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Stock optimization: 'a piece of cake'?

Kalverstraat

When you celebrate your birthday, you order cake. A birthday cake. Usually a cake which is fine for everyone. Sometimes two: an apple pie and a chocolate cake for example. Sometimes an expensive cake from the upscale bakery around the corner, and sometimes one from the local supermarket. You order only whole cakes and if you want to keep some friends, you always have a piece left over. That sounds nice, but isn’t, as leftover cake doesn’t taste nearly as good the next day.

Written by: Jasper Zeelenberg, CEO of our partner Retailisation. In this blog he will share his vision on the changing retail industry.

Of course, you would have liked to have given your guests exactly the cake they like best. Precisely that muffin, donut or cupcake they felt like. But you also know that it would be very difficult to find out who likes which cake. Even if you were to come close your ideal cake assortment, there would always be one or two complaining cousins, because someone has just eaten the last muffin. In short: too difficult, too expensive. It is what it is. So you just stick to ordering apple pie and chocolate cake.

A compromise with cream! The birthday boy is happy, but could be happier. The guests are happy, but could be happier and the same is true for the bakery or the supermarket.

But the beauty of this new era - and my message to you - is that you can cater for everybody’s individual taste on your birthday party, without paying too much and without having leftovers or worse: shortages. So no leftover cake the next day, but leftover money. To buy fresh cake if that’s what you want.

And that's not some birthday magic trick. That's exactly what the big platforms are doing. Airbnb provides exactly the apartment you are looking for, Uber delivers exactly the right car for that moment and Spotify lets you listen to exactly that song you want to hear. And those platforms do this without owning even one room, one car or one CD. And it all costs a lot less and can be used by everyone. And all because of the Internet.

Sharing economy

Internet changes everything. The advertising industry for example. ‘Advertising’ used to mean: create as much reach as possible via a range of advertisements in newspapers, on TV and other mass media. A shotgun approach that cost millions.

These days you can target your offer to relevant people only. And for a fraction of the media spend. Facebook knows all about it. Amazon too. And eBay as well. Internet makes it possible to sell a weird pink ping pong table from Cape Town to a weirdo in Amsterdam. Without ever needing to put an ad in the paper. Just by posting a picture a picture on eBay. Sellers of strange products find strange buyers with even stranger tastes. For free! The advertising industry will never be the same.

The Internet is also changing how the economy operates. Economics is still about scarcity. And about supply and demand. What has changed is how those two meet.

All markets are being disrupted. Newspapers, cars, music, the housing market. No industry seems to escape. Economic theories are often based on assumptions as ‘many buyers and sellers', ‘no barriers to entry’ and 'perfect information ', where we assume that everyone has all the information to make good decisions. These assumptions were of course handy to explain other theories like price elasticity but they were also incorrect, because no one ever had all the information and a few big sellers, typically those with largest marketing budgets, ruled the market.

Until today. These assumptions have recently become reality. Today, anyone can find out what is being traded because it is becoming easier to liberate data and share it with others. This will also change how we work and how we work together.

Everyone wants a piece of the cakeAnd for the retailer that direction is easy: make as much money as possible on every square meter. And the whole value chain benefits. From the factory to the store. Retailers have known for a while that everything will change for them. Anyone who owns or runs a store is thinking about its function and its value. Why shop in a store when you can shop online?

Not too long ago, you could only buy something in stores and only in stores could we hear, see, feel, taste and smell products on offer. Seeing and hearing has already been digitized and a big part of the business has moved online. We only need to visit the store if we want to feel, taste and smell. And a web-shop is often cheaper, faster and easier to run and you pay no rent. Not a happy story for the shopkeeper in the brick and mortar store. At the same time, something else is happening. The competition for retailers is getting stronger. Not just between online and offline because the retail market is fragmenting. I explain:

Where you used to go to a specific store for your favourite T-shirt or pair of denims, these items can now be bought in different 'multi-brand' and 'concept stores' and 'franchise' shops - and in several web -shops. Seen from the brand this development makes sense. More points of sale equals more opportunities to sell. It also seems logical from the perspective of the customer. Lots of choice everywhere, all the time.

The problem with this fragmentation, though, is that the load on the supply chain has become so much bigger. Now that the same product is sold in more retail outlets, it is becoming increasingly difficult to predict sales for each point of sale.

And as fashion changes faster and faster, forecasting mistakes are getting much more difficult to correct during the season. It is even worse in the wholesale business, where independent retailers still need to estimate their store sales twice a year; and often even before the season for which they buy is over!

Of course this doesn’t cause too many problems in the beginning of the season, because there is enough of everything (although cash-flow may be a challenge). The real problem occurs after the first few weeks - when products are sold out in one shop, while the same items are being dusted off week after week before they are marked down. What a waste!

