Know Your Customer Type

Both The Home Depot and Lowe’s continue to focus on the “Pro” customer as the key growth driver for sales. In the case of The Home Depot, there are some interesting store attributes available to vendors, which describe store characteristics from the The Home Depot's perspective. Last week, I was working with one of our customers  who sells product at The Home Depot, and I had an opportunity to help them prioritize where to focus their efforts in 2017. I recommended that they spend time identifying, analyzing, and creating specific sales plans for all Pro stores. 

Figure 1To get the conversation started, I showed the vendor a simple summary of dollars per week, per store by customer store type. There are three customer store types: Pro, DIY and Core.  Figure 1 shows the average weekly sales by the customer store type. The Pro stores are clearly leading the group in average weekly sales per store by a substantial amount (Figure1).  Among their 2,200 stores in North America, about 300 Home Depot stores have the Pro customer type attribute.  This subset of stores is easily analyzed on a deep dive basis, and results can have a substantial impact on your total sales if you create the correct strategies and execute them well.

To help my customer understand the importance of the store customer type attribute, I pulled 2016 sales for The Home Depot stores in the Anaheim, CA market. If you simply type Anaheim into the homedepot.com store finder you will get back a list of 16 stores. Then, I looked at the total sales by store for each store, and segmented them based on customer type. In the Anaheim market, 12 stores are tagged as Pro stores, 4 stores are tagged as Core, and zero stores are tagged as DIY.  Figure 2 identifies the Pro stores with a yellow tag and the Core stores using a white tag. The Pro stores averaged an additional 21% in sales compared to the Core stores. 

Figure 2

As we discussed how to leverage this information, I asked the VP of Marketing to pull a list of display promotions for 2016 in the Anaheim market. They ran two displays last year in the market – one in the spring and one in the fall. Each display was a pallet display in the aisle, at the front of their department, with 48 units of product. The average sell-thru time at the Pro stores was 3.75 weeks. The average sell-thru time at the Core stores was 5.35 weeks. The Pro stores are clearly superior when it comes to a high sell thru on a display, and we concluded it would not make sense to ship a display to the 4 Core stores in 2017.  Instead, they are allocating those displays to four Pro stores in the Sacramento market. Based on 2016 sales we would expect those displays to perform at similar sell-thru to the Pro stores in Anaheim. Those Sacramento stores did not have a display last year so the sales will represent net new dollars for 2017.

Working to gain an in-depth understanding of stores and their attributes can seem like an overwhelming task when you first tackle the project. With thousands of stores and about three dozen attributes, there are a lot of variables to consider. I find it’s helpful to start with the attributes you hear Home Depot executives focusing on, and then move along to other attributes as you gain efficiency in your analysis. The Home Depot (and Lowe’s) are both very focused on the Pro, which means you should be as well.

What You Can Learn From Your Average Retail Selling Price

Last week, I had the opportunity to work with two different customers analyzing their sales at The Home Depot.  One sells products in the paint department and the other sells into the building materials department.  The analysis goal for both customer projects was to deconstruct their YTD sales and identify the factors contributing to higher than expected comp sales increases.  Both customer’s sales for a set of key SKU’s were up about 2.5% YoY and the question they wanted answered was, “What is driving the higher sales, and will it continue?”

As we deconstructed their respective sales into its component parts of distribution, price, and rate of sale, we uncovered interesting data regarding average retail selling price.  The first customer’s average retail price was pretty consistent across Home Depot stores at the expected $22.95 retail price.  There were some fluctuations, but the data was pretty clustered, as expected.

In contrast, the second customer’s average retail price was very inconsistent.  Customer #2 believed that The Home Depot was pricing their core SKU at $59.95 or $65.95, depending on the market.  However, as you can see in Figure 2, the pricing was very inconsistent across stores.  In fact, we identified stores in the same Home Depot market with a selling price variance of $28.35 per unit. 

While there can be good reasons to price a product differently by market due to shipping costs or competitive pressures, it seems irregular to have different prices within the same market.  Take a look at the average retail price of your products. It’s an important exercise that can yield some interesting insights.  It presents an opportunity to have a conversation with your merchant about pricing strategies.  And, It also provides an opportunity to identify markets with similar demographic profiles, but different selling prices, thus providing insight into what price point drives the highest sales. 

Does your average selling price match your expectations?  The answer may not be as simple as you think and could reveal some interesting insights.

The Home Depot Q4 and Full Year 2016 Results

The Home Depot continued its strong performance in Q4 2016.  The Home Depot achieved the highest sales and net earnings in company history.  Fiscal 2016 sales grew $6.1 billion to $94.6 billion, an increase of 6.9% from fiscal 2015.

Comp Store Performance

• Comp sales were up 5.8% from last year.
• 5.7% in November, 7.1% in December and 4.7% in January
• U.S. stores had positive comps of 6.3%.  6% in November, 8% in December and 5.1% in January 

HomeDepot.Com Performance

• The online business grew over 19% versus the prior year, and now represents 5.9% of total sales.
• About 45% of online U.S. orders are picked up in our stores

Merchandise departments (Q4 performance)

• Flooring and tools had double-digit comps in the quarter.
• Lumber, Outdoor Garden, Appliances, Decor, Indoor Garden, Lighting and Plumbing were above the company's average comp.
• Hardware, Millwork, Electrical, Kitchen-Bath, Building Materials and Paint were all positive, but below the company average.

Transaction Summary (Q4 Performance)

• Total comp transactions increased 2.8%
• Comp average ticket grew by 2.9%.
• Looking at big ticket sales in the fourth quarter, transactions over $900, which represent approximately 20% of U.S. sales, were up 11.6%. The drivers behind the increase in big ticket purchases were Flooring, Appliances, and several Pro categories.

2017 Forecast

• Forecast 2017 comp sales of approximately 4.6%

Carol Tome’s comments on forecast methodology:  U.S., GDP is projected to grow by 2.3% in 2017. We then add to that the benefits we believe we will get from rising home prices, housing turnover, and household formation. And we think housing will add another point-and-a-half growth to our overall growth next year.  To that, we have added a little bit of share shift in Appliances and certain building categories. And just to put that in perspective, in 2016, Appliances contributed 50 basis points of our comp growth.  And then we're adding something else this year that we haven't included in the past, and that's what we call the cumulative wealth effect of home price appreciation. If you look at home equity, since 2011, home equity is up 108%. On average, that equates to $50,000 per household. And we believe that's contributing – as people use the equity of their house to spend back into their house, we believe that's contributing to our growth, so we factor that into our guidance, and that's how we got to the 4.6%.

