whitepaper

Manugistics Demand Management and Replenishment for Hard and Soft Goods Retailers
The Challenges of Retailing Hard and Soft Goods
Improving your customers experience does more than make your customers happy. Superior customer service helps to ensure brand loyalty, strengthens your market presence, and drives corporate profit. Today, consumers have more choices than ever where to shop, how to shop, when to shop. In making their choices, they determine what criteria they will use: service, quality, price, or some combination of all of these. To remain competitive in this environment, you must provide consumers with the best value by delivering exactly what they want every time. And you must improve operations and your entire trading network so that you can control your cost-to-serve while maintaining your customer service levels and your profits. Profitable customer service for retail is especially challenging, given the wide assortment of products. With SKU counts in the millions, many retailers believe that they must resort to simple forecasting and replenishment techniques. But using simple techniques forces merchandisers to make broad generalizations about product groupings such as hard goods versus soft goods. As a result, they must manage these groups with simple business rules such as re-order point replenishment or moving-average forecasting. Unfortunately, the simplicity of these basic techniques translates into overstocks of unwanted products, shortages of products in high demand, and lower margins due to aggressive markdowns or reactive inventory balancing. But by managing product assortment based on customer demand instead of high-level generalizations, retailers can significantly improve their customer service levels and profitability. In addition, demand-based replenishment gives merchandisers the ability to effectively manage basic items and fashion items in one integrated environment.

The Answer: Manugistics Solutions for Retail

Manugistics Solution for Retail offers a single, comprehensive approach to demand management and replenishment. It addresses the unique challenges for soft goods and hard goods by providing the essential capabilities for supporting both lines of business. For core products where demand is relatively stable, the solution provides a combination of: > Statistical forecasting > Leading-edge inventory optimization > Dynamic transportation management These capabilities help ensure high levels of in-stock positions and high inventory turns with high customer service levels. For the more seasonal and high-fashion items, the solution provides a combination of: > Behavior-based capabilities, including life cycle forecasting, marketplace analysis, and pre-season allocations for initial presentation > Robust sense-and-respond capabilities during mid-season replenishment > Integrated mark-down optimization for end-of-season clearance These capabilities allow retailers to intelligently reduce inventory to maximize profits through demand creation initiatives that take into account varied consumer profiles. To be effective in both core merchandise (basics) and seasonal merchandise (fashion), a genuinely best-in-class demand and replenishment solution should be able to: > Forecast demand and set optimal prices for stable, seasonal, and new products

Manugistics Demand Management and Replenishment for Hard and Soft Goods Retailers
> Enable the inclusion of the buyers wisdom and insights where statistics fall short > Determine optimal order quantities and support collaborative procurement > Calculate demand-based replenishment plans for core products > Optimize initial and follow-on allocations for fashionoriented and seasonal products > Sense and respond to significant shifts in buying behavior > Collaborate with suppliers on updated forecasts and replenishment requirements > Re-allocate inventory and optimize transportation and logistics costs > Calculate optimal markdown and promotions strategy based on market responses > Provide a flexible environment where product characteristics, and not product classification, determine how a product is managed > Consider manufacturing and vendor availability to service retail outlets and merging manufacturing timelines with retailers needs The Manugistics Retail solution not only supports all of these essential processes but also supports the sourcing complexity and high product counts that are inherent in the retail supply chain. As more companies face complex demand management challenges, they are looking for tools and techniques to identify and analyze the true drivers of consumer demand so that they can better understand the demand characteristics of their products. Such drivers of demand may include: > Environment econometrics) (weather, calendar, demographics,

> Marketing mix (advertising levels, consumer awareness, price, display, distribution, promotion activities) > Competition (advertising, price differences, new products, proximity of store) > Store attributes (assortment plans, store layout, square footage, number of displays) With access to better information such as point-of-sale, demographic, and economic data planners are better able to analyze these various drivers and better understand the demand characteristics of their products and the demand management needs of their organizations. To address these differing demand management needs, the Manugistics Solution for Retail encompasses a comprehensive range of techniques for analyzing demand and provides the appropriate techniques in an integrated set of tools. These techniques form a continuum of increasing forecast accuracy that corresponds to (1) increasing data volume and (2) user skill. They include: > Time-series analysis > Advanced time-series analysis (Lewandowski) > Judgment forecasting (expert estimates or management targets) > Event forecasting (quantification of marketing and sales actions) > Critical causal indexing (integration of predominant causal indices) > Life cycle forecasting

