The question is how consumers will behave. Will they line up desperate to start shopping again or will it be a more gradual process? Taking to heart that so many have lost their job or have taken pay cuts during this period, people do have less money to spend.
Let’s look at the economics: world trade is expected to fall by between 13% and 32% in 2020 (see the green and red line on the below chart).
The optimistic scenario, in green, suggests that the recovery will be strong enough to bring trade close to its pre-pandemic trend, represented by the dotted yellow line in Chart 1, while the pessimistic scenario, in red, only envisages a partial recovery. It is important to note there is a high level of uncertainty in the above chart, dependent on how the pandemic plays out.
This unfortunately doesn’t make it easier for many companies that, who at this point have already had to make difficult decisions regarding seasonal buy plans for spring and summer 2021.
E-Commerce – Here to Stay?
The COVID period has inarguably been a revolution for online shopping. Caterers, restaurants, retailers, and wholesalers are part of this new e-commerce world. If we look at the statistics, according to the ACI Worldwide study, global e-commerce retail sales rose 209% during the month of April, as consumers moved in-store activity to online and mobile channels. It is safe to say that online shopping is now within the comfort circle of most consumers.
Going forward, retailers may need to assess their channel strategy in terms of scaling up the online shopping experience, and should that be at the cost of brick and mortar stores? If you choose to scale up the online platform and compete in a world of irregular order patterns, limited order processing time and short-term delivery schedules (same or next day) as customers expect, efficient handling is key to success.
For those that have recently started their e-commerce, AGR can help. We often see companies start their online channel connected to the same location as their main warehouse, and this can complicate things.
Regardless of your ERP setup, AGR can create a virtual warehouse giving your company two strong benefits: Firstly, you can ringfence your online product range and thus maintain a high service level as your online stock isn’t pushed out to stores. Secondly, a split warehouse gives you separation of the online sales profile, enabling you to monitor and analyze the sales development.
Chances are we will see a permanent change in consumer behavior in a post COVID world. In any case make sure to stay on top of your store network, location, demand and profitability.
Merchandise Financial Planner – A Must Have Cash-flow Management tool for All Retailers
Many non-essential retailers were forced to close stores, resulting in a complete revenue drop while expenditures did not go away. To keep your bottom line healthy, the focus must be on optimizing margins and improving cash-flow – which is exactly what our Merchandise Financial Planning Tool is for.
For fashion and trend retailers who have spring apparel trapped in stores, they will want to sell as much as possible when stores re-open.
Unfortunately, these products are not likely the ones your consumers will be looking to purchase. Liquidate what you can to boost revenues, along with the summer apparel promotion and use markdowns on your spring collection to avoid excessive write-offs.
Use our Merchandise Financial Planning tool to forecast and plan your markdowns, promotions and stock intake needs on a weekly level. This will help as well to manage resources and re-balance inventory, while non-current items clear out and new product ranges are launched.
Demand Planning in AGR
Demand planning on item group level can be a good starting point. However, if the variability between items within a category are too great, going down to item level planning, although tedious, will pay off.
One of our customers, who has a business to business setup, created accurate demand forecasts simply by removing customers from their sales history – this adjusted the automatic forecasts. As customers opened back up for business, they were added to the sales history one by one, which in turn, ramped up the demand forecast.
Stay responsive and be open to the need of recalculating the demand factor frequently as the world gets back on track.
In our AGR software, forecasting calculations are set up during implementation on a daily, weekly or a monthly level. If your current forecast setting is set to months, our consultants could change it temporarily to weeks to make your forecasts more adaptive to demand changes. Keep in mind that weekly forecast settings are less sensitive to seasonal trends so as COVID times pass, the forecast setting should be changed back to monthly.
The following standard AGR reports can help manage demand changes:
- Seasonality: Shopping rhythm and seasonal cycles are up ended. Surface items with seasonal demand patterns in a normal economy and manage closely.
- High Forecast Uncertainty: Find items that have a large difference between forecast and actual sales (MAPE) and manage these items carefully.
AGR Planning Engine
If you have our planner module, we recommend using it to subjectively adjust your forecast. For example, if you had to close stores and haven’t adjusted your system, the automatic forecast will predict close to no sales going forward, impacting DC replenishments and demand from stores. The example below shows an item sold in a store that was closed for 2 months. See how the forecast reacts to the sudden drop in demand.
Now let’s look at that same item after the baseline plan has been created. Note the red chart lines. In this case, the baseline plan is set for a few months as a starting point. Once sales pick up, so will the automatic forecasts.
Feel free to contact us anytime, even if you don’t have the planner module. Our AGR consultants can do an upload via excel sheet to create automatic forecast adjustments and save you some manual labor.
Sales History Smoothing – Getting the Best Forecasts
In strange times comes strange sales history!
Statistical forecasting coupled with accurate demand history has proven to be a precise tool for anticipating future events. An obvious event like COVID-19 will distort a normal business trend line creating a sales history not suitable to give a true picture of the underlying demand.
All retailers and wholesalers have been affected in one way or another this year by COVID-19. Thankfully we do not anticipate the situation to repeat itself next year. Therefore, we recommend smoothing out the sales history of your items in order to create better statistical forecasts going forward.
Let’s take an example which a few of our customers have already applied to help them level out the economic effects of this pandemic.
The method consists of three steps. First, we select a period before the pandemic which we refer to as the “baseline period”. Second, we define the sales period that needs to be leveled out “COVID-19 period”. Third, we replace the actual sales for the “COVID-19 period” using the sales from the “baseline period” multiplied with a “COVID index”, which can be defined differently based on the months it applies to or any other preferred level.
1. Define “baseline period” (example March, April, May 2019)
2. Define “Covid-19 period” (example March, April, May 2020)
3. Define “Covid Index” (example using time-based index, MarchIndex = 0.7, AprilIndex = 0.6 etc.)
Using a simple method like this will allow us to easily remove the distorted demand pattern of Covid-19 from your sales history and with that create better statistical forecasts going forward.
Keep in mind that these demand smoothing methods are applicable to any customer and our AGR consultants are happy to help with applying the optimal sales history smoothing method that fits your business needs.
Allocation Logic – Demand Smoothing
Retailers who were forced to close several stores while able to keep some open, will see an impact on their allocation logic proportions to each store going forward. If untreated, the allocation logic will say there is lower demand in the stores that were closed and higher demand in the stores that remained open.
We recommend creating adjusted sales on store level to cover for the COVID period and apply to the allocation logic.
If you removed safety stock on all or selected items/locations in the beginning of the COVID period to drive down inventory cost, now may be the time to carefully put it back into place.
Retailers with sales peaks need to adjust them to avoid higher safety stock levels. An item with a high service level setting (confidence factor) will need a bigger amount of safety stock to cover random peaks.
Use our MBE report “High Forecast Uncertainty” to pinpoint these items.
If you haven’t touched your safety stock settings but foresee less demand and would like to drive inventory holding cost down, use our report “recent low demand” and change the confidence factor on selected items to 50 (no safety stock). For a more in-depth look at safety stock, check out our previous blog “Safety Stovk: What Is It and Why Is It So High?”
We Are Here to Help
These past few months have been difficult and strange. Our AGR consultants are standing by and ready to help your company get ‘back into the game’ and pick up business operations. While it may take a bit of time for the world to return to ‘normal’ (whatever that is), we’ll be here to assist you in any way possible.