• While private fixed residential investment as a percentage of GDP now stands at 3.8%, it has a way to go before it reaches the historical mean of 4.5%.
• Home price appreciation, housing turnover, and household formation continue to be tailwinds for our business.

Are Omnichannel Shoppers More Valuable to Retailers?

That’s the question that the Harvard Business Review set out to answer in a recent study conducted between June 2015 and August 2016. They collaborated with a major U.S. Company which operates hundreds of retail stores across the country and studied the behavior of 46,000 shoppers. The customers were asked about “every aspect of their shopping journey with a retailer”, focusing on which channel’s they used and why. The majority of the shoppers who participated - 73% - used multiple channels during their shopping experience and were deemed “omnichannel customers” by the study. Only 7% were online-only shoppers and 20% were store-only shoppers.

In tabulating results, the study considered each app, digital tool and shopping venue provided by the retailer as a separate channel, and discovered that the more channels customers use, the more valuable they are. In fact, the study revealed that omnichannel customers are “more valuable on multiple counts.” They spent an average of 4% more on every shopping occasion in the store, and 10% more online than single-channel customers. Additionally, with every channel that an omnichannel shopper used, they spent more money in the store. For example, compared to shoppers who used just one channel, customers who used four or more channels spent an average of 9% more in the store.

In additional to spending more, omnichannel shoppers were more loyal. According to the study findings, within six months after an omnichannel shopping experience, these customers had logged 23% more repeat shopping trips to the retailer’s stores and were more likely to recommend the brand to family and friends than those who used a single channel.”

Source: Harvard Business Review

Using Sell-Thru for Decision-Making

Sell-Thru is a key performance indicator for vendors and retailers alike. It allows you to understand the rate at which inventory is being consumed as it relates to sales.  Because sell-thru is a leading indicator, it is also very useful for predictive analysis.

When calculating sell-thru, careful consideration should be given to how the formula is constructed.  As with any business metric, there is more than one possible answer, but only one is correct in terms of meeting the business user's needs.

So ask yourself: what is the difference between calculating sell-thru using all available weeks of sales and inventory data as opposed to using the most recent 4 weeks of data?  Both methods are valid, although they may produce very different results.  The first method will tend to flatten out fluctuations due to promotions.  This is useful if the item is on replenishment and operates within established min/max guidelines.  The second method of calculating sell-thru, using the most recent 4 weeks of data, tends to provide a rolling snapshot of performance.  This is very useful if an item is highly promoted and you want to understand the impact of lift within a given promotional window.

Both methods are correct, but one will be more useful than the other to the decision makers at your organization.  Here are three best practices to make sure your team arrives at the most useful method:
1)  Have simple design sessions with business users to write out on a whiteboard all calculations.
2)  Discuss if the calculation supports the intended business decision.
3)  Adjust the formula accordingly.
4)  Identify low, middle, and upper performance conditions for each metric so exception dashboards can be created.
5)  Document your work in a place all team members can access so there is no confusion on how the calculation is performed, or how the performance conditions are aligned.

Interested to know how your sell-thru percentages compare to our benchmark data? The Accelerated Analytics research team has compiled the average sell-thru percentage for eight retail categories each at 8, 13, 26 and 52 weeks and put it all together in our Sell-Thru Benchmark Data Infographic. To request the infographic simply complete the form below and it will be e-mailed to you right away!

Accelerated Analytics Customers L’Oreal and Coty Ink Big Business Deals in the New Year

The string of beauty deals continues in the new year with significant beauty acquisitions for Accelerated Analytics customers L’Oréal and Coty, all within a 48-hour period earlier this week.

L’Oréal will almost double the size of its Active Cosmetics Division with the acquisition of CeraVe, AcneFree and Ambi for a reported $1.3 billion. Founded in 2005, CeraVe develops cleansers, moisturizers and baby products and is one of the fastest-growing active skincare brands in the United States, L’Oréal said. AcneFree provides acne treatments and skin cleansers, while Ambi makes products to treat dark spots and brighten skin. The new trio of labels generates yearly revenue of about $168 million combined, and puts L’Oréal head-to-head with Nestlé’s blockbuster brand Cetaphil.

“Although the price is very high,” said Eva Quiroga, an analyst at Deutsche Bank, “it is supported by the strong growth the business will likely achieve, initially in the U.S. and eventually on a more global basis. It is the kind of global expansion that L’Oréal has historically excelled at.”

Coty is the latest consumer-products maker to acquire an online start-up with the purchase of Younique, a Utah-based company that makes its own line of skin care, body care and makeup products that are sold via peer-to-peer social selling. Coty will acquire 60% of Younique for $600 million in cash and Younique founders Derek Maxfield and Melanie Huscroft will own the remaining 40% and stay with the company in executive roles. Younique’s sales are made mostly online through virtual parties on Facebook and other social platforms. Modeled after more traditional direct-selling models, Younique is part of a group of young companies that have adapted the model to the internet age.

Sources: Reuters, Women's Wear Daily

Stanley Black and Decker to buy Craftsman

The latest in a recent flurry of moves to raise cash, Sears Holding announced Thursday that it will sell its well-known Craftsman tools brand to Stanley Black and Decker. The value of the deal could top $1 billion.

Stanley will pay $525 million up front - the deal is expected to close later this year - and another $250 million at the end of year three. Stanley will also pay Sears a percentage of its new sales of Craftsman products for 15 years, and Sears will continue to sell Craftsman-branded products through a perpetual license deal, which will be royalty-free for the first 15 years, and royalty-bearing after that.

"This agreement represents a significant opportunity to grow the market by increasing the availability of Craftsman products to consumers in previously underpenetrated channels,” said Stanley President and CEO. “We intend to invest in the brand and rapidly increase sales through these new channels, including retail, industrial, mobile and online.”

Sears, once an icon of American retail, has reported declining sales for years. In addition to the Craftsman deal they also announced plans to close 150 more of their struggling Kmart and flagship Sears stores.

