Heading into the second holiday season after the pandemic upended business as usual, demand planning is more important than ever.
With the situation changing on a near daily basis, historical data is no longer a reliable indicator for sales projections. Instead of relying on the past for planning, experts say companies must leverage technology and more real-time data to inform their buying strategies for the crucial fourth quarter. And how effectively—or not—a company can predict demand directly correlates to performance and profit.
“The holiday season is probably one of the biggest drivers of demand planning, and it’s a critical step for reducing inventory costs, increasing inventory turnover and improving the customer experience,” said Norbert Altenstad, sales and marketing manager at supply chain software company Jesta I.S.
Holiday 2021 is shaping up to look very different from the previous year. According to data from the National Retail Federation, November and December sales across the board were up 8.3 percent year-over-year in 2020, but sales at apparel and accessories stores slid 15 percent from 2019 figures.
This year, experts expect softline sales to be less soft as pent-up demand has shoppers seeking out clothing beyond loungewear and active apparel. In May, a survey conducted by NPD Group found that 50 percent of consumers had plans to buy apparel in the next 60 to 90 days, making it the top category for expected discretionary spending. Apparel was followed by footwear at 37 percent.
“There’s going to be a balance of comfortable clothes, as well as people trying to get a little bit more style back in their wardrobe,” said Clay Parnell, president and managing partner at consulting firm Parker Avery Group. “I would see the whole apparel side being quite a bit heavier than it was a year ago.”
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Prepare for the unknown
Although the holiday sales outlook is looking up, things could change quickly due to factors like inflation or Covid spikes. Companies therefore have to be prepared for either an upturn or downturn in demand. “Recent advances in retail sales could be hindered if a post-summer pandemic wave causes new restrictions once more,” said Carlos Casado, vice president of growth at AI and prescriptive analytics platform Nextail. “Retailers will need to stay aligned with changing customer appetites for consumption or even revenge spending, should it occur.”
Compared to earlier years, pandemic shopping patterns have shifted. Rather than waiting for Thanksgiving to buy, consumers are expected to add gifts to their physical or virtual carts earlier. Forty percent of shoppers said in a 2020 NRF study that they began holiday shopping earlier last year, and this year the trend appears set to continue. A 2021 Shopkick survey found 25 percent plan to have most of their shopping done before Thanksgiving, and 10 percent are planning predominantly pre-Halloween purchases.
Getting inventory to the right place at the right time is imperative for the holiday season. Otherwise companies could be facing missed sales and profit. Per Altenstad, the ease of comparison shopping means that shoppers might migrate to competitive retailers or even a company’s own wholesale partners if an item isn’t available. He explained that retailers’ investment in inventory goes beyond the wholesale cost of goods to include distribution operations, transportation and other operational expenses.
Timely deliveries have become trickier this year, as retailers grapple with freight delays and port backups. Logistics congestion has also driven up pricing for international shipping.
With all of the unknowns about shipping this season, Amanda Astrologo, partner at Parker Avery Group, stressed the importance of contingency plans. This might mean ordering from multiple suppliers instead of relying on just a couple, or switching a portion of sourcing to domestic or nearshored vendors. Parnell pointed to the tendency of retailers to take a “set it and forget it” approach to allocation and replenishment activities and systems, rather than the more active management needed. “Just like everything else in today’s world, the processes and systems have to be configured to be much more responsive than they were perhaps in the past,” he said.
Another workaround for freight issues and product availability is buying and importing goods earlier. Astrologo has seen some clients do this, but to effectively deploy this strategy companies need to get “creative” to be able to store items—whether that means acquiring more warehouse space or using a shuttered storefront. One tradeoff when importing sooner is having to commit earlier. “If you bring more things in earlier, you lose some of that ability to pivot and capitalize on some of the big spikes,” said Astrologo. “You have to have the ability to flow through your supply chain or have opportunities to pull from different places differently than you would today.”
