October 30, 2009, 12:00 AM

A Small World

The web’s window into far-flung supply chains helps merchants keep in stock merchandise that moves.

When it comes to sourcing the right merchandise that will fly off the shelves as well as web and catalog pages, it takes a mixture of art and science, hands-on as well as software-driven projections, and effective communication between retailers and suppliers.

The right mix can produce impressive results. At The Orvis Co. Inc., a multichannel retailer of outdoor sports gear and apparel, for example, this kind of strategy has helped the retailer run leaner inventory-holding about 10% less merchandise than in the past-while maintaining a high order fulfillment rate of or above 85%, says Marc Salamone, senior systems manager, marketing and merchandising.

“We’re providing better analytical tools to enable our merchandise buyers to make better pre-season estimates,” he says. That helps get the right merchandise to Orvis stores and the warehouses that support its web and catalog channels. In addition, the retailer communicates with vendors through a web portal running software from VendorNet to expedite the processing of purchase orders and work out changes or disruptions to planned production and delivery of the goods.

Orvis uses a combination of demand forecasting software built into its Manhattan Associates Advanced Planning system and the retailer’s own in-house business intelligence software to project how soon and how much it should replenish products. The systems, for instance, can project sales by comparing data like current price points and customer traffic to prior seasons.

The ability of such systems to smooth out the sourcing of the right merchandise is playing an even bigger role this year, as retailers struggle with planning the right levels and mix of merchandise that will appeal to value-hunting shoppers and match the ability of suppliers in the U.S. and distant markets like China to produce and deliver what consumers will buy.

Too cautious?

As retailers rely more on foreign suppliers for broader selection, lower prices and wider profit margins, they must deal with longer lead times between purchase orders and deliveries, increasing the risk of ordering products that don’t hold up under changing consumer demand. Stocking the wrong products can hurt profit margins with merchandise-clearing sales, run up inventory carrying costs, and, worst of all, disappoint customers.

These pressures are leading many retailers to order too cautiously for the coming holiday shopping season, which could leave them severely under-stocked during their busiest shopping period, warns Paula Rosenblum, a managing partner of research and advisory firm Retail Systems Research LLC. “I’m concerned that the industry is under-bought,” she says. “All the data is telling us that retailers have significantly cut back on holiday receipt plans, and as far as I know, manufacturers are not holding any safety stock as a hedge.”

Retailers can just as easily wind up with too much of some kinds of merchandise that won’t sell without steep markdowns or sales to liquidators, however, and they face the risk of placing strategic orders with suppliers who may be unable to satisfy their standards regarding quality and delivery times.

“Even as the economy begins to recover, the impact of the recession on manufacturers and retailers will be long-lasting,” says Noha Tohamy, vice president of research at AMR Research Inc. and author of a recent report on risk in retail product sourcing. “Global supply chains will continue to face major risks in 2010 and beyond. As such, designing a supply chain risk management strategy is still crucial,” Tohamy says.

AMR Research notes that the largest number of companies in its report, 31%, cited supplier product quality failures among the top supply risks they face this year, followed by volatility in commodity prices, cited by 30%.

It’s no surprise, then, that the AMR report also found that retailers view technology to manage suppliers as the most successful tool in managing supply chain risks, cited by 23% of companies, followed by inventory optimization, cited by 17%, and sales and operations planning tools, also 17%.

Indeed, at Orvis and other retailers, merchandise buyers, marketers and inventory managers are using such web-based tools to sharpen their ability to manage the flow of goods from suppliers.

HSN Improvements LLC, a web and catalog retailer of home furnishings, for example, uses a suite of software from Direct Tech Inc. to better coordinate merchandise buying plans with inventory management. This enables the retailer to improve the accuracy of initial forecasts of individual product sales; improve the scheduling of purchase orders to optimize the delivery into warehouses of the right merchandise at the right time, and expedite reaction times to adjust the volumes of incoming merchandise as sales come in above or below projections.

“This system is so important to us in the current economy, when we’re not massively overstocked and need the flexibility to plan into the future and adjust merchandise plans on the fly,” says Leslie Burke, manager of merchandise information at Improvements.

Following common procedures at many retailers, merchandise buyers at Improvements use a combination of personal knowledge and software-derived data to plan the what, how much and when in ordering products.

They’ll combine, for instance, what they know about current consumer interests, planned promotions, and their gut feelings about what will sell in a coming season with data pulled from databases on current and past sales and inventory records. By looking at how particular products have sold in the past and comparing final selling prices with the cost of goods, they can figure expected sales volumes and profit margins and plan pricing and promotions.

The right merchandise

And by instantly sharing their overall forecasts with inventory managers through a web-based application, which enables personnel in multiple departments to access the same information online, the retailer’s buyers and inventory managers can quickly see what is in stock in the retailer’s Escalate Retail inventory management system, and what needs to be ordered.

Inventory records can also reveal how quickly particular products from certain suppliers are likely to arrive, and how much the goods cost to ship, to further help in fine-tuning merchandise buys and planned promotions.

With an older system it used before Direct Tech, Improvements could not easily access inventory data for help in planning.

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