Sears CEO Eddie Lampert said that Sears “will continue to take actions to adjust our capital structure, meet our financial obligations and manage our business to better position Sears Holdings to create long-term value."

Sources: CNN, Chicago Tribune, HBS Dealer

Robert Lighthizer Named Chief Trade Negotiator; Trade Policy Changes on Horizon

Yesterday, President-elect Trump named veteran Washington trade lawyer Robert Lighthizer as his chief trade negotiator in a move that confirms Mr. Trump’s intention to get tough with China, Mexico and other trade partners.

Lighthizer, who is with the firm Skadden, Arps, Slate, Meagher and Flom and was deputy trade representative during the Reagan administration, would replace Michael Froman, the Obama administration’s representative who led negotiations on a Pacific trade pact that would have covered nearly 40 percent of the global economy and was seen as a counterpoint to China’s rising clout.

Trump, however, argues that deals such as the North American Free Trade Agreement and the Trans-Pacific Partnership kill American jobs. He has vowed to make smarter deals and has signaled a tough stance on trade with China, including levying a hefty tariff on Chinese imports.

Lighthizer has previously accused China of unfair trade policies and has long advocated protectionist trade policies. In his role during the Reagan administration, he helped to stem the tide of imports from Japan in the 1980’s with threats of quotas and punitive tariffs. In public testimony in 2001, Lighthizer argued that China has failed to live up to commitments made in 2001 when it joined the Word Trade Organization and that more aggressive tactics are needed to “force change in the system.”

The Wall Street Journal’s William Maudlin writes that the choice of Lighthizer as U.S. trade representative signals a sharp shift in trade strategy that “will include a move away from multilateral deals, a tougher approach to China and Mexico and the threat of duties to impose higher costs on imports”. Mainstream economists warn that protectionist policies like import taxes could impose higher prices on consumers and slow economic growth.

Sources: Wall Street Journal, Bloomberg, Rueters

Confessions of an Amazon Prime Junkie

by Julie Stallman, Marketing Coordinator at Accelerated Analytics

I think my family set a new record yesterday. As we were pulling into the driveway last night after our daughter’s high school chorus concert, I looked at the house, admiring our holiday lights, and spied a package on our front porch. I laughed and told my husband that I think that brought the day’s total to seven - surely a record. But when I opened the front door to retrieve it, I saw that there were actually two packages on the porch, bringing the day’s grand total to eight packages delivered. And they were all from Amazon.com. 

My husband and I have been members of Amazon Prime for as long as I can remember. We joined years and years ago, back before they streamed music, tv and movies and way before e-commerce and Cyber-Monday were an integral part of holiday shopping. In fact, I can’t really remember life before Amazon Prime. And if you tell me you’re not a member I’ll likely react with a stunned look of disbelief and feel kind of sorry for you. You mean you wait more than two days for your packages AND you pay for shipping?

Suffice it say we’re fans of the e-commerce giant. It’s not uncommon for me to place multiple orders in one day, because, well, I can. And as I do, I often think to myself “Gosh, the people at Amazon must hate us.” I imagine the holiday elves at the Amazon warehouses cursing our family and wondering if we’re just trying to make their lives difficult. If they had a naughty list, I feel sure we’d be on it. But . . . they make it so easy. In reality, my guess is we’re not so different from all of the other Amazon Prime members out there this holiday season and anytime for that matter.

In a blog post this fall, we reported that ecommerce in general continues to grow at a rate that outpaces retail growth. We detailed that according to eMarketer, while moderate growth of 3.3% is expected for 2016 holiday retail overall, ecommerce is expected to make its biggest jump since 2011 and post growth of 17.2% this holiday season.

With an estimated U.S. ecommerce market share reported anywhere between 40% and over 65%, Amazon.com is the biggest player in the ecommerce market. Amazon Prime was launched in 2005 for $79 a year as an unlimited express shipping membership program for about 1 million products. While Amazon doesn’t disclose the exact number of Prime members, today it’s estimated to be about 80 million worldwide and about 65 million in the US alone. According to Statista.com, that’s an increase of 10 million subscribers since December of last year and more than double the estimated 25 million subscribers in December of 2013. Clearly, Prime’s growth has ramped up over the past few years as they have added more benefits, and content, expanded to new markets and introduced new membership options. Earlier this year Amazon Prime began offering monthly Prime membership plans for $10.99 a month and a monthly Prime Video plan for $8.99 a month, giving consumers more options and attracting new subscribers.

According to Consumer Intelligence Research Partners (CIRP), just over half of Amazon customers - 52% - are Prime members, each of whom spend an average of $1200 a year. That compares to approximately $600 per year spent by non-Prime members. And if you look at the frequency with which Amazon shoppers make a purchase on Amazon.com, Prime members are far more likely to shop more frequently than non-Prime members. According to a survey reported on Statista.com, 18% of responding Amazon Prime members said that they shop on the website at least once a week and 11% of responding Amazon Prime members said that they shop on the website at least twice a week.

So while my family’s delivery record seemed extreme yesterday, it sounds like our Prime-junkie tendencies place us in good company with a boatload of U.S. consumers. Hopefully we aren’t irritating the heck out of the Amazon shipping employees, and maybe they even just smile and shake their heads when we place our third or fourth order of the day. I hope so, because I just thought of another gift I need to order.

Analyzing Friday's Labor Report

Mark Twain famously said, "get your facts first, then you can distort them as you please."  As data analyst we have a responsibility to provide an accurate and complete picture when we poor through numbers and create reports.  The labor report released on Friday provides a great example of an incomplete reporting of the facts. 

If I told you sales for last quarter are up 5% from the prior quarter that would be good news right?  But what if I failed to tell you sales for the company's three new products had fallen 35%.  That would be a key piece of information that might change your view on the company's performance last quarter.  Friday's unemployment report, while good news, only tells part of the story.  Here is the positive part -  nonfarm payrolls rose a seasonally adjusted 271,000 in October taking the unemployment rate down to 5%.  Average hourly earnings of private sector workers rose at a 2.5% annual pace in October. 

