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Let’s Finally Get Serious About Optimizing New Item Inventory
Summary: New item forecasting is a troubling area because of its tremendous profit impact. If a company has $50M in inventory, New Items could be $5M or more of that investment. Yet, as Tracy explains, so few demand forecasting teams make optimizing new items a key focus. Download now to learn some strategies for putting a sense of urgency behind improving the performance of your new items across the portfolio.
Episode 8 Show Notes
Todd Intro: I am here with two people who consider themselves lifelong inventory optimization professionals. They love the profession and their careers have been built on educating inventory analysts and inspiring inventory planning and demand forecasting excellence.
Welcome, Tracy Coon and Dan Craddock! It’s great to have you both on the show and I know you want to dig into this topic in a big way. You were both replenishment analysts for wholesale companies prior to becoming education consultants.
Dan & Tracy: brief introductions
Todd: Despite this passion for the profession, you both say that you continue to be frustrated by the lack of success in one key aspect of a company’s inventory:
Optimizing New Items
New items? Really? I would think that inventory planning teams spoil and pamper their new items like they do their children? I would think that their shelves are stocked high with new items and that they are proud to show them and their results.
Is it really true that there is that much room for improvement here???
Dan: Todd, as I have watched our inventory community over many years, New Items is THE most common under-performing sector we experience in the retail and wholesale distribution world.
It always surprises me. It is amazing how new item poor performance is common – and also how it is tolerated.
Tracy: I agree… and I see it across industries and companies. Some do it well, but most really struggle for consistency.
Todd: Why is that? What is at the heart of the matter?
Dan: Todd, we will get into the details of the issue, and several suggested moves, but the most surprising thing to me, is that poor performance on new items is tolerated!
I can say that as a former replenishment analyst, I rarely got into trouble when I was out of stock on new items. I simply had to remind my bosses that the item was ‘new’ and there was a collective shrug and acknowledgement, and like magic, I was off the hook.
many inventory teams feel they have a ‘get-out-of-jail-free’ card on new items. This has to change.
Tracy: That’s right, and it should be just the opposite. These items are the future of the company and the need a strong, solid start. There should be even more emphasis on forecasting these items than the day-to-day items.
I don’t believe most companies really take new items seriously enough. We rarely hear presidents and leaders requesting to see weekly or monthly reports on new item success.
You need to have some urgency and feel some pressure.
Todd: It sounds like the overall approach is wrong. What should the demand forecasting strategy be for New Items? What tone should be set from the top down?
Tracy: New items should be treated like new team members. There should be special attention and a realization that they need a strong orientation and ongoing mentoring and guidance. There should be extra investment of time paid to them so that they will pay dividends later.
Dan: Todd we want to start and share a new overall method or strategy on New Items. We call it the 3X Strategy.
The ‘3X Strategy’ means that if 5% of your items are new in recent weeks or months, that they should receive 15% of the time spent on replenishment optimization tasks. Possibly even 4X.
Once you set that level of expectation, everything changes. You start to realize that if you spend the same amount of time on new items as other items, that they will never be successful.
Tracy: Another part of the strategy is simply a focused area of accountability. This means that there is a separate program, with separate and focused reports and very unique goals. This puts the proper attention on new items as their own inventory sector to manage and monitor.
Todd: It sounds like a special program for new items makes perfect sense. I have to believe for a category like new items, much of the success relies on collaboration, doesn’t it?
Tracy: Great point. New items are probably the #1 inventory group of items where communication and collaboration are as important as the process and tools.
Todd: So does collaboration play a large role in new items today?
Tracy: Some companies do well here, but most companies could do much better. You just can’t expect success by using only system tools. You need to load your item components with as much great knowledge as possible.
Dan: That’s right. And that knowledge is normally spread across several parties.
I am the Inventory Replenishment Planner, and I am handed a new item from my Category Manager. I am looking for an idea of the initial forecast and sales pattern from her.
She was given the item from the supplier rep who should have access to the initial plan behind the item and perhaps some early sales numbers.
That rep probably needs to turn to a product manager expert for that data. The knowledge and data needs to travel through several channels and can easily get lost in translation.
Tracy: The best companies which I experience have a roadmap or flow chart for this information. They work with each supplier to understand how to get to this information and to demand that it is part of the process to add new items.
Once you see success with the best, proactive suppliers, you have a blueprint for success to take to others.
Todd: So you have to start by making New Item Success a priority. Recognize if it is a weakness and decide to get better. After coming up with a plan to talk, share and collaborate, what comes next?
Todd: What is an ideal situation for New Items? Is there an ideal situation on introducing a New Item?
Tracy: Yes! The item is typically going to replace an existing item – or sell in a very similar pattern to an existing item. You have years of great data and you don’t want that to go to waste.
This really requires an advanced inventory planning solution beyond just basic ERP or a buying report. A sophisticated inventory tool will step you through this process and connect, or transfer or share the key components of old or existing items with the new items.
In fact, if it is a pure replacement, it will completely manage the transition so that the stock status and on-hand values are combined with the new items. This avoids overstock and ensures service.