Demand Management: Different Forecasting Techniques for Different Planning Needs

Historically, companies have used classical methods for demand analysis and forecasting, and they have supported sales planning activities with detailed splitting of products and locations. This technique has worked well in the past and will continue to be appropriate for some companies but a growing number of business environments require a more robust process for accurately projecting demand. Determining the most appropriate technique from among the many techniques available for analyzing demand depends on the demand characteristics of the products and on the needs of different companies and trading networks. The goal, however, remains the same: making sure the product is on the shelf at the right time, while incurring the least cost.
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Time-Series Analysis
Time-series analysis is used to extrapolate demand history into the future and includes the traditional forecast components of level, trend, and seasonality. This type of analysis assumes past usage, indicates future usage, and is highly effective for

Manugistics Demand Management and Replenishment for Hard and Soft Goods Retailers
products such as tools or clothing basics for which demand is usually steady or only somewhat seasonal. Time-series analysis techniques include time-weighted average, exponential smoothing, linear regression, and the Fourier Series family of models. judgment forecasting requires tools that capture estimated forecast data at any level of aggregation, in any bucket of time, and in any unit of measure. This typically represents market intelligence not captured in historical or causal data. The Manugistics solution enables you to intervene at any level region, category, product, etc. you wish. It then synchronizes the adjustment across all levels of the hierarchy.

Advanced Time-Series Analysis

The Lewandowski method provides advanced time-series analysis and a more robust forecasting method, which combines linear regression and exponential smoothing. This method automatically recognizes the peculiarities in the data of a forecasting unit and chooses the appropriate technique to accurately analyze history and to project forecasts based on specified requirements like time frame, annual budget, product type, and market dynamics. Unlike other methods, which typically extrapolate past sales into the future, Lewandowski applies pattern recognition techniques to identify the appropriate method and unique set of parameters that match each given demand pattern. This approach generates two optimal methods: one designed to describe historical development and one designed to produce the most accurate forecast. Using this combination, the Lewandowski method: > Responds well to changes in the marketplace > Gives early warning of trend changes > Applies particularly well to stochastic time series > Suits large problem sizes Because the Lewandowski method is good at uncovering changes in demand and accounting for them in its forecasts, it applies particularly well to fashion items, which can trend up or down quickly, and to the problem of geographic allocation of such products, which can trend differently in different regions. For items that lack an extensive history, Lewandowski can extrapolate from like items in order to produce a forecast.

Event Forecasting
In demand management today, the difficulty of manually estimating the impact of events limits the ability of planners to manage multiple events across multiple products, locations, or customers. In both business-to-consumer and business-tobusiness environments, the difficulty arises with events such as major delivery problems, competitive activity, or natural disasters. To address the challenge of accounting for these events in forecasts, the Manugistics solution provides event forecasting. Users no longer must manually estimate and specify the effects of future events. Instead, the user simply provides information about the timing of past events or promotions and the technique infers a demand profile that can then be applied to future forecasts. The demand profiles are stored in a library and used to project future events, automatically accounting for any adjustments to mean and trend. The benefits of data-driven events forecasting include the following: > One-time past events can be isolated from history and removed from the forecasting model, improving the accuracy of time-series forecasts for turn demand. > The effects of future events can be forecast using combinations of profiles in the library. > Event profiles the percentage impact that an event has on demand can be stored in this library and reused in combination with data-driven event capabilities. > Promotional lift can be separated from baseline demand, using minimal data instead of requiring detailed analysis, to determine the percentage impact of the promotion. > The technique applies across multiple industries, including consumer products, automotive, electronics and high technology, durables, and others.
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Judgment Forecasting
Forecasting is both an art and a science. Sometimes there is no substitute for fine-tuning forecasts with human judgment. At a minimum, you must be able to augment statistically derived time-series forecasts with management overrides. Such

Manugistics Demand Management and Replenishment for Hard and Soft Goods Retailers
With Manugistics event forecasting, you no longer get blindsided by events. Instead, you can proactively plan for them. Poor visibility into events and their impact result in excess inventory to handle just-in-case scenarios. With event forecasting capability you have a powerful tool that automatically and accurately predicts the impact the event will have on demand ensuring adequate supply of product to meet the demand. families are linked to external variables that influence demand. For example, in the sale of air conditioners the weather, geographic location of customers, and price of the product may all affect the demand for particular items. The weather may affect the entire product family in a similar manner, so this causal factor would be attached at the product-family level because it would influence each product within that family. In instances where geographic location affects only certain item groups, this causal factor would be specified at the item-group level. Further, because the price elasticity of each item may differ and may therefore dampen or lift each item in a different manner, the causal factor of price would be specified at the item level. In each case, advanced causal modeling can be used to calculate the impact on demand.