However, here is the part which was not included in most of the news stories... the labor force participation rate remained unchanged from September at 62.4, and the labor force participation rate has not been that low since 1978. (see accompanying chart)  94,513,000 Americans who are working age are not working or actively seeking a job.   Retiring baby boomers explains about half of the drop in the participation rate and that trend will continue. The second factor is that people are choosing to go back to school or stay in school longer. The number of individuals enrolled in post-secondary degree granting institutions ballooned to more than 52 percent between 1990 and 2014 according to the National Center for Education Statistics.  Another factor is a sharp increase in the number of Americans on disability.  With an aging labor force that trend is also expected to continue. 

Labor Force Participation Rate

As data analysts our job is to tell the entire story - the good and the bad - so that quality decisions can be made.   

Increase Sales by Managing Out of Stock Inventory

What is an out of stock?

A retail out of stock is when the inventory available on the shelf is either zero, or depending on the product category, when the inventory available for sale is less than the typical job lot quantity.   Conceptually an out of stock is not difficult to understand and therefore one might assume it would be fairly easy to monitor inventory and avoid an out of stock.  In reality however, out of stocks average 8% and much higher on promoted items. 

Why are out of stocks important?

Out of stocks are important for two reasons: (1) lost sales and (2) lost customers.   If your product is not available the obvious result is lost revenue.  We recently studied the average out of stock for two customers for a 52 week period and found a clothing manufacture of basics averages $1,669 per week in lost dollars sold at a major department store.  A consumer products company we studied averages $1,835 per week in lost dollars sold at a major DIY retailer.   Neither of these figures may raise any alarm bells on a week to week basis; however when you total the lost dollars due to out of stocks for a full year, the loss is 7.5% and 8.2% of sales respectively.  In a retail environment where low single digit comp store growth is typical, increasing sales 7% to 8% based on simply managing inventory better has the potential to make a large impact.   Even more compelling, these figures are for one of the many retailers these brands work with so the opportunity can be multiplied several times.  The bottom line: Out of Stock stores are costing your business a significant amount of sales.   The second impact of out of stocks is lost customers.  Studies show a consumer confronted with an out of stock product will substitute for another product at the same store.   What if that consumer decides the other product is the same or even better quality than your product?  Will they purchase your product the next time they are in the store or will they stick with the substitution?   A simple out of stock could cost you a customer and the repeat sales you might have otherwise enjoyed. 

Fixing Stock Out of Stock Issues

A multistep process is required to fix out of stock issues and increase sales.   The steps in the process are outlined in Figure 1 below.  

Calculate Dollars Lost to Stock Outs

Change in any organization rarely occurs until there is a financial incentive to invest in a solution.  In order to motivate the manufacturer and the retailer to invest into solving out of stock issues we recommend starting by calculating the dollars lost to stock outs.    The initial benchmarking can be accomplished through a fairly straightforward process.   An example is provided in Figure 2 below.    The analysis will require either four or eight weeks of sales in units and dollars, ending units on hand, and the unit retail price.  The decision to use four or eight weeks of sales for the analysis depends on the rate of sale of the products being analyzed.   If the products are fast moving, four weeks of sales should be sufficient, if the products are slow moving eight weeks of sales will yield a more accurate result.   The example below includes sales for both periods.    The data should be at UPC/SKU and store grain.  In order to identify the out of stock issues driving lost sales two filters should be applied to the data.  First, a minimum sales activity filter should be applied to make the estimate as conservative as possible.  A good rule of thumb is to apply a filter requiring an average of one unit sold per week over the period.  If your products have a high rate of sale then you can increase the average.  The second filter is used to limit the data to rows with OH = 0.  After applying the filters calculate the average weekly units sold over the sales period you selected.  E.g. total units sold / count of weeks.  The average weekly units sold is used for calculating the lost dollars sold since we are assuming in this example the store would have sold that number of units had it not been out of stock.  To calculate the estimated lost dollars sold multiple the average weekly units sold by the unit price. 

Although the analysis is fairly straightforward it has proven to be a reliable benchmark for quantifying the dollars lost on out of stocks.  Keep in mind in our example the lost dollars is for one week but it is often more compelling to repeat the analysis for additional weeks so a trend can be established. 

Identify Where to Focus

The next step in the process to fix out of stock issues is to review the lost dollars sold report and identify where to focus for the largest potential impact.  A good starting point is to sum the lost dollars by store and then analyze the stores on a percent contribution to the total lost dollars sold.   This will help to identify stores which are having the largest inventory issues.  You can also sum the lost dollars by item to identify which items are having the largest impact on out of stocks.   As you study the results look to see if there is a pattern to the lost dollars.  Is there a group of stores or items which are having a disproportionate impact on lost dollars?  If specific items are having a large impact on the total lost dollars this many indicate a fill rate problem or a promotion which created unexpected demand.  This should be further analyzed to ensure the root cause is identified.   The goal is to identify a subset of stores and/or SKU’s which are having a disproportionate impact on out of stocks.   Our experience shows retailers prefer to trouble shoot problems and develop new processes using a subset of stores and SKU’s for a pilot before agreeing to a broader adoption.   As we move forward in the process we will use this subset to craft the plan to improve inventory management and sales. 

Identify Data Gaps

A common problem encountered with managing out of stocks is a gap in the data available from the retailer.   The most common two gaps are the lack of units on order and week grain data instead of daily data.    Units on order are a very important data point as you move forward to creating a process to manage inventory more effectively.  When you have identified an out of stock, or an item that has less than the desired weeks of supply, the next question you need to answer is does the retailer know about the issue and have they placed an order.   If the answer is yes, then you simply need to ensure the order size is sufficient and then continue to monitor the on hand to ensure the inventory has been placed on the shelf.  If the answer is no, then you will need to work with the buyer to suggest an order quantity which will fix the issue.  The second gap in data for managing out of stocks is week grain instead of day grain data.  Week grain data provides a week ending sales and on hand value which means the out of stock could have been impacting sales for several days before you even receive the data.  When you add the time it takes to recommend an order and ship the product the problem only gets worse.   Some retailers have the ability to transmit daily sales and inventory which will greatly improve the visibility and ability to react quickly to an out of stock.   If your retailer does not provide units on order and daily data you should explore the benefits of closing these gaps with them.  The lost dollars sold report created earlier in the process is a good tool to put a financial impact on the table for discussion.  

