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Special Order Analysis: 6th Essential Step to Expert Demand Planning
You’ve taken care of your customers’ needs. You’ve created your replenishment order, but you left a few stones unturned… What about those Special Orders? Before you send the replenishment order to your supplier, don’t overlook the opportunity to boost revenue and cut costs in these 3 Special Order areas:
- Events and Promotions,
- Investment Buys, and
- Overstock Transfers and Balancing
It has been almost 23 years since we first heard a phrase we’d love to borrow from the beloved Jerry McGuire… “Show Me The Money!” That’s exactly what Special Order analysis does for your business.
We are stoked that you are here today for Step 6 of our 7 Essential Steps to Expert Demand Planning series. We’re here to Show You The Money. Well… more like you are here to Show Yourself The Money through strategic Special Order analysis. We’ll give some strategies you can use to optimize Special Order opportunities and drive incremental margin on all your promotions, investment buys, and overstock transfers/balancing. These areas offer a fast, easy win for boosting sales, expanding margins, elevating your products, and balancing overstock.
Special Order analysis happens after basic replenishment and before the final rounding of buying multiples and supplier brackets in the demand planning process:
- Demand Forecasting
- Lead Time Forecasting
- Order Cycle Optimization
- Service Level Management
- Special Order Analysis
- Order Validity Analysis
Are Special Orders Really Worth Your Time?
Time and again, we’ll give that a big “Hell yeah” they are!
Optimizing events and promotion, deals and investment buys, and overstock transfers are prime opportunities to improve the income statement of the company — often with inventory reductions up to 20%. Assuming you do your Special Order analysis prior to releasing the final order.
optimizing SPECIAL ORDERs OFTEN increases revenue and cuts inventory up to 20%.
Managing Special Orders is a game of agility. Getting demand forecasting right is key.
A replenishment order typically puts pressure on having a strong demand forecast for days or a few weeks. However, when you are promotional buying or deal buying, the importance of strong demand forecasting goes up dramatically.
The demand forecast must be relevant, and any seasonal patterns incorporated. Otherwise, your 90-day investment buy could actually result in 150 days of supply. Your goal of making money could end up costing you money!
The same holds true for overstock balancing and transfers. With poor demand forecasting, the same location that pushed away overstock could turn around and need to replenish again quickly.
Let’s dive into the Special Order analysis strategies you need right now.
Promotions and special event campaigns provide the opportunity to feature new items, highlight high-margin items, promote the company and increase exposure. But damn, is sure does throw off demand planning!
WHAT GOES WRONG?
Marketing teams love to promote items, but without an advanced demand forecasting solution, promotional activities cause chaos, out-of-stocks and overstocks in inventory. These are common and expensive:
- Promotional movement artificially increases demand history and inflates forecasts for upcoming periods.
- Promotional inventory increases your inventory balance and stops normal replenishment activity from happening on time.
- Promotions with too much guesswork, which perform better than expected, result in out-of-stocks, emergency orders and unbalanced lines.
- After chasing demand, rushing last-minute orders, and experiencing out-of-stocks and overstocks, very little history of the event is collected and used appropriately in order to limit disruptions the next time you promote the item.
HOW TO MANAGE PROMOTIONS RIGHT
Profitable events and promotion management requires 3 key actions on your part:
- Protect your demand forecast
- Keep it clean
- Get smarter over time
Protect your demand forecast: Protect the integrity of the long-term demand forecast. Track demand during the promotional-event period and push the increased movement into a proper promotional-demand bucket. Ensure that you understand and update the promotional dates if they change during the process, so that you filter the right demand into the right category:
Shipped/Sold + Lost Sales/Outs – Promo = Replenishment Demand
Maintain the accuracy of your replenishment demand forecast, providing a history of promotional movement for future event analysis.
Keep your stock status clean: Ensure that your inventory balance understands ‘holding out’ of the planned inventory. Planned promotional inventory that is not properly categorized will stop your necessary replenishment orders from occurring. As soon as the planned promotional order is placed, the additional quantities need to be entered into your ‘promotional reserve’ bucket. The amount needs to be subtracted from your on-order while you wait for the order, and from your on-hand once it is in stock:
On Hand + On-Order – Back Orders – Promo Reserve = Balance
Of course, you’ll need to remove the quantity held in reserve at an intelligent rate as you near the end of the promotional time. This needs to be done in coordination with your lead time. This critical and time-sensitive process cannot be done manually. Attempts to do it with ongoing human intervention will always lead to failed performance. Demand and supply chain planning software solves this beautifully – read more.
Get smarter over time: Now learn from your actions and do better the next time. Collect data with every new order, analyze, and refine it with every new order.
Throughout these processes, don’t just work to eliminate the mistakes. Collect and display great data to see how promotional events have occurred in the past. Review events right after they occur while you have the best insight as to why one event inspired a 100% demand increase, and another event resulted in a 300% increase.
Create profiles and strategies of events that can be applied as a default starting point the next time it comes around.
Today’s advanced demand planning solutions do this legwork for you, resolving these issues faster and easier.