Causal Modeling
Manugistics solution also provides critical causal forecasting capabilities to capture demand drivers that have a continuous character, such as weather effects (average weekly temperature, number of sunny days in a given week), non-seasonal calendar effects (number of working days, timing of specific holidays), or price and price elasticity. Additionally, basic marketing variables such as end of season promotions (e.g., 25% off during February and 40% off during March) may also be included in the analysis and forecast. Critical causal indices external variables such as price and consumer spending in retail, weather in grocery retail, and new housing starts and interest rates in hardware retail become extremely important when medium-term variables influence sales. For example, during a dip in consumer confidence, all forecasts based on time-series analysis alone would show downward trends. If there were no causal index to indicate that consumer confidence was expected to rise soon (say, two months later), lower sales forecasts for the period shortly after the rise would result in lost sales due to stock-outs. The advantages of critical causal indexing include the ability to: > Work for continuous phenomena > Improve historical analysis > Simulate effects of changes in causal values > Significantly improve forecast accuracy With the Manugistics solution, advanced causal factors can be applied throughout the demand management process to forecast the future. Information on relevant causes is incorporated into the forecasting problem and items or item
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Lifecycle Forecasting
Even robust, causal-driven forecasts have difficulty accurately predicting demand for products, like womens fashions, that have extremely short lifecycles and little or no history from which to derive a forecast. In these cases, lifecycle forecasting techniques are required to estimate the profile, duration, and magnitude of demand. These techniques can create lifecycles from historical sales patterns, index them, and store them for future use. In addition, the Manugistics solution enables you to combine these life cycle profiles in any number of ways to reflect the attributes of lifecycle products. For example, a historical profile of girls sneakers may be combined with the historical profile of girls loafers to derive a lifecycle forecast for a new type of casual shoe. For this method to be effective, the lifecycles must be dynamic during the life of the product and be adapted and modified based on initial and on going actual sales. These capabilities enable retailers to create an initial forecast for start of season purchases and then dynamically adapt to actual demand, ensuring that products are in stock where they are selling and not overstocked in areas of low demand.