Create a Monitoring Process

Creating a process to monitor inventory proactively is critical to reducing out of stocks.   All good processes need tools, and in this case the essential tool is an out of stock monitoring report.  An example can be seen in Figure 3.   The out of stock monitoring report should include the ending on hand units and inventory weeks of supply.  The OH value can be used to identify out of stocks which require immediate attention.  The inventory weeks of supply can assist in getting out in front of a stock out before it occurs.   We add a column for minimum inventory quantity on hand so that each individual store and SKU can be set uniquely if desired.  If that level of detail is not required you can simply fill the minimum quantity on hand at a SKU level across the board.  The minimum quantity on hand value should take into consideration the lead time necessary to process a new order and ship the product as well as job lot quantity if that applies to your business.     The recommended order quantity then is simply a function of minimum quantity OH – current OH.   If the inventory weeks of supply is below the total time it takes to process and ship an order to the store that indicates a possible future out of stock which should be addressed before it becomes an issue.    After the out of stock monitoring report is ready for use the organization should identify who will run the report, the day and time the report will be run, and the specific actions to be taken based on the report findings.  The actions should be arrived at based on a conversation with the retail buyer. 

Collaborate with the Retail Buyer

There is very little benefit in creating out of stock reports and monitoring processes if the buyer is unwilling to accept and process a recommended order.  Some buyers are quite happy to collaborate with a vendor to better manage inventory.  However, our experience indicates buyers frequently need some convincing, and may even need to get buy-in from other people on their team, in order to collaborate with a vendor on inventory management.   This is where the tools which have been developed will be useful.   Create a business plan which starts with the lost dollars sold for a 13 to 26 week period as a way to highlight the financial impact of out of stocks.  Add a discussion on the long term impact stock outs may have on product substitution and possibly even causing the customer to shop at a competitor.   Use the subset of stores and/or SKU’s identified in the first step in our process to recommend a limited pilot for active inventory monitoring and include a detailed explanation of the tools and processes which will be used to manage the pilot and make order recommendations.   Include a forecast estimating the increase in sales which can be expected to result from the pilot by referencing the lost dollars sold report created earlier.  Be conservative with the forecast and propose that 70%-80% of the lost dollars on the report may be capture in new sales.  Work with the buyer to understand the steps involved in processing a recommended order as well as the people who are involved in the process and any deadlines which may impact the plan.  If there were gaps in the data as discussed earlier in this article have a discussion with the retailer about closing those gaps through a more rich set of data sent on a daily basis.   Finally, agree on the duration of the pilot, how the performance will be measured and what the rollout plan will look like after the pilot is successfully completed. 

Execute and Adjust the Plan

The tools for proactively monitoring out of stocks are now in place and you have an agreement with the buyer for a pilot.  Now it’s time to execute the plan.    Up to this point the planning process may have been directed primarily by the sales and account management team.  It’s important to connect with your production and supply chain teams to inform them about new orders that will be coming which are above the historical rate of sale.  After all, if the pilot goes as planned and sales are increased by several percentage points, you will need to ensure there is sufficient inventory ready to ship to keep your fill rate high.  We have seen many pilots successfully identify retail stock outs and retail orders placed only to be short shipped due to lack of inventory. 

Conclusion

Addressing retail out of stocks has the potential to increase sales by several percentage points.  The data analysis is manageable with the right tools in place and the benefits will accrue to both the retailer and the manufacturer.  It’s a classic win-win.  If you would like to explore how Accelerated Analytics can help your company address retail out of stocks simply complete our information request form. 

Additional reading on retail out of stocks

Reducing Out of Stocks

How Much are Out of Stocks Costing You?

Reducing Retail Stock Outs

How Much Do Retail Out of Stocks Cost?

Calculating the Cost of Out of Stocks

What is Collaborative Planning, Forecasting and Replenishment (CPFR)?

CPFR is a business methodology which integrates multiple parties in the planning and fulfillment of customer demand.  The idea behind CPFR is that by coordinating activities throughout the supply chain inventories can be moved more efficiently, in the correct quantities, to the correct inventory locations to meet customer demand.  CPFR establishes a common language, common processes and metrics to assist the trading partners to achieve these goals. 

The CPFR model

The customer, as the creator of sales demand for a product, is at the center of the CPFR model.  Surrounding the customer is the retailer and the supporting activities provided by the retailer: Category management, POS forecasting, Replenishment Management, Buying, Logistics & Distribution, Store Execution, Supplier Scorecard, and Vendor Management.  The outside ring of the CPFR model is comprised of the manufacturer and their activities.  The model is broadly organized into four quadrants comprised of Strategy & Planning, Demand & Supply Management, Execution, and Analysis.    The retailer, manufacturer, and supply chain partners interact through a series of eight business activities: Collaboration Arrangement, Joint Business Plan, Sales Forecasting, Oder Planning & Forecasting, Order Generation, Order Fulfillment, Exception Management, and Performance Assessments. 

Information Sharing in CPFR

Information sharing is a critical requirement to make a CPFR initiative successful.   Consumer demand must be quantified at a UPC/store level and quickly communicated from the retailer to the manufacturer.  The orders for new inventory must be placed quickly in the correct quantity and the orders must be fulfilled and shipped on time to ensure delivery to the shelf when the consumer is ready to make the purchase.  Any breakdowns in the communication process, or a lack of visibility into consumer demand in the cycle, has the potential to create an out of stock and lost sales will result.   

Successful Inventory Allocation in CPFR Requires Constant Monitoring and Adjustment

CPFR is not a one-time event, it is a business process which follows the entire life cycle of a product and which must be continuously monitored and adjusted.  All parties including the retailer, manufacturer and supply chain participants must be involved in the planning and communication cycle.  Participants should coordinate and agreed on the initial order quantity to establish the on shelf inventory position.   All parties should carefully monitor demand and adjust the regular on shelf replenishment rules based on local demand which govern the flow of inventory.  Proactive pre-planning for promotions, markdowns or price changes which may impact the regular consumer demand for a product are essential to avoid out of stocks.  

Is the EDI 852 document Sufficient to Enable CPFR?