Altenstad advised against “knee-jerk reactions” such as buying earlier in favor of more “methodical” purchasing. He noted that companies must consider the carrying costs associated with moving up inventory buys, since goods would be waiting longer in warehouses before retailers can recoup their investment with sales. He believes that with options like endless aisle, dropshipping and dark stores, there won’t be an issue fulfilling demand—whether goods are shipping to stores, distribution centers or direct to consumer. “The critical challenge is,” he said, “do all these retailers or companies have the tools in place to be able to satisfy the need of their wholesale operations, their distribution networks and their direct-to-consumer order management system planning?”
“Customers are seeking further alignment with their suppliers so that they can be prepared in advance for what’s to come, given the climate of uncertainty over the past year and a half.”
– Carlos Casado, Nextail
Ensuring visibility
Once inventory has left the factory, having visibility and fulfillment flexibility will be a competitive advantage. Consumers today are leveraging multiple channels—from e-commerce to brick-and-mortar and buy online pick up in store (BOPIS). Data can assist retailers in allocating the right number of SKUs to each fulfillment point. Astrologo explained that with demand fluctuating across channels and geographies, agile merchants will be able to pack and hold merchandise or move it to another location based on real-time demand. “People who get innovative with fulfillment and think about it a little bit differently and not just stay within what they used to do, I think will win,” said Astrologo. “Those that stay a little bit more static will be challenged.”
In the past, Casado said companies may have pushed merchandise that was available to certain channels, at the expense of product availability at other points. Instead, if retailers face scarcity, he said, “The key is to allocate as little as necessary initially in order to hold back stock for flexibility as demand patterns change, and then replenish intelligently.” If inventory in a storefront is low, another option is to leverage endless aisle capabilities to keep the customer experience positive, Astrologo suggested.
Per Altenstad, the most sophisticated retailers are leveraging artificial intelligence and machine learning to analyze factors like shipping lead times and seasonality to inform forecasts. In contrast, those just starting out with more data-led demand planning should focus on getting information management in order. This includes determining whether the right data is being collected, and connecting with suppliers on a platform to share details like transit times.
“What we’ve seen is that customers are seeking further alignment with their suppliers so that they can be prepared in advance for what’s to come, given the climate of uncertainty over the past year and a half,” said Casado.
Rather than a “top-down” approach that is general and based on past data, Casado noted the importance of having current data to unlock flexibility. This “bottom-up” alternative allows decisions to be made with shorter lead times, enabling retailers to adjust to sudden shifts.
“The key for retailers will be to quickly identify and match new seasonality patterns that have arisen over the past year,” said Casado. “This is enabled by inventory management technologies that allow retailers to use fresher granular data for a much closer to reality demand, making it possible to more quickly capture changes and shifts and adapt to them faster.”
Companies are keen to avoid understocks, but overstocks are also an issue. Overbuying can put pressure on companies to mark down goods, thus lowering margins. “It’s always a traditional balance between having enough of the right inventory, making sure you can do a good presentation and offer the right shopping experience to the consumer, versus the risk of having too much inventory and getting stuck with it,” said Parnell. To mitigate risk, retailers might look at shallower buys than they have in the past.
Promotional activity may also look different this year. With consumers getting a jump on shopping earlier, they might not be able to wait for a sale to buy. “The mix of that from a consumer standpoint may change depending on how much they want the item,” Astrologo said. “There may be fewer units bought, but it might be at a different price point. We’ll see how willing they are to do that.”
Among the looming pandemic-related uncertainties is labor. Astrologo noted it’s unclear whether there will be enough personnel to staff stores, factories, warehouses and ports. Additionally, a perennial unknown for the holidays is weather, such as nor’easters that can cripple activity and shopping.
To navigate through changing situations, the key is keeping a real-time pulse on demand.
“Everything is still in a constant state of change, and that’s why it’s so critically important that retailers have not only the culture, but have the technology behind them to support change,” Altenstad said. “They need agility and flexibility—internally in their company and in their technology—to be able to support that need.”