Manugistics Demand Management and Replenishment for Hard and Soft Goods Retailers
Maintaining Optimal Forecast Accuracy
The many benefits of better forecasting include lower inventory holding costs, less inventory obsolescence, less working capital investment, better on-time order fulfillment and faster order-to-cash cycles, and more up-to-date products for customers. But demand is a moving target; and over time, product demand patterns change. Seasonal products may move into the mainstream, losing their seasonality and exhibiting more stable demand characteristics. Meanwhile, products that have historically exhibited stable demand patterns may begin to trend, especially near the end of the products life cycle. A high fashion item may be so successful that it becomes an everyday staple. Conversely, an everyday item may suddenly become part of a hot new fashion trend. Yet while the demand patterns change, the forecasting system continues to use the forecasting parameters that were configured into the system during implementation, when the demand patterns for products were first analyzed. As a result, forecast accuracy inevitably begins to deteriorate as demand profiles change. Demand profile changes are challenging to detect because it is difficult for a demand planner to recognize an actual profile change versus a temporary demand fluctuation. Planners must then determine what type of trend is present. Is it linear, is it short-term or long-term, or is there no trend at all? Has the underlying average demand undergone a step-change? Are there statistical outliers, and should they be excluded from the calculations? Is the variability high or low in relation to the average demand? Is the absolute magnitude of the demand a factor in the forecasting decisions? And even if the planner can satisfactorily answer these questions, resetting forecasting parameters is a time-consuming and often tedious process. As a result, demand profile changes go either undetected or detected well after the actual profile shift has occurred. And because of the time required to adjust forecasting parameters, demand profile changes are not reflected in the system, or updates are significantly delayed until long after the fact. To help companies maintain the highest forecast accuracy, Manugistics now offers Demand Classification a hosted, subscription-based service that provides a systematic, scientifically-based method of ascertaining and measuring the characteristics of demand history so that the most appropriate forecasting techniques can be assigned automatically. The advantages of using Demand Classification far outpace traditional pick best algorithm approaches, generating more accurate forecasts more consistently and with significantly less effort. The Demand Classification logic will not only recommend one or more preferred forecasting methods, but also specify a preferred set of parameters, by item, for each method. With the Manugistics Demand Classification service, companies that use the Manugistics demand solution now have the added ability to maintain consistently high forecast accuracy. And because the Manugistics Demand Classification service is a hosted solution that works seamlessly with the Manugistics demand solution, companies that use it do not have to implement any software, add additional hardware, or pay for implementation consultants. Periodically generally once a quarter to once a year the company sends Manugistics the actual demand history for all of the companys products, using automated file extract routines that already reside in the on-site Manugistics solution. Manugistics processes that demand history through the Demand Classification algorithms and generates updated classifications for the products as well as the optimal forecasting parameters for each product and associated algorithms. Through existing file import routines, the updated classifications and parameters can be automatically imported into the clients Manugistics demand forecasting engine. Once imported, updated classes and parameter settings for each of the products are automatically configured. Because Manugistics does not attempt to infer product characteristics from product hierarchies, our clients drive significantly more value from their operations by understanding and planning to the truly basic replenishment items (in both hard lines and soft lines) and the truly fashionoriented items. By providing in-depth analysis and systematic decomposition, Manugistics Demand Classification services also assist buyers in isolating the fashion items from the basic items. This demand-based classification of merchandise can also be done at the facility or location level, which gives category managers even greater control in optimizing assortments.
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Manugistics Demand Management and Replenishment for Hard and Soft Goods Retailers
The comprehensive demand forecasting techniques in the Manugistics Solution for Retail, coupled with the Manugistics Demand Classification service, can provide a uniquely flexible demand management environment that supports multiple methods of forecasting, from the pure statistically-based time series to the judgmental and life cycle based techniques, each suited to a particular product characteristic and designed to ensure a consistently high level of forecast accuracy.

Dynamic Recalibration
As demand changes, the solution dynamically adjusts recommended inventory levels. If demand is greater than expected, SKU-level coverage durations and forecast consumption logic will increase the recommended inventory level. If demand is less than expected, overall recommended stocking levels for the planning period will automatically decrease.

Replenishment: Increasing In-stocks and Simultaneously Reducing Inventory Costs

Retailers have always faced the dilemma of ensuring in-stocks while keeping inventory costs as low as possible. Today that challenge is compounded by increasing competition, new channels, and eroding brand loyalty. A mixed retail environment of hard lines and soft lines requires a comprehensive yet flexible solution that supports multiple stocking strategies. The fulfillment component of the Manugistics Solution for Retail is designed to help build and position the right amount of inventory at the right place at the right time and allocate constrained product in the most optimal way according to your objectives. Inventory levels across the network are optimized to ensure that targeted customer service levels, minimum presentations, and open-tobuy constraints are met. Key components include:

Overseas Sourcing and Domestic Sourcing

Sourcing of products can be a management nightmare. With Manugistics time-phased sourcing rules, users can seamlessly switch between pre-season sourcing overseas, where product can be procured at a lower cost, to on-shore domestic sources, where lead times are shorter but overall product costs are higher. The replenishment module of the Manugistics solution can dynamically adjust source allocations to take advantage of overseas opportunities when lead times permit it and source from higher-cost suppliers when service levels are in jeopardy. In addition to the switching of sourcing points, the Manugistics solution enables contingency planning for delayed shipments and short shipment orders. These capabilities, in conjunction with our alerting, substitution, and allocation methods, can mean the difference between out of stock and alternative stock, which can dramatically affect consumer perception and loyalty.

