Managing retail supply chains is complicated, heads-down work. Supply chain teams are often expected to meet ambitious KPI targets that are critical to the health of the entire business. So why should these teams expand their focus to consider markdown planning in addition to their already full slate of targets? Because better markdowns have the potential to significantly improve the traditional KPIs that supply chain teams are evaluated on.
The most important KPIs for supply chain teams include availability, which drives sales; inventory levels, which can reduce working capital; and operational efficiency, which can drive down costs. Strategic improvements to a retailer’s markdown optimization strategy dramatically and rapidly improve these KPIs.
The first use case that demonstrates the impact of markdowns on supply chain targets is the effectiveness of periodic assortment reviews and changes, which directly impacts a retailer’s availability and inventory level KPIs. Imagine a retailer sells a range of coffee beans and has products cycling out of their coffee bean assortment as well as new products being introduced.
For end-of-lifecycle products, it’s important to maintain high product availability right up until the point that you wish to remove those items from your assortment. At the same time, it’s also important to ensure the retailer doesn’t have excess inventory clogging up stores and distribution centers past the planned deletion date, tying up both capital and space in inventory that’s effectively “dead.”
A “blanket” approach to markdowns can drive some benefit, but retailers would be leaving quite a lot of money on the table. An overly broad approach drives benefits in some locations, but would likely drive down performance KPIs at other locations because the approach is not localized enough.
However, a tailored, targeted approach to markdown optimization that draws from granular demand and inventory data on a location-specific level will maximize value on your inventory. This is why availability and inventory level KPIs are actually quite dependent upon an effective markdown strategy that makes full use of real-time supply chain data.
A second use case to explore is the management of seasonal products, which are extremely important to sell-through before season’s end when demand nosedives. Consider, for example, a retailer that sells outdoor furniture for porches, pool sides and gardens. Quite frequently, retailers nearing the end of the warm weather season find they have excess inventory that in some locations they were unable to sell.
Retailers that have excess stock in their distribution centers must put together a smart allocation strategy to ensure those items are sent to the specific store locations where they have the greatest potential to be sold — a task very much within the scope of a supply chain team’s day-to-day work.
However, imagine if the retailer could execute that allocation in combination with a markdown strategy that considers each product’s price elasticity on a store-specific basis. Allocation is the first step, but the second, often-skipped step is to ensure that markdown pricing for those allocated products ensures that the business can achieve the highest possible margin based on store-level data.
This joint approach that takes season-ending allocations and markdowns into consideration together is a far more effective approach to clearing seasonal inventory, maximizing sales, minimizing inventory levels, and maximizing operational efficiency — all goals that are core to traditional supply chain KPIs. The right markdown solution serves as a true silo-breaker — but only if it can be fully integrated with the solution the supply chain team is working with. With access to real-time supply chain data, planners serve an integral role in helping supply chain teams hit their KPI targets consistently and efficiently.
And it’s not just the supply chain team who’ll be happy! Their colleagues in purchasing will also be delighted to see increased margins from the use of localized price elasticity calculations. Store personnel will also benefit, as they will no longer have to scramble and execute manual, on-the-fly work to get rid of lingering, outdated inventory that’s hanging around after its termination dates.
Retailers that are still relying on manual processes to clear their excess inventory should take a close, thoughtful look at the KPI improvements they could achieve with localized markdown optimization. What’s most important is the ability to look beyond existing silos and think critically about how simple improvements to markdown planning processes can help the company’s supply chain leaders hit their KPI targets.
Laurence Brenig-Jones is a Senior Retail Advisor at RELEX with eight years of experience at Waitrose, the UK grocer, prior to joining RELEX in 2019. He has held positions including Head of Product Supply and Head of Operational Strategy, including time as a Business Lead for a major transformation project spanning supply chain, commercial and retail channels. Currently, his focus is on helping retailers unlock their potential through best-in-class AI and machine learning technology solutions offered by RELEX.