The EDI 852 document (also referred to as the Product Activity Transaction Set) is the most common method for retailers to communicate retail point of sale data and inventory to manufacturers.   The most common elements of an EDI 852 document include units sold, dollars sold, and inventory on hand by UPC and store.   While the EDI 852 document provides a wealth of useful information to inform the participants of a CPFR initiative unfortunately the implementation of the EDI 852 is often incomplete.  The EDI 852 document outlines standard elements and technical details of the file structure but the implementation by each retailer varies.  One retailer may provide inventory on hand and units on order, while another may provide only on hand, or in some cases no on hand at all.  The problem is not the EDI 852 document or the standard, the problem is the implementation is not consistent.  Another problem with the EDI 852 document is the frequency of transmission.  In nearly all cases the EDI 852 document is transmitted weekly and summarizes sales for the period.  This creates a significant delay in the manufacturer’s ability to sense and react to changes in consumer demand.   If an out of stock is encountered early in the reporting period the manufacturer will not be alerted to that for several business days.  Another very significant gap in the implementation of the EDI 852 document is units on order data.  Unfortunately, a majority of retailers do not provide this data in their EDI 852 document.  So while a manufacturer may identify a spike in sales demand they do not have order information to know if the problem has already been identified by the retailer and an action taken.  The manufacturer can separately consult their purchase order data from the retailer but with today’s modern supply chain most retailers place large orders which are destined for a distribution center which obscures the store level order information.  The retailer may have placed an order but are those units going to the store which most needs them?  This is a critical gap in the information flow which is required for a successful CPFR implementation.    

Replenishment System Barriers to CPFR

Most retailers have invested heavily into information systems to forecast demand, monitor sales, and place automatic orders based on min/max inventory rules.  These systems can be very sophisticated and accurate at an aggregated level, but they are not typically monitoring individual store and product inventory positions.   A replenishment manager at the retailer is responsible for monitoring and adjusting the replenishment system to ensure inventory levels are maintained.  However in reality an open to buy budget has a large impact on the decisions the information system or the replenishment manager can implement.  Far too often inventory has built up in one area while other stores are starved for inventory but the overall financial position of the retailer is constrained and additional purchase orders cannot be issued.  Manufacturers may identify inventory out of stock situations and communicate the problem to the replenishment manager but the replenishment manager may be powerless to do anything to react.  For a CPFR initiative to be successful the retailer and manufacturer must defined the communication process and action steps before the inventory shortages begin to occur.  The action plan must identify who has the authority to override the replenishment system and place an order even if that means temporarily exceeding the total desired inventory position.  The allocation and redistribution of inventory must also be discussed prior to starting the CPFR initiative.  While it may be counter intuitive to create inventory positions which are significantly different by retail store location the inventory must follow, and react to, consumer demand. 

CPFR – the Bottom Line

There are many case studies which point to the benefits of CPFR.  Some of these case studies demonstrate inventory reductions of 10% to 40% with corresponding improvements in sales between 5% and 20%.   It is hard to dispute that when all the parties involved in the supply chain plan, coordinate, and act that business benefits will not be realized.  The difficulty it seems comes down to efficient and consistent communication, and pre-planned agreements on what actions will be taken based on consumer behavior.   Our experience has demonstrated even when all participants are aware of a problem it does not necessarily translate into productive actions to solve the problem within a meaningful timeframe to make a significant impact.  If an out of stock occurs on a Tuesday and the manufacturer identifies it the following Monday when the EDI 852 is transmitted, and the retailer places an order on Tuesday, the shelf has been empty for a week.  That is the challenge of CPFR – communicating and acting rapidly.  This does not diminish the value of CPFR by any means; however the real world implementation is anything but easy. 

Getting Started with CPFR

There are some practical steps manufacturers can take to begin on the path to CPFR:

1. Work with your retailer to identify the gaps in the retail point of sale activity data they are providing and how they can be filled.  These gaps usually revolve around inventory on hand and on order, and the frequency of the data transmission.
2. Work with your retailer to understand the steps involved to prevent, or at least fix, an out of stock.   Who has the authority to place an order?  Who has the authority to override the replenishment system?  Who has the authority to reallocate inventory from poorly producing locations to high producing locations?  What is the turn time from order to on shelf by region?  What are the min/max rules and how were they established?
3. Create a system for proactive monitoring of sales and weeks of supply inventory by store and UPC.   When will the analysis be conducted each day or week?  Who owns this analysis and what actions they will take based on severity of the shortage?  If the retailer will not accept and act on the order advice is there an escalation process and who’s involved?
4. Automate the analysis in step #3 above.   Analyzing sales and inventory at a UPC/store location presents a significant data challenge due to the sheer volume of data for most manufactures.  For example, if you have 45 UPC’s selling at 2500 retail stores there will be 112,500 rows of data to review, analyze and report.   Most manufacturers start with a spreadsheet as their tool for this process but quickly find it is a time consuming and difficult task.  As a result the analysis is not completed quickly and accurately and opportunities can be lost.   A more sophisticated solution is required which is exception based.  Predefined exception reports which alert the analyst to only those items/stores which are below desired levels can be developed.   This saves time and allows the analyst to work on the problem rather than on a spreadsheet. 

Is Erika going to be a bad girl?

Ten questions to get you started on a severe weather continuity plan.

Tropical Storm Erika has caused at least 4 deaths and widespread flooding as she moves past Dominica and Puerto Rico.  The current forecast model cone suggests a path right over Florida with Miami impacted early Monday morning (31 Aug).  The model is uncertain because traveling through the Caribbean could strengthen Erika into a hurricane, steer her toward the Carolinas, or just create mild to moderate flooding and wind.   

Florida is a huge retail market for Home Depot, Lowes, CVS, Walgreens, Walmart and many other retailers.  The east coast of the U.S. has millions of people in several large cities.  With a possible impact from Tropical Storm Erika less than three days away, now is the time to evaluate the risk Hurricane Erika poses to your business. This is a great exercise for not only this storm but also so that you can quickly and proactively act when the next storm is on the horizon.  

Ten Questions to Start Your Severe Weather Planning

1. Are my products impacted by the severe weather?  
2. What products are impacted?
3. Is the impact from the severe weather before, during, after, all the above?
4. What are my retail customer’s policies for store operations before, during, and after severe weather?
5. How will I be kept up to date on actions my retail customers are taking as a result of severe weather?
6. Can I create and save reports with the SKUs and stores I expect would be impacted by a severe weather event?
7. Can I purchase weather alerts or data to more quickly initiate our planning process?  