Dan: Yes, these features work great, but they really benefit from your suppliers sharing what they expect, what they have planned and what they are seeing in the market. They might see when patterns are moving differently than expected before a single company does.
Todd: So beyond the ideal option of a ‘replacement function,’ what are the key steps to setting up a New Item? What is getting missed today?
Dan: Todd, let us take you through the 4 main components and tell what really needs to happen.
Everyone puts a starting forecast in. We talked about the need to reach upstream for better information. But you need to go beyond that!
Forecasting Frequency – Some companies who are forecasting 4-Weekly set their New items up to initially update weekly. This provides early reaction to sales changes as well as exposure during exception time. The nice part is, you can normally try this with a handful of items.
Dan: Tracy what about a Seasonal Forecast Profile?
Tracy: Yes, will it sell in a seasonal pattern? If so, then assign/borrow the profile from an existing item or category. Don’t wait for it to have years of perfect history. If the item sells in a seasonal pattern, it won’t perform correctly without a profile. A group profile or shared profile is going to be better than no profile!
Many star players keep a strong list of seasonal profiles that best fit each category to use as a starting point.
Dan: Let’s hit an area that is normally not considered…
Based on the level of movement, does the demand deviation (here’s a handy video on the demand deviation metric) need to be adjusted to have a better starting point? It will drive down your safety stock, so take the time to get it close. Use your analytics. What is the typical/average demand deviation for that forecast range?
Just a reminder that you want to work hard to find any knowledge that your suppliers have for help in the starting Forecast and Season. They see their products everywhere.
Tracy: I’d add Lead Time. Just a quick note about Lead Time… Anything beyond normal for this item? If the category has delivery issues, reflect that now in the Lead Time settings or you will be buying too late. For more on Lead Time, read: Long Lead Times Bring the Heat.
Next, let’s talk Buying Cycles. Obviously, the item will live within the order cycle of its line, but you still have two critical decisions to make: (1) Buying Multiple and (2) Convenience Pack.
A smart Buying Multiple will avoid potential overstock if the item does not sell. This is a value that will need to be revisited in some weeks or months, depending on how sales develop. Too often companies set this and forget it.
Dan: Tracy, the answer is similar on the last component of Service Level Goal.
Service Level is something I believe most people hit well initially. However, you have to follow up in case the items begin to sell much more or much less than expected. When it falls into its normal pattern, what is the strategy for ensuring that it gets to its proper spot?
Have your reporting set to alert you and guide you.
Todd: So those suggestions set the teams up for success. How do they monitor and ensure success?
Dan: Great question, and this is where the 3X rule really kicks in.
Let’s break down our reply into Daily Alerts as well as Period End and Ongoing Report Analysis.
There should be a whole briefcase full or special tools and reports that focus solely on New Items. This direction reflects the serious commitment to New item success!
Daily Alerts – Asking the team to dig in and remember to pay special attention to new items is not the answer.
Strong analytical reports are available today that will highlight when new items are over or under achieving during the period. PTD verses the forecast, as well as early buy warnings should be created, and should have plenty of intelligent filters to allow inventory professionals to focus on higher forecast new items, high-dollar items or other special categories.
You don’t have to wait until the end of the period to be surprised. You don’t yet have faith in your forecast, so have your demand forecasting solution provide smart exposure and alerts each day. It can be a very short part of the day, but very critical.
Tracy: From there, you have a chance to do some great reporting.
There are two methods we suggest:
- Ensure that every report, and especially every period-end report have a special filter or method to highlight only New Items. I can think of a report where I don’t need special focus on New items. This includes Overstock, Missed Service, Inventory Levels, and more
- Have a dashboard or set of reports that only focuses on New Items and paints a picture.
Every inventory analyst should always be able to answer this question:
What % of your items are new right now???
Dan: Todd, I’m going to end with this vision… To Tracy’s point, every inventory professional should have a dashboard that tells them the following story. Here is an example:
Todd, we pass each other in the hall, and you ask me for a quick update on my New Item Portfolio. And it is a portfolio.
I glance at my one-page report and share this:
Of my 12,000 SKUs + $10,000,000 in total inventory,
6% of my SKUs are New Items in the past 6 months.
They make up 11% of my inventory investment.
They are driving 4% of my sales.
My service attained is 97.5% — in line with my goals.
I need to respond to under-performers to avoid overstock.
I am working returns on some items.
I am in collaboration with the suppliers on sales programs;
I know my business!
Tracy: That is our vision. You have to know your numbers and know where the attention is needed. Just deciding to get better at this key inventory sector is a huge step in the right direction!
Todd: So this is a worthwhile conversation. If a company has $50M in inventory, it sounds like New Items could be $5M or more of that investment. If I am one of the stakeholders, I would want to think my team is set up for great success!
Thanks, Dan and Tracy for joining us! For more great demand forecasting strategies and tips, be sure to subscribe to our podcast at PlanningPosts.com, iTunes, Spotify, or wherever you get your podcasts!