Multi-Echelon, Time-Phased Replenishment Planning

Time-phased replenishment planning creates inventory recommendations that are based on true demand, accounting for seasonality and promotions. Both hard lines and soft lines include seasonal items that require pre-builds of inventory. Time-phased coverage durations ensure that inventory levels for seasonal items are increased during peak season, but reduced as demand drops, avoiding inventory build-up. Flexible safety stock rules optimize inventory levels by using statistical safety stock calculations for items with predictable demand and min/max strategies for items with more sporadic demand. Replenishment builds consider network-wide constraints such as distribution capacity, supplier minimums and order quantities, shipment constraints, minimum presentations, and opento-buy allocations.

Allocations: Maximizing Profit on Scarce Inventory

Inventory strategies for fashion-based soft lines or seasonal hard lines usually require some form of product allocation a critical capability that can mean the difference between ordinary and extraordinary business performance. Because some items are ordered only once in a pre-season buy, merchandisers must determine how to allocate those products to maximize profits while demand is high. Merchandisers have a single opportunity to allocate the products making the wrong decision can ruin a season. Manugistics provides the core information at the right level of granularity and optimal configuration to ensure that the initial distribution of inventory is as accurate as possible, while providing the recommended hold-back quantities as a hedge against poor information.

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Manugistics Demand Management and Replenishment for Hard and Soft Goods Retailers
Manugistics allocation capabilities provide flexible allocation rules that support the following allocation strategies: > Proportion > Weighted > Fair share > Profit- and priority-based > Push/pull strategies > Date-sensitive inventory These allocation strategies are based on the core capabilities of demand prediction that have already taken into consideration variables such as: > Varying geographical demographics > Past purchasing patterns > Overall competitive landscape > Buyer insight The solution also allows the buyer to perform allocations at varying levels within the hierarchy, including and excluding individual stores from the allocation or prioritizing specific regions or specific stores. The solution can also perform back to performance allocations based on sales patterns to determine which stores are selling products at higher rates and re-deploy products to those stores. > Provide flexible planning horizons > Enable consensus forecasting internally and with trading partners > Manage exceptions > Measure and analyze performance > Conform to the testing standards of the UCC Interoperability Program These powerful capabilities can help enable you to: > Increase sales through improved forecast accuracy > Improve customer service levels through integrated trading partnerships > Reduce out-of-stocks > Match inventory availability to promotional plans > Accelerate inventory turns by matching inventory availability with promotional plans > Reduce selling costs through coordinated trade fund management and promotion planning A successful collaboration initiative requires the designing of a collaborative process that incorporates best practices. As one of the founders of the CPFR process, Manugistics has helped dozens of companies, including GNX, build best practices into their collaborative processes from the very beginning.

Synchronizing Demand and Supply Through Collaboration and Event Management

Reducing out-of-stocks and improving customer service requires retailers and suppliers to synchronize their efforts. Reality can more closely mirror optimized recommendations when trading partners have adequate visibility into requirements. Built with adherence to VICS CPFR standards, Manugistics collaborative solutions and services provide the foundation needed to share critical information such as forecasts, promotions, inventory, store-level data, and transportation requirements with strategic trading partners. Its powerful features include the ability to: > Incorporate business rules > Enable market planning > Manage multiple forecast streams

Event Management and Dynamic Deployment: Sense and Respond

Integrated event management is an essential component of a synchronized retail supply chain. High SKU counts and complex supplier relationships require a manage by exception approach. Allocation processes can also be greatly enhanced with integrated event management. As previously noted, allocation is used extensively for soft lines (and seasonal hard lines) to set initial presentation plans as well as in-season replenishment. Usually, a percentage of total available inventories will be pushed to the stores at the start of the season, while the remaining inventory is held back to be pushed based on response to actual demand patterns. Retailers must have the ability to quickly identify trends, changes in demand patterns, and market events that will influence subsequent distribution plans.

