Retail Mathematics: The Story Behind Next Retail Results
Next Retail Plc blamed its disappointing Christmas sales on unseasonal warm weather and unavailability of stock.
In October 2014, Next delivered similar excuse when it failed to meet sales forecast.
The question I will attempt to answer in this article is, why do retailers struggle with forecast accuracy?
Instances of sales or profit forecast has bedevilled the retail industry for decades and the industry has not been able to get a grip on it despite the advancement in forecasting technologies.
It will be unreasonable for anyone to expect hundred percent forecast accuracy.
One might argue that despite the advancement in meteorology technology, even the weather men struggle to predict the weather.
One could almost place a wager on the fact that they will get the weather forecast wrong.
Therefore, what would one expect from retailers who are dependent on the weather men for weather report?
The Apple Case Study
Between 2010 and 2013 research firm Gartner ranked Apple’s Supply Chain as the best in the world.
Prior to the arrival of Tim Cook in 1998, Apple was on the brink of bankruptcy because of its crappy supply chain system.
At the time, when someone ordered an Apple product, it was certain to miss it delivery date.
When Tim Cook arrived as the new Chief Operating Officer, he was determined to change that. In his words: “inventory is fundamentally evil…You kind of want to manage it like you’re in the dairy business. If it gets past its freshness date, you have a problem.”
What is Apple secret source?
Apple ensure all of its components are shipped to a single assembling point in China, from where orders are shipped directly to customer who order online.
It stores also have a single warehouse from where products are shipped to the various regional warehouses and then the stores.
With that arrangement, Apple is able to control both delivery and availability.
What The Lesson For Other Retailers
I know I know, I cannot make a comparison between Apple that sells its own products and Next that is dependent on multiple suppliers.
I get that.
I am not comparing like for like.
But the basic principle applies.
Tim Cooks’ strategy was based upon cutting down the numbers of suppliers and warehouses.
He initially slashed the numbers of Apple suppliers from 100 to 24 and the numbers of warehouses from 19 to 10.
Those cuts in the numbers of suppliers and warehouse meant he was able to streamline the production and delivery processes.
What retailers such as Next and its competitors could do is follow Apples’ example by slashing the numbers of their suppliers.
Secondly, arrange for suppliers to fulfil online orders.
Thirdly, change payment terms with suppliers and pay them immediately a product is sold on the shop floor.
Paying suppliers as soon as the product is sold will incentivise suppliers and ensure prompt delivery.
What I mean is this, the moment merchandise are sold on the shop floor, the supplier should be allowed to raise invoice and be under obligation to replenish the product.
This process will be a radical departure from the current 30, 45 or even 60 days payment terms that most retailers have with their suppliers.
But the benefit for the retailers will be huge.
Retailers will not have to carry massive inventory and it will become the interest of suppliers to ensure products availability.
Explaining the way this process will work is not the subject of a single article.
Retailers must realise that changing their current modus operandi will increase their forecast accuracy and reduce inventory shrinkage.
As I said in my previous article, the one thing that messes up retail mathematic is retailers’ inability to analyse the stories behind their numbers.
Every number in retail tells a story.
Understanding the stories behind those numbers is the key to accurate forecasting and profitability.
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About the author
Romeo Richards is an experienced retail trainer and consultant with knowledge of retail marketing, store performance and retail loss prevention.
He has the ability to choreograph the customer journey, boost store conversion and enhance in-store experience using store design and visual merchandising.
Specialises in increasing retail profit through shrinkage reduction.
He is the author of 23 retail and marketing books including:
• How to Increase Retail Sales
• How to Make Profit In Retail
• Store Design Blueprint
• Visual Merchandising Display
He is the creator of five retail home study courses.
Frequently presents webinars on shoplifting prevention and boosting retail sales.
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