Developing a detailed understanding of how severe weather could impact your business and then using that to create a comprehensive process map, with actionable steps, is critical to business success when a severe weather event occurs.   After you have created your plan review it in detail with your retail buyer and replenishment managers.  They are likely to have input which will strengthen the plan further, and it's also very possible they will be willing to share resources which are part of their severe weather plan like advanced weather forecasts, and emergency store operations communications you might not otherwise have been able to access.  Is there model for Tropical Storm Erika more detailed than generally available information right now?

I would also recommend adding Twitter into your communication monitoring process.  During a storm news travels very fast on Twitter.  If you have taken the steps above to identify specific stores you can monitor Tweets by simple saved searches and hashtags.  You can also send Tweets using hashtags if you want to get a message out quickly which is related to the weather and your product. 

Retail can be severely impacted by weather, but with proper planning allowing your business to act prior to a storm or react very rapidly to a storm, your business doesn't have to be negatively impacted. In fact, a severe weather event could be a tailwind for your business. 

Consumer Spending Keeps Leading The U.S. Economy In Fourth Quarter

January 30, 2015

The U.S. Bureau of Economic Analysis today reported 2.6 percent annualized growth in real Gross Domestic Product for the fourth quarter of 2014, which is a little below consensus, but closer to the long-term trend growth rate of the economy.  The long-term trend is about 2.0 percent.

The resiliency of consumer spending shouldn't be surprising as it is fundamentally supported by strong job growth, falling oil prices and relatively optimistic consumers, as suggested by The Conference Board Consumer Confidence Index released earlier this week.  The fundamental factors supporting spending are the strongest they've been in this expansion.

Investment in equipment dropped by 1.9 percent, mostly due to weakness in investment in industrial and transportation equipment, which is probably related to investment cuts in the energy sector.

The current pace of economic growth is likely to sustain strong job growth in the coming months and further reduce the unemployment rate.  The Employment Cost Index, released today as well, showed ongoing acceleration in wage growth, with wages in the private sector moving up to 2.3 percent year on year.  Further acceleration is to be expected.  The acceleration in wage growth increases the likelihood of an increase in the Fed interest rate by mid-2015.

Despite the current strength in economic activity, the downward pressure on profits, the strong dollar, and the weakening global economy are likely to partly offset the strength in consumer spending.  We do not see further acceleration in GDP growth as a likely scenario.  Moving forward, we expect the U.S. economy to grow at about a 2.5 percent rate in the coming quarters.

Source: The Conference Board

Super Bowl Spending Expected To Reach $14.3 Billion

January 22, 2015

184 Million Americans To Watch 2015 Super Bowl, According To NRF Survey

The most widely watched sporting event of the year will draw an estimated 184 million viewers, for Super Bowl XLIX on Sunday, February 1.  Average viewer spending will reach a survey high of $77.88, up from $68.27 last year, with fans planning to splurge on everything from game day food and new televisions to athletic wear and decorations.  Total spending is expected to reach $14.3 billion.

"With renewed confidence in the economy and the outlook for 2015, consumers are looking forward to some good old-fashioned fun with their friends and family to celebrate the big game," said NRF President and CEO Matthew Shay.  "Retailers will take full advantage of the expected traffic from avid fans by making sure they have adequately invested in decor, party food and accessories and other Super Bowl related inventory."

Of the 75.8 percent planning to watch the game, nearly eight in 10 (79.3%) will purchase food and beverages, 10.8 percent will buy team apparel or accessories and 8.8 percent will splurge on new televisions to watch the game at home.

Source: National Retail Federation

New Home Sales Rise 11.6 Percent In December

January 27, 2015

Sales of newly built, single-family homes rose 11.6 percent in December to a seasonally adjusted annual rate of 481,000 units, according to newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

"This uptick is in line with what our builders are telling us in surveys and on the ground - that they are seeing increased traffic and more serious buyers in the market for single-family homes," said Tom Woods, chairman of the National Association of Home Builders (NAHB) and a home builder from Blue Springs, Missouri.

"After a slow start to 2014 precipitated by bad weather conditions, new home sales have ramped up in the second half of the year," said NAHB Chief Economist David Crowe.  "We can expect this momentum to continue into 2015 with the release of pent-up demand, particularly as existing home owners are trading up."

The inventory of new homes for sale rose to 219,000 in December, which is a 5.5 month supply at the current sales pace.  Regionally, new home sales rose 53.6 percent in the Northeast, 17.7 percent in the South and 3.1 percent in the West.  Sales dropped 11.5 percent in the Midwest.

Source: National Association of Home Builders

The Conference Board Consumer Confidence Index Increased Sharply

January 27, 2015

The Conference Board Consumer Confidence Index, which had increased in December, rose sharply in January.  The Index now stands at 102.9, up from 93.1 in December.  The Present Situation Index rose to 112.6 from 99.9, while the Expectations Index increased to 96.4 from 88.5 in December.

Lynn Franco, Director of Economic Indicators at The Conference Board, said: "Consumer confidence rose sharply in January, and is now at its highest level since August 2007 (Index 105.6).  A more positive assessment of current business and labor market conditions contributed to the improvement in consumers' view of the present situation.  Consumers also expressed a considerably higher degree of optimism regarding the short-term outlook for the economy and labor market, as well as their earnings."

Consumers' assessment of present-day conditions was considerably more favorable in January than in December.  Those saying business conditions are "good" increased from 24.7 percent to 28.1 percent, while those claiming business conditions are "bad" decreased from 18.9 percent to 16.8 percent.  Consumers were also much more positive in their assessment of the job market.  Those stating Jobs are "plentiful" increased from 17.2 percent to 20.5 percent.  Those claiming jobs are "hard to get" decreased from 27.3 percent to 25.7 percent.

Consumers' optimism about the short-term outlook improved in January.  The percentage of consumers expecting business conditions to improve over the next six months rose from 17.8 percent to 18.4 percent, while those expecting business conditions to worsen declined from 9.9 percent to 7.7 percent.

