizing inventory availabil-ity and reducing costs.

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THE NEW RULES OF RETAIL AUTOMATION

WHY RETAILERS SHOULD RUN – NOT WALK – TOWARD AUTOMATED FORECASTING AND REPLENISHMENT