Inventory Projections
You discover a terrific product that you know your customers will love. The vendor’s pen hovers over the quantity line on the order form. How much should you buy? Three catalog executives shared with Editor Donna Loyle their insights and methodologies for projecting how much merchandise to stock for each catalog campaign.
Ron Zientarski, vice president of purchasing and inventory management, Corporate Express, Grand Rapids, MI
Product: business-to-business office supplies and furniture
Size of warehouse facilities: The company has 257 office products locations, including 40 distribution centers spanning more than 6 million square feet.
SKUs: 70,000, but 7,000 to 25,000 are stocked in its warehouses at any one time.
Catalog Success: What criteria do you use when deciding how much of any one product to stock?
Zientarski: We calculate things such as demand and demand variations, lead cycles and service-level goals. Our calculations are warehouse-specific, and every item must live on its own. It has its own demand variation for that particular marketplace served by that warehouse. So our calculations also depend on the size of the warehouse to which it will be shipped.
CS: What systems do you use to help make these inventory projections?
Zientarski: E3TRIM, software from JDA Associates, and our own data warehouse that runs on an Oracle database system.
CS: Do these systems notify you when there are problems, such as projected overstocks or shortages?
Zientarski: Yes, we capture hits and history, different costs, and all of that information is accessible by our central purchasing department. We have 24 buyers on staff. On a daily basis, they can see the projected product shortages and overstocks, all reported online. Our buyers review these reports daily.
We have a variable order scheduling system that looks at orders every night and knows when to recommend we place an order with the vendor. We can see when an item is crossing over into the safety-stock level.
CS: How do you determine the accuracy of your inventory projections?
Zientarski: We look at a forecasting accuracy metric and an inventory accuracy metric. The system calculates a theoretical inventory based on these stats, and compares it to what the actual inventory is. Then our buyers can make inventory projection determinations. They’ve been doing this work a long time, so they have a good feel for it.
We can look at the inventory rates at the buyer level, warehouse level and vendor level. So we can drill down pretty well to see, for example, what’s causing a problem.
CS: How have you achieved that accuracy, and how do you plan to maintain or even improve it?
Zientarski: We’d like to see vendor collaboration on our inventory projection needs in 2003. Vendors could share in the forecasting duties. We don’t currently do that.
We trade files, and we can give the vendor our product needs a year ahead of actual sales. We’re moving toward a system in which our top vendors can see our data via the Internet and help us to forecast up the supply chain. JDA offers such a collaboration system, and we’re looking at that for 2003.
CS: With 70,000 SKUs, however, won’t that be a huge endeavor?
Zientarski: Not really; 40 of our vendors account for 90 percent of our product sales. We have about 300 vendors in all.
CS: Who creates the inventory forecast?
Zientarski: Our purchasing department. The merchandising department puts the catalog together, and before they start on the next book, they meet with the purchasing department to get input on sales forecasts and other things. We can copy forecasts and seasonal profiles, and then apply them to new items.
CS: What forecast tolerance percentages do you use?
Zientarski: We have a deviation rate of +5 to -3 percent.
CS: How many inventory turns do you have per year or per month?
Zientarski: We really don’t focus on that. Instead we look at item-specific metrics, such as service-level goals and profitability levels. For example, some products we can buy in 60- or 90-day supply because their carrying costs are pretty low.
CS: What have been your toughest inventory-projection challenges, and how have you overcome them?
Zientarski: I’ve been here since 1995, and we’ve had a lot of transition in that time. We’ve had two major mergers in the last three years. We’ve converted to a central purchasing system. The challenge has been in consolidating the different purchasing habits of our acquisitions and communicating effectively with an expanding base of customers.
Lisa Hammond, CEO and founder, Femail Creations catalog, Las Vegas, NV
Product: general merchandise, with a concentration on items made by women artists and business owners
Size of warehouse facilities: the company’s outsourcer allocates about 10,000 square feet
SKUs: 3,500
Catalog Success: What criteria do you use when deciding how much of any one product to stock?
Hammond: We use past performance indicators. They’re strong guidelines for us. For example, if we’re considering a piece of jewelry, we’ll look at past sales of our jewelry category and any other related product sales.
But in reality, it really comes down to gut, especially for a new item or category. That’s why I haven’t handed over this task to anyone else, because a lot of this information is here between my ears. To be a great inventory forecaster you also must have a deep knowledge of the past and be very familiar with sales history. Knowing what has sold well in the past is a good indicator of what will sell in the future.
CS: What systems do you use to help make these projections?
Hammond: We don’t have any special forecasting software. We use an Excel spreadsheet program. We call it a demand report. We forecast out based on the life cycle of that catalog. In the first few weeks after a catalog drop, I watch that demand report daily, looking at the demand level for each item in the catalog to see how it’s trending. Toward the end of the cycle, I may look at it once every other day, then maybe once a week.
CS: How do you determine the accuracy of your projections?
Hammond: Within the demand report spreadsheet, I look at each SKU’s sales to date versus projected sales through the life of that catalog. I’ve found that calculation to be as accurate as any software program I’ve seen.
