In today's digital world, where real-time information is readily available to almost everyone, consumer buying behavior is influenced less and less by the retailer or brand owner. Instead, it is driven by the consumers themselves. Using a powerful mobile device, consumers now can simply scan a product and instantly receive information about availability and price options. Instant access to product reviews and interaction with digital social communities can further influence consumers' choices. This means today's trends are likely to emerge overnight, rather than over weeks or months.
To compete and thrive in this consumer-driven environment, retailers and consumer goods manufacturers must collaborate in different ways and quickly and profitably respond to the choices consumers make at the retail level and across all buying channels. In this environment, a new trend has emerged: the shelf-connected supply chain.
Matching products to consumer preferences
The key to attracting consumers is providing them with the choices they want. As a result of economic uncertainty and real-time digital influences, consumers today are changing their preferences more frequently and thus affecting loyalty life cycles. The practice of setting assortments and space plans manually and at macro levels__and refreshing them annually or biannually__ is no longer sufficient. Retailers and manufacturers must collaborate and leverage point-of-sale (POS) demand to develop forward-looking forecasts and create localized assortments that are reset and adjusted more frequently. Companies that engage in these practices have an opportunity to capture more consumers and therefore grow market share, revenue, and profit margins.
Aligning demand and supply chain strategies
Typically, a manufacturer's demand forecasts are based on historic shipments from distribution centers versus actual consumer demand at the point of purchase. As a result, significant disconnects between true demand and available supply can occur. Demand synchronization entails tapping into POS data, the purest form of consumer demand, directly from the retailer. With these data, manufacturers see more consistent demand patterns, enabling them to improve forecast accuracy, develop better promotional forecasts, and balance variations that come from using shipment data alone. POS information also can be used to analyze the effectiveness of new product introductions, promotions, trade spending, and pricing actions, as well as to provide insight into category performance, market share, and competitive activities.
A better forecast
More effective forecasts serve as the foundations of a time-phased, multi-echelon replenishment plan, which creates synchronized and more accurate demand signals up through the entire supply chain. Plus, visibility into the retailer's total supply chain inventory, desired service levels, safety stock policies, and replenishment strategies enable an agile supply chain response system. Retailers and manufacturers also can model different assortment, replenishment, and promotional strategies across the entire supply chain__through the retail shelf__in order to accurately assess the impact on sales, service, and cost prior to executing those strategies.
Collaborating on execution
Collaborating on inventory strategies and accessing POS data enables manufacturers to jointly manage inventory and resource constraints and helps them produce executable deployment plans to meet projected consumer demand. By working together, scenarios and execution corrections can be proposed and accepted based on actual inventory levels, transportation or warehousing constraints, and resource availability. Assortments and planograms (diagrams of fixtures and products that illustrate how and where retail products should be displayed) can be adjusted to accommodate for product seasonality, new product introductions, promotional displays, or emerging consumer trends recognized by either partner.
How to connect at the shelf
Following are some of the key capabilities consumer goods manufacturers need to build a shelf-connected supply chain:
- Store clustering and assortment optimization. Due to the sheer volume of stores, it is impractical for many manufacturers and retailers to manage individual assortments for each store. Clustering stores together based on similar consumer buying preferences instead of geographical locations, format, or size enables the optimization and localization of product assortments. Sophisticated store-clustering tools can be used to leverage POS demand, along with other factors such as demographics, weather, margin, and product attributes to build localized assortments.
- Supplier-developed store planograms. Once store-level clusters and assortments are created, manufacturers need to collaborate with retailers on shelf planograms to execute these localized assortments. In addition to creating executable shelf plans, rules-based, planogram-generating tool sets can be leveraged to make more frequent resets and adjustments for new product introductions.
- Supplier-generated, store-level forecast and replenishment plans. In order to make proactive inventory changes or shift production strategies, manufacturers must be able to model and forecast demand through the retail shelf level, rather than at the more traditional distribution center shipment level. To do this effectively requires processes and technology to quickly gain insights from potentially tens to hundreds of millions of stockkeeping unit and location combinations. In fact, manufacturers often struggle with collaborative planning, forecasting, and replenishment programs because effective ways to translate store-level forecasts into reliable, time-phased order plans aren't available. The effective approach is for manufacturers to work closely with retailers to develop reliable multi-echelon, time-phased plans based on POS data and perpetual inventories while incorporating the constraints of the overall supply network.
- Collaboration on forecasting and replenishment strategies. Many manufacturers unexpectedly experience large swings in order patterns resulting from a retailer's decision to change service levels, safety stock settings, lead times, transportation modes, and order parameters. Collaborating around replenishment policy and store-level forecasts enables both supplier and retailer to better manage merchandise flow.
- Shelf analytics. In addition to analyzing historical data, manufacturers should deploy new practices and solutions to analyze the retail shelf with a predictive lens. Root-cause predictive analysis that examines phantom or ghost inventory, inappropriate ordering parameters, inaccurate demand forecasts, insufficient shelf space allocation, and poor in-store execution can predict which items are likely to be out of stock now and in the future. Manufacturers can use this information to collaborate with their retail customers to adjust forecasting and replenishment parameters and correct inventory inaccuracies to prevent an out-of-stock situation.
- Multi-echelon inventory optimization. Multi-echelon inventory optimization provides manufacturers with improved inventory performance while driving higher in-stock rates. By analyzing inventory safety stock policies throughout the multi-echelon distribution network to the shelf, manufacturers can tier service levels for different products. They also can take advantage of scenario modeling, enabling them to set the right inventory policies at all nodes in the network and collaborate with retailers to set more profitable end-to-end inventory strategies.
- Synchronized, enterprise-wide sales and operations planning (S&OP). Manufacturers must have the ability to synchronize their demand and supply plans to those of their largest customers. To achieve this, demand signals must be sensed further down the supply chain and a process must be in place to synchronize the planning and execution sides of S&OP. This integrated process transforms the traditional supply and demand balancing exercise and aligns operational plans with long-term business strategies and financial objectives. With real-time shelf data, manufacturers can shape demand instead of simply reacting to changes in the market.
By optimizing and localizing assortments and determining the best space allocation models on a store-by-store basis, retailers and manufacturers will be well positioned to respond to__and capitalize on__consumer trends as they develop and change more frequently. New processes that connect the shelf (or virtual shelf ) to the entire supply chain are enabling them to develop localized assortments, shorten cycle times, set profitable flow strategies, reduce inventories, trim costs, and improve shelf availability.
David Johnston is senior vice president, supply chain for JDA Software. He is responsible for strengthening relationships with manufacturing and wholesale distribution customers. He may be contacted at firstname.lastname@example.org.
Ben Pivar is vice president at Capgemini, where he leads the North American supply chain practice. He may be contacted at email@example.com.