For the past decade fashion retailers have enjoyed expansion through innovation, adding new stores, fascias and ranges to boost revenues. And with booming sales, few retailers have felt the need to really hone operations – from replenishment to store management.

But those days have gone. For the foreseeable future, fashion retailers will need to pay serious attention to detail in a bid to maximise every piece of stock, to drive extraneous cost out of the business and create a highly efficient, highly slick operation. A key, yet counter-intuitive strategy for maximising full price sales is to adopt a store replenishment approach that is based on minimum in-store stock levels.

Jon Clay, Senior Business Consultant at Prologic, explains the importance of replenishment strategies to improve sales and reduce markdowns.

Credible display

The majority of fashion retailers have good processes for allocating new season stock to stores, typically opting to allocate up to three quarters of the total stock available at the beginning of the selling season. This produces a strong display in each store, with a full selection of sizes and ranges to entice the customer.  Items sold are replenished on a like for like basis to maintain this strong display and to ensure there is sufficient stock available in store to meet the higher levels of demand usually experienced early in the season.

Problems arise as retailers hit the middle of the selling season when warehouse stocks become depleted. Because such a high proportion of the season’s total stock has been allocated to stores in the first place and replenishment has maintained these high store stock levels, warehouse stock usually runs out half way through the season. Once a business loses the ability to replenish stock, variation in rates of sale across stores and sizes soon results in product fragmentation.  Although there is still plenty of stock held in the business, each shop finds that their ranges are missing sizes. This not only reduces sales but, at the same time, leads to customer dissatisfaction.

The traditional solutions to stock fragmentation are either hefty mark downs to clear stock or inter-store transfers to consolidate ranges. Neither option is especially appealing in the current economic climate where margins are already under unprecedented pressure. The cost of mark downs are obvious but excessive inter-branch transfers can be equally damaging to profits.  Transferring product between stores is labour intensive, increases product shrinkage and means that product is unavailable for sale while it is being relocated. Obviously the ideal solution is to ensure that stock fragmentation is minimised in the first place.

Better approach

The most effective way to minimise stock fragmentation is to reduce mid-season store stock levels before warehouse stock is exhausted. There is usually plenty of potential to reduce a product’s store stock levels from the initial high levels that were designed to create a strong display and accommodate high initial demand.  Reducing stock towards a minimum credible display ensures more stock is retained in the warehouse for longer during the selling season.

Prolonging warehouse stock availability enables the retailer to respond to actual sales variations across the estate that may be based on a variety of factors, from competitors’ promotional activity in one town to the simple statistical variation in sales that occur in the fashion & lifestyle sector.

It may feel wrong to leave stock in the warehouse rather than on display to customers but that strategy can result in up to an extra 5% of turnover landing on the bottom line.

So why are many merchandisers struggling to adopt this straightforward strategy for effective replenishment?

Counter intuitive

It may appear counter intuitive to management keen to meet customer demands, but this strategy of holding stock in the stores and not in the warehouse actively constrains full price sales, especially once the early season demand begins to fade.

In these trading conditions, it is essential for retailers to maximise the skills and expertise of key individuals. Merchandisers in particular need to fight their corner in the face of pressure from management to maintain high store stocks in a bid to maximise sales.

This approach requires both the right mindset and in depth, accurate information to determine the appropriate stock levels for each store. As most fashion products have very low rates of sale and companies are replenishing their stores 3-5 times per week merchandisers can afford to reduce mid-season stock levels quite aggressively for most stores. With confidence in the accuracy of stock information at both company and store level and by both line and size, organisations can ensure that lower stock levels do not result in missed sales.

Highly responsive

For most merchandisers, however, currently managing both this season’s replenishment whilst also planning the next two seasons down the line, this level of fine tuning of branch stock requires too much manual analysis to be viable. With inadequate systems it is simply not feasible to work out when to reduce stock levels, by how much, in what sizes and to which stores.

It is crucial that merchandisers have access to accurate stock information and software systems with replenishment algorithms that can automate most of this process. Retailers can then opt for a variety of strategies, including sales reactive replenishment where stock holdings are increased in a successful store – and reduced in a less successful store – or simply replenishing back to an ideal stock level as before, but reducing that stock level progressively throughout the season.

With confidence in the accuracy of stock information, sound replenishment processes and good algorithms to automate those processes, retailers can transform both the operational costs associated with replenishment and significantly increase the proportion of full price sales.

Changing behaviour

With limited experience of economic hardship, it may well be tempting for retailers to push as much stock as possible onto the shop floor. But that strategy is fundamentally flawed and will lead to increased logistics costs for transfers, reduced stock availability and increased markdowns at a time when costs need to be reduced.

Now more than ever, retailers need good merchandising practices. By retaining more stock in the warehouse for longer and leveraging accurate sales information at store level, retailers can begin to fine-tune their selling season replenishment strategies. Ensuring the right stock is allocated to the right store at the right time will reduce costs and maximise the value of every item.