Talk to the hand… Why does Retail persist on blanking the benefits of S&OP?
The global retail sector presents the perfect business conundrum for sales & operational planning (S&OP): a delicate tightrope of supply and demand must be balanced, with cash controls tightening as you try and move forward. An excess of stock keeping units (SKUs) weigh heavily alongside complex, outsourced supply chains. Also, what about the high cost of display and limited marketing funds? Not forgetting the myriad of short life cycles and variable customer habits. These all present a perfect set of problems for S&OP to solve.
So, why does retail continue to ignore its benefits? Dave Alberts, Director of Crimson & Co discusses:
Being exceptional at merchandising is no longer enough in retail. Improved supply chain processes now also provide an important market differentiator, and S&OP can have a significant role in helping manage the trade-offs like cash flow for purchasing the merchandise, important display space in the store, marketing funds and required profits.
Here are the current areas where retailers live or die and how S&OP can help:
Typically a retail customer wants multiple options when making a purchase. But, the ideal assortment isn’t about limitless options because that would break the constraints. Effective assortment planning is about selecting the right number of items with appropriate variety in a category to optimise space and cash availability. This also includes the pricing of the items to achieve profit margins and to find ways of guiding customers to purchase these items that will maximise profit.
Assortment decisions are vital and these guide critical merchandising decisions as to where to put products, how products should be displayed and how much should be purchased. S&OP provides a structure to manage the relevant trade-offs and make the right assortment and allocation decisions.
Promotions exist to grow sales volumes, increase traffic into stores and amplify brand awareness. Different elements take on different grades of importance to different retailers, but effective promotional planning should always address media, store operations, product selection and pricing, deliveries – anything that contributes to higher profits and high levels of customer satisfaction during a promotional event. S&OP can help by providing an ideal structure to facilitate decisions that maximise profits from promotional activities by examining and tightly managing product availability and inventory budgets.
Sales and Inventory Planning
Sales and the associated gross profits must be planned on both a financial and unit basis. Typically, financial sales plans are managed at levels in the product hierarchy above SKU level and in monthly or quarterly periods. The SKU level plans define what is needed to achieve the financial sales plans and identify which items need to be purchased, displayed and promoted, and this is typically defined in daily or weekly buckets.
Inventory planning also needs to occur at both the SKU and financial level. The financial inventory plans determine what is ‘open to buy’, and the SKU inventory plans determine what needs to be purchased, in what quantities and when. The inventory plans drive the flow of materials from suppliers through to the actual points of sales, making sure the item level plans match the financial plans, and it is all aligned to maximising profit.
Across all of these activities there are multiple functions that sometimes have conflicting goals and a need to link executive and operational level decisions with appropriate escalation paths and filtering. It’s a complex area, but this is what S&OP is designed to address.
How can S&OP help?
S&OP can help the retail functions involved in assortment, life cycle, sales & inventory and promotions, to reach a consensus on the plan that will achieve those outputs successfully. To do this, the significant issues need to be filtered upwards, and the decisions to resolve need to feedback downwards, so that everybody is working together horizontally and vertically to maximise profits, by delivering what the customer wants or what the retailer wants them to want.