INVENTORY

The Future of Automated Forecasts and Ordering

BY CSA STAFF

European retailers are already using automated demand forecasting and computer-assisted-ordering software solutions. U.S. companies, however, have taken a watchful backseat when exploring these options. Daniel Brandon, executive VP and general manager for automated ordering and replenishment company SAF USA, Grapevine, Texas, talked with Chain Store Age Web editor Samantha Murphy about why more domestic retailers should make the switch now.

Chain Store Age: Why is there a stigma attached to automatic ordering?

Daniel Brandon: The past is littered with failed computer-assisted-ordering projects. The greatest challenge is getting retailers to understand that today’s solutions are vastly improved. They offer a significantly lower risk and a greater return than solutions used in the past.

CSA: What other challenges are affecting retailers’ commitment to automated ordering?

Brandon: Perpetual inventory at store level is a requirement to do demand-driven automated ordering. Many U.S. retailers have never done perpetual inventory.

Many retailers are concerned that perpetual inventory and automated ordering will increase labor at store level. Some are worried that they don’t have the proper employee skill sets at the store level. And others are concerned about whether a system can effectively deal with promotions and other events that influence consumer buying behavior.

Today’s solutions effectively deal with all of these concerns.

Retailers that make the commitment find the solution has a terrific value proposition. It provides both top- and bottom-line improvements, including more than a 50% reduction in out-of-stocks and more than 30% reductions in excess inventory levels. These improvements also have a significant impact on customer satisfaction.

CSA: What is the penetration of the solution in the retail industry?

Brandon: While there is still low penetration here in the U.S, we are definitely seeing movement. We have customers that started a couple of years ago that are now aggressively rolling the solution out to their stores.

So far, the grocery industry seems to be very keen on it. I also see interest from drug, home improvement and consumer electronics retail segments.

CSA: Retailers need to be open to change to use these solutions, correct?

Brandon: Once a company begins an automated-ordering initiative, it will learn that some of its internal business processes are the enemy of computer automated ordering. For example, headquarters often generate push-orders and are not typically micro-forecasted demand-based. This causes either too much or too little inventory.

Warehouse substitutions are another challenge since they are based on available merchandise, not consumer demand.

However, many successful automated-ordering implementations are occurring even among these business practices. To get the full benefit however, a company would need to address these processes.

CSA: How soon do you expect it will be until these processes become mainstream?

Brandon: Ithink 2007 and 2008 will be significant growth periods, and many retailers will initiate projects. This is not a quick project or something that can be implemented overnight.

Companies that don’t start in the next two years will be behind the curve. Within five years, I think almost everyone will be embarking on some type of demand forecasting, just to keep up with their competition.

CSA: What is the industry’s next step?

Brandon: Retailers’ first step is to become demand-driven. Demand-driven retailing begins at the store, proceeds to the warehouse and eventually comes back to the supplier. Metro Group, which runs the SAF solution at its retail stores and in its warehouses, is a good example of a demand-driven company.

Once retailers start down this demand-driven path, they have the opportunity to make improvements beyond just delivering goods. I believe these early steps lead to more improvements for retailers, and these improvements will have a dramatic impact on a retailer’s future.

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Weekly Retail Fix

BY CSA STAFF

THE NEWS: SAM’S REALIGNS STORE-LEVEL MANAGEMENT

BENTONVILLE, ARK. Sam’s Club is changing the management structure in its stores. In the realignment, approximately 250 positions will be eliminated, Wal-Mart Stores announced last week. The company said it’s replacing five lower level management positions at each Sam’s Club location with three new higher level and higher paying assistant manager positions.

“This is not a cost cutting effort. We expect a slight increase in payroll upon completion of this change,” said Sharon Orlopp, senior vp of Sam’s people division.

THE FIX: Differentiation would better help Sam’s

Since Sam’s decided that its refocus on the business customer was too narrow, it has sought to find ways to make its clubs more attractive to primary shoppers, i.e., women. And that’s a pretty tough row to hoe, as Costco has done a pretty good job at satisfying the club customer in general and BJ’s has been going after female shoppers for several years now, with some success.

Having fewer managers with more direct responsibility could create a tighter knit club-level management and shorten lines of responsibility and accountability. Yet, without differentiating the offering, execution isn’t going to overcome all of Sam’s challenges.

That being said, a store-level management realignment might be overlooked at other retailers, but, this being Wal-Mart, everyone has to make a big deal about it. But that’s the price you pay as the big guy on the block.

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Weekly Retail Fix

BY CSA STAFF

THE NEWS: TOYS ‘R’ US EARNINGS GAIN 40.1%

WAYNE, N.J. Toys “R” Us today posted net earnings of $199 million for its critical fourth quarter, which meant it turned a profit for the fiscal year ended Feb. 3. But special charges and gains had an impact on its numbers.

Sales for the previous fiscal annum were $142 million, the difference translating into a net earnings increase of 40.1% year over year. For the last fiscal year, Toys “R” Us posted net earnings of $85 million versus a net loss of $384 million for the previous period.

Operating earnings in the fiscal 2006 fourth quarter gained 53.1% to $571 million versus $373 million for the fourth quarter of fiscal 2005. For the last fiscal year, operating earnings were $649 million versus an operating loss of $142 million for the previous period.

THE FIX: Improved shopper experience ups comps

Of course, any observer has to take into consideration special financial circumstances. Fiscal 2006 operating earnings were positively impacted by $96 million from gains on property sales, slightly offset by restructuring and other charges. In fiscal 2005, operating earnings were negatively impacted by $410 million in costs relating to the merger of the company, as well as $58 million of costs and charges relating to contract settlement fees, restructuring and other charges.

Still, sales were trending up at last year’s end. Net sales gained 15.8% to $5.7 billion. In the full fiscal year, net sales advanced to $13 billion, up 15.2%.

Comparable-store sales for the Toys “R” Us’ U.S. division gained 0.6% in fiscal 2006, and that represents the division’s first comps increase in six years. Comps at Babies “R” Us were up 4.8% and those at Toys “R” Us international were up 2.6% for the fiscal year.

Jerry Storch, chairman and ceo of Toys “R” Us, said the company is “pleased with the strides we made in fiscal 2006 to improve at all levels of the organization and reposition the company for profitable growth over the long term.”

He said the company’s new management team has been focusing on executing a strategy that would turn the retailer into a global toy and baby products authority.

“This translated into higher overall sales, positive comparable-store sales, improved gross margins and strong operating earnings growth for the 2006 fiscal year,” Storch asserted. “The key to our strategy has been improving the customer shopping experience in our stores. We are accomplishing this by delivering a more compelling merchandise selection, better service and a cleaner and more comfortable shopping environment.”

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