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Marshall Fisher
The Wharton School

"The Role of Optimization in Supply Chain Management"


Institute for Mathematics and its Applications (IMA)
September 23-27, 2002
Varvard/Wharton Project: Vow can recent advances in Information
Technology improve the way retailers forecast demand and plan
supplies?

Apparel, Consumer Books, CDs, Other


Footwear Electronics Jewelry, Toys Product
and PCs Theme Stores Categories and
Multiple Product
Categories
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Agenda

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State of retail supply chain management today

31%

Department 26%
Too many of
store the wrong
markdowns 21%
as a
products
percentage of
sales 16%

11%

6%
1970 1980 1990 1995

³One third of customers Too few of


entering a store leave without the right
buying because they can¶t find products
what they came for´

_ 

     

  
Two knit tops appeared wellbought
at the
 chain
 style
 color level «

Blue Hooded Top rint Top

7  86 86


869: 886;99

   <8=:> <8=:>

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Blue Hooded Top rint Top


rut at the style/color/size/store level, the blue hooded top was seriously
under-bought, especially in the largest size

Week Week

_ 

     

And SKU-door level  |


analysis reveals #$
huge lost margin !

rlue Vooded Top Print Top

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4$   
What¶s causing these problems?

Long lead times Up to 11 months for apparel


products sourced from Asia, but
some ± World and Zara ±
achieved 2 week lead times

Inaccurate forecasts 50% -100% errors for a season


forecast at chain level is typical

_ 

     

P  f t  highly i t


(Eh rl  t C p  t  Pti l Styl/C l  f
W m¶  f   Mj  Ctl g)




t l
m





    
4 t m

vg E  i 55%


_ 

     

What¶s causing these problems?

Long lead times Up to 11 months for apparel


products sourced from Asia, but
some ± World and Zara ±
achieved 2 week lead times

Inaccurate forecasts 50% -100% errors for a season


forecast at chain level is typical

Store level execution Stock outs caused by inventory


cannot be assumed record errors or product in the
backroom

_ 

     

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Retailers have data that can help, but don¶t use it

Scanners and data


warehousing has
created huge ³We are awash in data and starved
databases, but for information´
retailers lack ability
to analyze this data

³Vow can history Vistory -> seasonality, price


possibly be useful elasticity, store/sku patterns,
in a fashion size mix, reaction to
business?´ promotion, etc.

_ 

     

Retailers have data that can help, but don¶t use it

Inadequate tools - Reality is many products like


Planning paradigms shoes, home fabrics, books &
are replenishment of music, toys, etc have features
staples and µone and of staples and fashion ±
done¶ category limited life but can replenish &
planning for fashion items matter
products

Need to manage at rut can¶t do this without analytic


the SKU store level tools ± too much data for a
manual approach

_ 

     

Too many decisions to actively manage

Data for median retailer in our survey

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  5 6*

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---> $4.14 gross margin per week per stock point

Only way to actively manage this is by computer

_ 

     

The payoff from fixing this can be huge

retter analytics can Data + analytic tools


easily double a
= better in-stock + fewer mark-
retailers profit downs

=profit increase of 5 ± 10% of


revenue

_ 

     

10% higher in stock leading to 10% more sales doubles profit

+   ' B  5



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Product Life Cycle Planning


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Merchandise Depth Test

Typical calendar for Fall season

Early
Test Read Primary sales season Closeouts
May Aug Sept Dec Jan Feb

Goal is to predict total chain primary season sales


from test sales

2      % ;%  ! 


   71%   <  =  1M 
 


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Test design issues

Test Stores

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Testing practice

 Written survey
       
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Typical testing process

   average stores    


 

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Predicted vs actual using typical process with 25 test stores at apparel


retailer

Actual
Sales

Predicted Sales
_ 

     

New testing process uses store clustering to find representative test


stores

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  $   store from each cluster  B  

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 predict sales of each cluster6    


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Test store selection problem

Season sales Difference in sales


mix between store
of store i
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=1 if store i  ! @   as a
chosen
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cluster 
represented 9 >   !  ?11 ö 
by test store j
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_ 

     


Predicted vs actual using new method with 10 test stores at same retailer

Actual
Season
Sales

Predicted Season Sales


_ 

     

Performance of the new method for four retailers

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What Drives Mix? Correlation retween Sales Mix and Store Descriptors

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Product Life Cycle Planning


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Season     
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Forecast Committee Results

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The Committee Process Is A Powerful Way To Determine What You Can


And What You Cannot Predict

 
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The Initial ruy Minimizes the Cost of Stockouts and Closeouts

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Initial 
Demand 


        
 
 
Closeout
 
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Initial 
Quantity
      
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Read/react can be used to evaluate the impact of Lead Time reduction


Incremental $
Gross Margin as a
% of rase Case
Revenue 
  
   

 

 
 

Lead Time (Weeks)

_ 

     

Nine West Example

Objective To improve demand forecast using early


sales data and decide mid-season replenishment order
quantities

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Needed forecast model that considers impact of price and supply

   


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 H I;         
nd
en we go
accura
e forecas
s
Model Fi
on Spring 97 Sandals His
ory Predic
s Spring 98 Sales wi

16% verage Error








c
al Season Sales














          
Forecas
of Season Sales

_ 

     

Weekly forecas
vs ac
ual for one sandal

Forecas
ing Weekly Demand for Sandal 4 Using
Price Da
a - Error 3% (verage Error 14.5%)

P

P
Percen
age of Sales



P
  

P

P
  
Week

_ 

     

Application of this approach to one style-color

Original Optimized Actual


plan plan based results
on our
work

Unit Receipts 6  6  6 

Unit sales 6  6  6 

Gross Margin $  6   6  6 

_ 

     

Product Lifecycle Planning

Different Challenges require Different Algorithms


New Product Intro            5 
   

Initial ruy -$   $


B#O #6 (      
 

Read React  


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Replenishment 0 
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End of Life    $


      
O   #
4R System Clients ± Partial List

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Retailer/Supplier Collaboration via Common 4R Planning Platform


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% +  

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On Vand inventory prior to 4R

OVO





 

 

4R

Cont













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Lost sales prior to 4R

Lost ales






 

4R

 Cont

 











_ 

     

Lost sales for 4R SKUs decreased from 6.6% to 2.2%

Lost Sales






 

4R

 Cont

 











    
_ 

     

Weeks of supply relative to Control SKUs decreased 7%

W S





 


 4R

Cont













    
_ 

     

Summary ± the profit increase from retail analytics is large


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        3% reduction in
  lost sales with 7%
less inventory
Profit increase = Profit increase = from next
11% - 18% of 3.5% of revenue generation
revenue replenishment
46% gross
algorithm
margin increase
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Research Opportunities in Retailing

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Real demand differs from textbook image

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Research Opportunities in Retailing

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