Planning your way back from 2020

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The retail industry has suffered its worst period in living memory with the damage inflicted by the Corona virus and the necessary lock-downs that came in its wake.

Merchandise Planning will never have been more important than it will be in navigating a course back to whatever the “new normal” may turn out to be.

We have already seen a massive shift in consumer behaviour with on-line shopping now taking an increasingly large proportion of sales. These changes to consumer behaviours may well have become ingrained before we emerge from the other end of this tunnel. Indeed, in the short term, the on-line channel may be the only way in which many retailers can continue to do business. We are already seeing on-line operations being used to clear the massive mountains of unsold inventory which our extended supply chains have made unavoidable with the sudden brake that Covid-19 has applied to the retail business. Expect this to get a lot more painful as the next months go by. We may never go back to the familiar world dominated by bricks and mortar stores, so what scenarios might we reasonably expect?

Future Shock

The future for retail would seem to be the result of a combination of two factors.

Firstly the effectiveness of government interventions in combating the spread of the virus and returning society to some semblance of normality. Government interventions in response to the progress of virus will dictate consumer behaviours and impact demand as a result.

Secondly the resilience and flexibility of the retail industry in the face of an onslaught of a scale few if any could ever have imagined will determine which businesses survive and how.

The first stage in a survival plan has to be a strategic assessment of a variety of possible short to medium term outcomes (guessing about potential long term outcomes is interesting but will not be particularly fruitful as a business planning strategy at this point)

Business strategy must look at a variety of hypothetical high level outcomes and and then provide a recommended scenario for execution by the planning teams in merchandise and other areas of the business.

Scenarios need to be defined by possible parameters, for example :

Scenario 1Scenario 2 etc …
R number > 1, Social distancing still requiredR number < .5 , Social distancing relaxed
Stores remain mostly closedStores mostly open
Consumer demand reduced by 30% in storeConsumer demand reduced by 10% in store
Consumer demand increased by 5% onlineConsumer demand increased by 5% online
25% of supplier base in administration …25% of supplier base in administration …

Risk Versus Reward

The typical 6 monthly planning cycles will need to determine where we are in terms of the progression and containment of the virus, and what the likely impact will be on consumer behaviour.

Teams working on these plans then need agile and flexible planning systems that give them the ability to switch scenarios when it becomes necessary, whilst reacting to the same set of actual data that has come in.

Within the merchandise plans we obviously need to see the ability to plan separately by channel and by seasonality of merchandise to give us the most effective levers to operate to maximise profitability. Ideally we also need to have complete flexibility over the inventory which is used to service the channels, which may mean that operational procedure need to be changed where retailers currently ring-fence stock by channel, and some planning system logic may also need amendment.

The different demand forecasts created by these scenarios can then be flowed through to a WSSI process that will calculate the impact on potential stock positions and cash flow. This WSSI process should have the capability of generating and managing different plan versions for the chosen scenario allowing the planner to execute what-if analysis on the different tactical responses that are available to optimise profitability and the flow of stock.

The volatility of the new environment will inevitably focus retailers on risk mitigation and reduction. This means that within range plans we will probably see a lot of SKU reduction with a focus on key items which have a reliable and resilient supply and on those items which are the key profit drivers. This makes sense in most retailers as there in normally a long tail of options which add interest to a range but which do not otherwise contribute significantly to sales or profit.

Rank Curve

Concentrating on the 50% of items which generate about 85% of our sales (those numbers are remarkably consistent) makes a lot of sense, and it is much harder to justify having the additional items when the associated risk is so much greater.

it is also likely that we will see a shortening of supply chains with an increased focus on Efficient Consumer Response (ECR). Trade off between higher price and greater flexibility and responsiveness with shorter lead times may seem more attractive in this new less predictable world.

Working Within New Constraints

Merchandise planning is also about managing constraints and Covid-19 has created a new set of them to take into account in planning. Changes to the required operational procedures inevitably also have an impact on plans. For example, the need to find space to house returns for a quarantine period may reduce storage space in store, and the requirements for facilitating social distancing may result in less display space front of house. These factors may also feed into the rationale for SKU reduction programmes. Store door temperature checks and ongoing social distancing requirements will also impact footfall and demand.

Necessary changes to logistics operations may create new constraints on possible dispatch and return volumes, and an increase in the business done via the web may impact DC staffing levels and procedures as pick and pack has different requirements than pick for store deliveries.

Finally revised operational procedures in the merchandise department to reflect the ongoing risks means that being able to work from any location including home will be very important. Any viable planning solutions will therefore need to be web based.

So, that’s a brief snapshot of where merchandise planning has a role to play in helping us to find our way out of the Corona virus situation. It is of course only scratching at the surface of the myriad issues that exist, but it is clear than any exit strategy need to be driven from the top of the business, and that realistic scenarios and goals need to be provided to planners as guidance. They need tools that are flexible, capable of modelling and rapid re-forecasting using the principle levers that are available. These tools must be available remotely.

Challenging times lie ahead.