Deals & Investment Buys
Your CFO is waiting for you to ‘show him/her the money’ with abundant deal buys and smart pre-price increase buys that chisel away at your cost of service.
While speculative buying doesn’t always come up roses, you can drive very high returns from your decisions by knowing the do’s and don’ts.
WHAT GOES WRONG?
Deal opportunities offer a direct impact to your income statement, which can be good. Or bad. Every missed step limits your profit potential. When things go wrong, here are the common reasons why:
- Skipped opportunities: Missing opportunities is understandable. Skipping opportunities is just plain dumb. Even if cash or space is limited, you want to take advantage of every deal. Buying 50% of the desired amount on each deal is much more profitable than only buying forward on half of the deals. Buying 50% on all deals will still deliver 75% of the profit you would have made buying out all the way. The first days bought forward are the most profitable.
- Not buying enough: The inventory team needs to be in alignment with the CFO and the financial team to understand the opportunity. The decisions need to be financial and scientific. A 10% discount should result in the same amount purchased, regardless of the person offered the deal – and regardless of the day of the week, or the mood of the team. Take time to learn the financial picture for your company.
- Treating all deals the same: Many inventory teams tend to overbuy on extra dating payment terms and underbuy on discounts. Additional payment terms provide a chance for an investment buy, but 90 days extra dating should not equate to buying 90 days additional inventory. For much of that inventory, you wouldn’t have wanted to buy until 60 days from then, which drops the additional advantage to 30 days on that portion of the purchase. Discounts are slightly different than price increases. Both are very different from extra dating payment terms. Ensure that you have solid investment buying math which helps you and your team make the smartest decisions.
- Waiting for the deal to be offered: Yes, you hear us mention this one often. Your suppliers will reach out to you; but you should also reach out to your suppliers. Find the individuals within your suppliers’ organizations who will benefit from your increased orders and make them offers. Get the flywheel spinning for profits.
HOW TO MANAGE INVESTMENT BUYS RIGHT
- Have a corporate strategy: The CFO, CEO and the inventory team need to be inspired by the potential; understand the math; and deliver the formulas and guidelines. The formulas should not change, but the guidelines will change as you enter different seasons of your cash position. You can then apply investment buying aggressiveness limits to evenly control the deal buys.
- Remove the emotion and the delay: When a deal is offered to you, or when your deal is accepted by your supplier, you should be minutes away from delivering the final order to them. The formulas and guidelines are set. Anyone in the company could create the order and should get the same result. Deliver the order quickly, and you will ensure that you are the first to be offered a deal the next time. They’ll show YOU the money.
- Layer your inventory and track your results: Your inventory will go up and your profits will go up. However, so will a few eyebrows. So begin to report the inventory in layers. Ten million dollars in replenishment inventory and $3 million in forward-investment inventory looks much better than $13 million in inventory! Report your profit results frequently so that the company understands why the warehouse looks different.
Overstock Transfers and Balancing
The cash needed to pay for the next order is often sitting in the next bin. This is especially true in multi-location / multi-store environments. Let’s look at some do’s and don’ts for overstock transfers and balancing.
- Ignoring your neighbor’s overstock: Your DC, store or branch orders and you pay the invoice. At the same time, a peer branch is sitting on overstock which they want to return. You need some sort of integrated business planning solution to collaborate and synchronize enterprise-wide execution and bring those two needs together.
- Wrong overstock calculations: Also, you transfer product that shows as overstock on a report that does not understand true overstock. Soon after the overstock is moved, the location reaches out to buy the product again.
- Doing nothing: The above situations are common, but the worst situation is when you ignore the subject of overstock… and make it a once-a-year project. Balancing needs to be an ongoing process built into your demand planning process.
HOW TO MANAGE OVERSTOCK TRANSFERS AND BALANCING RIGHT
- Find the true overstock: Overstock is not simply a list of every item that has over 100 days of supply. The overstock amount is unique to each item, and considers the item’s demand forecast, seasonality, item order cycle optimization, buying multiples, economics and special inventory bought for promotions or events.
- Understand the financial burden: Overstock burden needs to be understood by applying the carrying cost that will be incurred before the item depletes down to a normal level [Watch related webinar from our INVENTORY MASTERS SERIES: Inventory Depletion and Replenishment Process]. One hundred units of overstock that totals $5 of inventory and $2 of burden is not actionable overstock.
- Make it available: Depending on your environment, your current transfer options and the cost of transferring product, your decision to transfer known overstock from a regional location should be a scientific and financial one. For some environments, daily or weekly transfers built into the replenishment process work best. For others, an overstock balancing strategy on an intelligent frequency makes more sense. In either case, always use supply chain analytics to understand and report your overstock investment picture. Also make sure there are limits and goals in % of inventory and dollars.
Make the Most of Special Order Opportunities
Remember, great work in the first 4 essential steps will lay the foundation for success in Special Orders.
Conduct promotions and events for increased exposure. Create and take advantage of every deal possible to increase profits, and keep inventories lean with smart overstock strategies.
Want a quick assessment of your potential results with Special Order analysis? Contact us to learn more.
Next up: Order Validity Analysis
Back to Part 5: Replenishment Optimization
Back to the beginning of this series