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Manugistics Demand Management and Replenishment for Hard and Soft Goods Retailers
Manugistics event management and analysis capabilities provide extensive visibility, facilitating the detection, resolution, and root cause analysis of user-defined business conditions. Using push technology, merchandisers are proactively directed to the most significant issues and are presented with resolution paths to help correct problems. Examples of exceptions that would trigger further analysis and resolution might include the following: > Forecasted sales will not meet the quarterly financial plan > Projected store inventory exists beyond end of season for item x > Delayed shipment may affect customer service level > Item classification changes categories > Forecast performance trends negatively > A promotional campaign exceeds maximum allowance allocation > Change in economic indicators may trigger shift in demand These causal factors can also be used as triggers for adaptive planning and event management. For example, if an economic indicator such as housing starts affects demand, the Manugistics solution can monitor change patterns in the indicator, test its relevance, and alert planners to the possibility of a significant shift in demand. Because the solution is monitoring exceptions rather than all transactions merchandisers can focus on valueadded activities. Further, monitoring leading indicators such as a change in housing starts and its potential impact on, say, the demand for washers and dryers enables retailers to sense a demand change and respond before production capacity or inventory has already been committed. Certain exceptions can be configured to trigger an automated response such as system selected allocations (send more) or system recommended transfers. Other exceptions, such as total network supply is significantly greater than projected demand may trigger a markdown optimization analysis. stores. Unfortunately, todays markdown practices often result in low margins, low inventory turns, and even adverse effects on brand image. The markdown optimization component of the Manugistics Solution for Retail enables retailers to link promotion and liquidation plans to inventory levels and business goals. The solution enables merchandisers to: > Simultaneously model multiple market responses > Evaluate alternatives based on user-defined parameters > Determine the most effective markdown strategy based on business goals > Optimize level and timing of discounts > Optimize product pricing throughout the life cycle > Analyze impacts and results through a web-based workbench > Determine cannibalization and halo effects

The Manugistics Advantage

Manugistics provides the framework, the optimization experience, and the industry knowledge to meet and master todays retail demand management and replenishment challenges from forecasting to replenishment to allocations, alerting, and markdowns. Manugistics understands that basic items and fashion items behave differently, drawing different consumers for different reasons into stores and to web sites. In fact, all retail products have unique characteristics; they are defined by the very sectors that created, branded, and marketed the products to the end consumer. By basing management of demand and replenishment on the demand characteristics of products, instead of artificial, high-level generalizations, the Manugistics Solution for Retail helps retailers dramatically lower inventory costs and improve service levels, leading to increased sales. Manugistics solutions are designed to support multiple industries. Based on more than two decades of experience, we have developed the solutions and capabilities required to forecast and replenish product in the apparel, automotive, building materials, consumer electronics, consumer packaged goods, food and beverage, footwear, industrial, office products, pharmaceuticals, and textile industries industries that produce the very kinds of products found in the typical retail environment.

Markdown and Promotions Optimization: Linking Promotion Incentives to Inventory

While advanced planning tools will greatly improve a retailers ability to match supply and demand, situations will always arise in which retailers need to clear inventory from their
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Manugistics Demand Management and Replenishment for Hard and Soft Goods Retailers
Offering a comprehensive and integrated approach to managing the complexity of your business, the Manugistics Solution for Retail provides powerful capabilities that help drive profitable growth and provide competitive advantage. From sell-side customer-focused operations such as pricing and promotion optimization to replenishment and demand planning to vendor compliance and collaborative logistics, Manugistics gives you the power and intelligence to analyze and optimize business processes. Our comprehensive solutions combine advanced pricing and revenue optimization, supply chain optimization, and leading-edge supplier relationship management. The integration of these solutions helps enable companies to maximize profits by simultaneously boosting revenues and reducing costs while managing complex trading partner relationships and achieving effective operational planning. Whether as part of a wider solution or to address demand management and replenishment, Manugistics Solution for Retail can help bring you closer to that goal.

About Manugistics Group, Inc. Manugistics powers the demand-driven supply chain. Today, more than 1,200 clients trust Manugistics to help them drive profitable growth, unlock the value of their existing IT investments, and ensure the security and integrity of their global supply chains. Its clients include industry leaders such as AT&T, BMW, Boeing, Cingular, Circuit City, Coca-Cola Bottling, Delta Air Lines, DHL, Diageo, DuPont, Harley-Davidson, John Deere, Marriott, McCormick, Nestl, Nissan, RadioShack, Sanmina-SCI and Unilever. For more information about Manugistics and our solutions visit our website www.manugistics.com
Copyright 2005, Manugistics, Inc. All rights reserved. Manugistics is a registered trademark, and the logo mark is a trademark of Manugistics, Inc. All other company and product names may be trademarks and are the property of their respective owners. CC0893-0105

Manugistics, Inc. 9715 Key West Avenue Rockville, MD 20850 Tel: 301-255-5000 Fax: 301-255-5370