forecasting - gjm · pdf file2001, george j. mollo, jr. topics to be covered •at least 10...
TRANSCRIPT
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2001, George J. Mollo, Jr.
Inventory Forecasting
Art?
Science?
Crystal Ball?
or ………..?
Presented by:
George J. Mollo, Jr.
GJM Associates
NCOF, May 2001
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2001, George J. Mollo, Jr.
Topics to be Covered
• At least 10 factors to be considered when forecasting
• Several methods of forecasting
• Ways to forecast new items and repeat items
• How to improve inventory coverage to achieve maximum fill rates
• Profitability considerations
• Ways to simplify the process
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2001, George J. Mollo, Jr.
UNDERSTANDING
RELATIONSHIPS !!
Inventory Forecasting
Art?
Science?Crystal Ball?
or ………..?
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2001, George J. Mollo, Jr.
How Do We Improve
“Forecasting” Accuracy?
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2001, George J. Mollo, Jr.
Simple & General Approach
• Improve majority of items - Don’t try for 100% accuracy on all items
“ALMOST” Right NOW is better than…“EXACTLY” Right Later !
• Reduce exceptions
• Take Small steps
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2001, George J. Mollo, Jr.
Planning
• Formal Planning Process
• Historical Analysis
• 6-12+ months in advance
• Assortment Plans (Category, etc.)
• Category/Sub-Cat Relationships
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2001, George J. Mollo, Jr.
Planning
• Item Counts (based on pages/density)
• New vs. Repeat Item relationships
• Space Allocation
• Margin Targets & Price Points
• Average Price Offered vs. Sold
• Vendor Performance History
• Estimated Item Profitability
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2001, George J. Mollo, Jr.
Communication (Pre & In Season)
• Marketing (demand by drop, list information, target audience, etc.)
• Merchandising (market, competition, styles, etc.)
• Creative (Coordinate presentation to audience, availability, add/drop items)
• Internal Relationships - Between Departments
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2001, George J. Mollo, Jr.
It’s All in RELATIONSHIPS !
• How Many Use These Measures –
Yet Independent of Each Other ??
• Category Share
• Item Count
• Page Space
• Demand (Book & Item)
• Page or Spread Average
• Etc…...
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2001, George J. