While supply chain management gets a lot of attention, what should
drive a company, especially retailers, is how demand for its products
is tracked. Let's look at a case study from Macy's, which grew sales and reduced
its inventories considerably, thanks to careful management of its demand chain.
The problem is that many retailers have both online and brick-and-mortar presences, and the balance between the two can get difficult. Take Macy's: it operates two online business units and three additional units running 800 physical stores around the country. In the past, these businesses have been operating independently, but lately Macy's wanted more coordination. Given the retailer's size, you can understand the problem: What if a customer buys an item online but wants to return it to a physical store? Or wants an item that he sees online but isn't in stock in his nearest store?
That isn’t a new issue. I remember teaching e-commerce intro classes at various conferences around the world back in 1998 and having to address the problem then. In one of my classes, we had the developers from the US Postal Service that were trying to figure out how they could manage their stamp inventories and not end up selling stamps online that they no longer had in stock.
But the issue is still with us today. "We wanted our customers to buy anywhere and be able to fulfill the order from anywhere," said Wade Latham, the Director of Business Process at Macy's. Latham gave a presentation last fall at the Teradata Partner User Conference outside of Washington, DC. The problem was that its original processes were mostly manual or used Excel spreadsheets to track demands. "We couldn't recognize seasonal or climate differences among our stores, and couldn't really accurately forecast inventory levels. We also wanted to collaborate and share information both internally with our merchants and externally with our vendors for better planning, so they would have the product to ship us when we need it."
Spreadsheets! Yikes, it was definitely time for an upgrade. Adding to its woes, Macy’s buys its stuff six to nine months before any of the items are on its shelves. But it wanted to start forecasting its demands when it made the purchase, so it could plan in advance. One of its biggest decisions is when to buy two of something. You would think that a chain of department stores would be purchasing things in greater lots than two, but because it sells about a tenth of each SKU each week, that can be an issue. Some of its departments sell things faster than others, and some stores -- such as the flagship store on Herald Square in Manhattan -- sell products even faster still.
The goal of demand chain management is bottom-up forecasting. You collect a lot of assumptions and dial in things such as the type of ethnic population that visits your store: having more Asian-American shoppers means you will sell more smaller-sized clothing in that area, which makes sense.
Macy's switched to Aprimo's Demand Chain Management software, and used several of its retail-specific modules for intelligent stock item introduction monitoring and to track clusters of item profiles.
"We focused on the opportunities surrounding replenishment of our stock, because they have higher profit margins," he said. "Now we account for seasonality and can rank our stock items by location and know exactly what inventory we have on hand." About 40 percent of Macy's stock has been entered into the new system, which took about 18 months to build from start to finish. Latham says Macy's is seeing a seven percent sales increase and more frequent inventory turns as a result, and a much more satisfied customer base too.
All that means is that demand chain management is here to stay.