Consumers' outlook for the labor market was also more optimistic.  Those anticipating more jobs in the months ahead increased from 14.6 percent to 16.7 percent, while those anticipating fewer jobs declined from 16.5 percent to 15.0 percent.  The proportion of consumers expecting growth in their incomes improved from 16.2 percent to 20.0 percent.  However, the proportion expecting a decrease increased marginally, from 10.2 percent to 11.3 percent.

Source: The Conference Board

Housing Starts End Year On High Note

January 21, 2015

Led by solid gains in single-family housing production, nationwide housing starts rose 4.4 percent to a seasonally adjusted annual rate of 1.089 million units in December, according to newly released data from the U.S. Commerce Department.  For the year, overall housing starts topped 1 million units.

"Today's figures continue to be in line with our recent surveys, as builders have been becoming increasingly optimistic," said Kevin Kelly, chairman of the National Association of Home Builders (NAHB) and a home builder and developer from Wilmington, Delaware.

"With overall starts ending the year above 1 million units for the first time since 2007, we expect this momentum to carry forward in 2015," said NAHB Chief Economist David Crowe.  "A growing labor market and strengthening economy will spur steady growth in single-family housing production in the year ahead."

Single-family housing production rose 7.2 percent to a seasonally adjusted annual rate of 728,000 in December while multifamily starts edged 1 percent lower to 361,000 units.

Combined single-family production was up in three out of four regions in December.  The Northeast posted a 12.5 percent gain, the South was up 8.8 percent and the West registered a 5.8 percent increase.  The Midwest posted a 13.3 percent decline.

Overall, permit issuance was down 1.9 percent in December to a rate of 1.032 million.  Single-family permits rose by 4.5 percent to 667,000 units while multifamily permits fell 12 percent to a rate of 365,000 units.

Regionally, permits were mixed in December.  The Midwest and South posted gains of 6.7 percent, respectively, while the Northeast and West dropped 16.8 percent and 20.5 percent.

Source: National Association of Home Builders

55+ Housing Market One Of The Most Robust Segments Of The Market In 2014

January 21, 2015

The 55+ housing market fared quite well in 2014, and 2015 should be no different, according to industry experts at a press conference held today at the National Association of Home Builders (NAHB) International Builders' Show (IBS) in Las Vegas.

"The 55+ housing market has been one of the healthiest segments of the overall housing market, and is likely to remain that way over the next several years," said Paul Emrath, NAHB's vice president of survey and housing policy research.  "When you look at age-restricted single-family starts, there were as many in the first half of 2014 as in all of 2012.  And going forward, the steady rise in the 55 and over population will signal an increased need for housing to accommodate that group."

Emrath also noted that builder confidence has steadily increased over the past several years.  "NAHB's 55+ Housing Market Index (HMI), a survey of members that measures builder and developer confidence for that market, has regularly posted year-over-year gains."

Builders and developers say they have seen an increase in not only the number of people who are generally interested in 55+ housing, but also in the number of people who are actually making the move to purchase a new home.  "We are seeing more consumers actually make the decision to buy a new home as they are able to sell their current home at an acceptable price," said Steve Bomberger, chairman of NAHB's 50+ Housing Council and president of Benchmark Builders Inc. in Wilmington, Delaware.  "We are busier now than ever before.  And I don't think it's going to slow down anytime soon."

"Consumers in this market are looking for a home that accommodates their specific needs, and 55+ builders and developers are able to create homes and communities that address these needs," said Timothy McCarthy, vice chairman of NAHB's 50+ Housing Council and managing partner of Traditions of American in Radnor, Pennsylvania.  "As the economy continues to improve, so does our overall business.  Builders in this market have the opportunity to have tremendous success since the population we are serving is so vast."

Source: National Association of Home Builders 

Cupid To Shower Americans With Jewelry, Candy This Valentine's Day

January 26, 2015

Cupid has some tricks up his sleeve this year with plans to shower Americans with jewelry, candy and a special night out.  According to the National Federation's Valentine's Day Consumer Spending Survey, the average person celebrating Valentine's Day will spend $142.31 on candy, flowers, apparel and more, up from $133.91 last year.  Total spending is expected to reach $18.9 billion, a survey high.

"It's encouraging to see consumers show interest in spending on gifts and Valentine's Day related merchandise - a good sign for consumer sentiment as we head into 2015," said NRF President and CEO Matthew Shay.  "Hoping to draw in eager shoppers, retailers will offer unique promotions on gifts, meal options at restaurants and even experiences."

While most (53.2%) plan to buy candy for the sweet holiday, spending a total of $1.7 billion, one in five (21.1%) plans to buy jewelry for a total of $4.8 billion, the highest amount seen since NRF began tracking spending on Valentine's gifts in 2010.

Additionally, 37.8 percent will buy flowers, spending a total of $2.1 billion, and more than one-third (35.1%) will spend on plans for a special night out, indlucing movies and restaurants, totaling $3.6 billion.  Celebrants will also spend nearly $2 billion on clothing and $1.5 billion on the gift that keeps on giving: gift cards.

The survey found nine in 10 (91%) plan to treat their significant others/spouses to something special for the consumer holiday, with plans to spend an average of $87.94 on them, up from $78.09 last year.  Additionally, 58.7 percent will spend an average of $26.26 on other family members and $6.30 on average - which equates to a whopping $703 million on pint-sized gifts of all varieties.

"It's great to see consumers coming out of their shell this year, looking to spend discretionary budgets on those they love once again, though I fully expect many to continue to look for ways to cut costs where they can.  While many will splurge, some will still look for simple and affordable ways to show their appreciation for friends and family and celebrate in a way they are most comfortable with."

Discount (35.2%) and department stores (36.5%) will be among the most visited locations for those looking for the perfect Valentine's Day gift, as will specialty stores (19.4%) and florists (18.7%).  One-quarter (25.1%) say they will shop online and 13.3 percent will shop at a local or small business to find something unique for their loved one.

It seems women are in for the biggest treat this Valentine's Day.  Men will spend nearly double what women plan to spend ($190.53 versus $96.58 on average, respectively.)  Additionally, adults 25 to 34 will outspend other age groups at an average of $213.04; 35 to 44 year olds will spend an average of $176.21 and 18 to 24 year olds will spend an average of $168.95.

Source: National Retail Federation