Sometimes it looks like the internet is gobbling up all industries. Everything that can be digitised is digitital. And it is only getting worse. Newspapers, for example, are no longer the main source of news and we will probably have to tell our grandchildren that the newspaper was once printed on paper.

So do retailers just have to close their doors and trust people will find them online? Of course not. A walk through the main shopping centers of the world shows that stores definitely have a future. Customers still want to touch and feel the merchandise and try new outfits in an environment that caters for all the senses.

And this is the reason why a store-visit is becoming more and more an 'experience'. The store smells nice and sometimes you get a chic Nespresso or even a glass of champagne. Whether you're talking about the 'traffic factories' on the high streets or the luxury boutiques just off the main shopping streets, a retailer can no longer survive with a shop-fit that was developed in the nineties. It has to be different.

Shopping for clothes is about emotion. About trying on, taking off and trying again. It is about feeling, tasting and smelling. It is a fascinating world of emotions and sensitivities that I find extremely interesting but gladly leave to other experts. But it shows that stores have a clear right to exist. Now and in the future.

Senses

But a right to exist is not the same as a guarantee for success or even survival. In order to secure your future in this warm-blooded industry, we must do like the digital world does and look to the cold hard facts of retail. The data the shelves provide can - again metaphorically speaking - ensure that every guest at the birthday gets his favourite cake.

And with facts and data you do not have to be a magician or be able to predict the future. You just have to know how to use them. Like Uber and Airbnb do: as the source of perfect information and a platform that continually matches supply to demand. Using that data, you can continually fine-tune the flow of product to each store to maintain good availability of each product in each colour and size in every location. Without having to buy more.

That can deliver huge value. Especially when you know that according to the 80/20 principle, you always earn 80% of your margin with only a small part of the range (the so-called "fast movers" ). You normally only find out when the items are already in the store and in the warehouse that feeds the stores. In the so-called "last mile". Traditionally, this is also the time that you cannot do much about it.

Today you can. And that's the key point of my story. And if you can tip the scale in your favour by only a little bit, you can make exponentially more margin. According to the 80/20 principle, solving only 1% of "out of stocks" adds significantly more in sales! And the whole value chain wins. From the factory to the customer.

And not by magic but by using the same weapons the digital world use in the battle for sales. And it works in wholesale too. The platform will become a trading platform like eBay. And this platform makes it possible to offset one retailer’s shortages with overstocks in other places. Automated trade makes the whole network more profitable.

I’m not saying that the wholesale model is outdated. Only that good use of data makes the 'last mile' flexible, reducing both ‘lost sales' and markdowns. The good thing is: suppliers and retailers can finally trust each other. Not because everyone has suddenly become so nice and noble, but just because everyone in this ‘last mile network ' has the same commercial interest.

Joining the last mile network will prevent lost sales on product that is being dusted off week after week in other stores. Suddenly suppliers, retailers and consumers are all on the same side. Because trust is embedded in the system and the additional revenue only builds more trust.

Does that put the whole retail world upside down? Not at all. Retailers still have to estimate the seasonal demand twice a year, as best as they can but with one big difference: in the last mile to the stores, the flow of product is synchronised to the actual demand. When it is clear which store needs which item. And this significantly increases the profitability of the network.

Supply chain coorporation

While the media often paints a negative picture of brick and mortar retail, physical stores are undeniably better at catering for the senses than the internet. When retailers and suppliers team up in a last mile network, with the sole aim to improve sales and margins, everyone will benefit.

Airbnb, Uber, Facebook and eBay have already demonstrated that it is possible to accurately match supply and demand via a platform. This is also possible for suppliers and retailers in the fashion industry. By focusing on the last mile, you can get your product to the right place at the right time to return the highest margin. It is not only possible, it can be done now and you won’t have to make any big changes. You just have to tap into the arsenal of the internet and compete with the same weapons digital platforms use.

You may be thinking: that sounds logical but why do I still not have the ideal cake assortment at my birthday party? The answer is simple: you don’t have to maintain inventory levels between birthday parties. Unlike retailers, who are open for business every day. And because birthday invitations and images can easily be transmitted digitally, a birthday-App no longer seems such a crazy idea. The guest accepts the invitation by clicking on the cake he likes best and the App gathers the demand to determine the ideal assortment. Guests will eat more and will enjoy the taste better and the bakery delivers more. And you will serve more and have no leftovers. Meanwhile, you can really focus on your role as the host of the party.

And with our App, we ensure that you will have that XXL skinny jeans on your shelves for that pie-eating aunt who also want a fancy pair of trousers. In this video you can see how that works:

Want to know more? Please contact us.

References

  • Fritom  Group
  • Verhoek Europe
  • De Jong Verpakking
  • Deleukstetaartenshop
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