A few years ago we hired a consultant to help us with some things, and she used a software program to calculate how many products we should be buying. I looked at that and thought, “Well, these are not the numbers I would’ve used, but maybe the consultant knows something I don’t, so let’s test this.” We kept her projections, and I did my own as I normally do.
Then I bought based on my projections, and all I can say is, I’m glad we didn’t go with her plan. It was a good lesson for us. Software is only as good as the data you put into it. In the end, a live person still must look at that data and make decisions based on it.
Some catalogers get hung up on the computer data. They tend to believe the data over other measures. But when I’m looking at my demand reports, I’m seeing things that can’t necessarily be measured by a computer. For example, say we sold 20 of a particular item today. Did 20 different people buy that item, or did one woman buy 15, and the rest were sold to individual buyers? Computers often can’t tell you that or aren’t programmed to ask, and yet that’s crucial information when making accurate inventory projections. You still need a human touch.
CS: How many inventory turns do you have per year?
Hammond: Six to eight.
CS: Have your vendors helped you at all in your projections?
Hammond: We look to our vendors, who are mostly artists, to give us some feedback on how their creations have sold in other catalogs. Artists know their products better than we do. They have insights we couldn’t possibly have. We, as a catalog industry, can learn a lot just from listening to our vendors more.
CS: What have been your toughest inventory-projection challenges in the past two years, and how have you overcome them?
Hammond: Forecasting for new categories of products is a challenge. That’s when you wish you had that crystal ball. That’s when you need the guidance from your vendors.
To overcome that challenge, we ask vendors for quick turnaround times. So if it’s a new product for us, we’ll buy a bit less, but we’ll be sure the vendor can ramp up production if the item turns out to be a runaway bestseller. It’s a tricky proposition, though. We sell primarily handcrafted items made in the United States. Some of our vendors are working, literally, at their kitchen tables. But the upside is that these small vendors often can give better turnaround time than big vendors. Our artists will work all night if they have to because they often appreciate getting the big orders more than a larger company might.
Second, forecasting for holiday orders is always a challenge. By the time you know you have a winner, it’s often too late to order more. We try to test earlier in the process, either by posting new items on our Web site or featuring them in our newsletter, which we e-mail to about 120,000 customers. If we see that we’re selling a lot of the new products, that helps us to project inventory levels for when the item hits the print catalog.
Cary Tennis, executive vice president, co-founder and co-owner, Crow’s Nest Trading Co., Wilson, NC
Product: home furnishings
Size of warehouse facilities: 6,200 square feet.
SKUs: 478 in current catalog
Catalog Success: What criteria do you use when deciding how much of any one product to stock?
Tennis: We drop-ship 16 percent of our products, but that accounts for 53 percent of our revenue. These are items such as furniture, rugs, lamps, etc. So one of the things we look for when selecting product is, can it be drop-shipped? Other parameters include a supplier’s lead time, our own sales projections for the product, quantity discounts, product cost and seasonality.
CS: What systems do you use to help make these projections?
Tennis: We use a catalog commerce program from a small company called NewHaven Software. The software can supply historical data on product sales, it tells us how many we have on order, how many are back-ordered, how many are in stock and how many have been returned. But it doesn’t project future sales. We dump the historical data into an Excel spreadsheet template, then we look at the numbers and manually make determinations on product sales projections.
When projecting sales at the beginning of a campaign, I use other tools such as an in-depth merchandise analysis and profitability report created by F. Curtis Barry & Co. and Chuck Howard, our consultants. These reports tell us what sold—specifically or by category—say, last spring, and then we can make determinations for this coming spring.
CS: How are you notified if there are impending problems?
Tennis: We look at inventory reports on a weekly basis; they tell us if we have too much or too little on order. We tend to order products in smaller quantities—we don’t order minimums, though—and we order quite often. The size of our company right now allows us to do that.
CS: How do you determine the accuracy of your projections?
Tennis: We look at the products sold during a given three-month campaign. So, for example, if we’re a quarter of the way into a campaign, and we’ve sold 50 of a product, we can project we’ll need an additional 150. Most of our vendors can resupply us in four to six weeks. That helps us keep out of overstock situations, yet helps us avoid out-of-stock cancellations.
CS: How many inventory turns do you have per year?
Tennis: Eight.
CS: What have been your toughest inventory-projection challenges in the past two years, and how have you overcome them?
Tennis: We branched out into new product categories, for example holiday products, which you have to order in larger quantities far in advance. We had to spend more time analyzing the possible activity on these products and monitoring sales closely.
The second challenge has been the imports. We used to pride ourselves on selling only American-made products, but you just can’t do that anymore. Inventory projections have to be more accurate when ordering products from overseas because of the longer lead times.
For example, we found a piece of furniture from an overseas supplier, and we projected we’d sell 25 to 30 of it. We sold about 125. It taught us that we have to stay on top of these inventory reports. Luckily, we were able to act quickly to order more in time to avoid cancellations.
Third, our annual sales were up 30 percent in 2002. But success has its own dilemmas. In some ways, the stakes are even higher now, and we can’t afford to be wrong in our projections. It’s one thing if you’re 12 short on a product, but if you’re 64 short, that’s a problem.
As our company continues on an aggressive growth track, we know it will become increasingly important to communicate well with our vendors and to project inventory needs accurately.
