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What your inventory can tell you about your promotional strategies

Inventory Management and Promotional Strategy
Picture of Linda Whitaker

Linda Whitaker

VP of Science Delivery

Many retail challenges, like promotions and inventory management, impact and require coordination across many areas of the business. It is key as a retail business to work across functional areas and bring different perspectives to the table. 

Below are some thoughts about promotions from the POV of an Inventory Manager.
customers waiting

Customers will wait for promotions on products they already want to buy.

We’ve seen products where up to 90% of sell-through happens at discounted prices that otherwise would not be bought at a regular price. These items are typically fashion items or consumable products that are on sale frequently.

If customers know significant price drops are coming, they can wait to buy the fashion item. Likewise, if the consumable product has a shelf life that extends until the next promotion, why not stock up?

Other circumstances we’ve seen are retailers who have one or two major sales per year that largely contribute to their overall business sales. Expensive items are sold at a discount that customers can’t refuse.

Why do Inventory Managers care?

Inventory Manager

As we condense the sales of our items or business into fewer periods the volatility increases, and demand is more challenging to predict. Achieving high service levels for our customers is more difficult and expensive.

 

It’s harder to move inventory through the supply chain quickly in response to sales. Sometimes, to chase demand, we have to use alternate sourcing, which increases costs and strains the supply chain.

 

Customers are given offers they cannot refuse.

 

Limited time offers and bundled offers can convince customers to buy. They may purchase items they don’t want or spend more than they planned.

40% off

Limited time offer examples:

  • Free shipping on orders over $50
  • $20 off when you buy $50
  • 40% off marked items, today only!

This is awesome, right? From a customer standpoint, the risk is limited since they can return the item, and we get the sale that might not have happened without a deal.

How does this impact Inventory Management?

Inventory management
It’s not unusual for 25% of online fashion sales to be returned. In fact, the return rate of fashion items is even higher with promotions. This impacts our stocking strategies. Sometimes we cannot track it or transfer it because the items aren’t ranged to sell in that location. We have to mark it down to sell it. Other times we have stores package it to fulfill online demand.

It’s almost too easy to connect with customers about promotions

offers

The email you send out today impacts what customers buy tomorrow. Anywhere from a single person to all loyalty or potential customers could be targeted. When customers share promotions on social media and third-party sites publish them, the promotion audience can grow amazingly fast.

What burden does this place on Inventory Management?

We may see sales spike and discounts applied, without insight into the promotional strategies or vehicles. If we don’t know in advance what offers, we can’t respond in time to get inventory in the best locations. Even if we do know a promotion is coming, the results are difficult to forecast because we don’t know the important details.

What can retailers do?

retail customers

Share data and create good analytics

If the data is not centralized, each group may only see a part of the puzzle. Don’t assume everyone is looking at what you are. Information is the first step for better promotional strategies.

Here are important questions to clarify to further improve data:

  • Does pantry loading drive traffic or higher spend overall? Under what circumstances?
  • Are we running promotions on competing products at the same time?
  • What promotions are driving cherry pickers?
  • How much inventory is orphaned by returns coming into stores? What is the impact of these un assorted items on markdowns, store labor?
  • What is our promotional service level? How much inventory does it take to support different types of promotional strategies?

Objectively assess promotional forecasting ability as it relates to inventory management

Promotional forecasting is challenging, but some practices make sales even more difficult to predict:

  • Assess available data – Use the 80/20 rule as it pertains to data. Good forecasts can often be obtained with a foundational set of accurate and consistent data.
  • Assess information lead times – If promotions are planned in a short time frame or have aspects we do not know about (social media or store displays), we may not be able to react in time to appropriately stock inventory.
  • Assess demand variability – Inventory management is harder with increased variability, which is exactly what promotions do. Instead of focusing on a single forecast number, it is often more beneficial to better understand the forecast error, and how much inventory is needed to achieve a desired service level.

Understand and agree upon stocking strategies

Imagine being able to have these discussions:

These items are frequently on promotion, and have huge pantry loading effects. – 80% of sales are at a discount.  Do we want to continue these promotions? If so, what should our stocking strategy be?

Another group of products are expensive, highly price sensitive, and are rarely promoted. We are confident in the total sales but having high service levels at the store could risk overstocks after the promotion. We’ll hold inventory back at the warehouse, replenish during the promotion and offer customers home delivery if we stock out.

Occasionally, let the tail wag the dog

Listening to your Inventory Managers and Supply Chain can help you see your promotional strategies from a different perspective and may inspire you to tweak and align practices to improve your promotional performance.

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About Cognira

About Cognira

Cognira is the leading artificial intelligence solutions provider for retailers. Cognira is passionate about helping retailers unlock valuable, transformative business insights from their data.

We know retail. We love data.

To learn more, check out our website at cognira.com or contact us today to get started. 

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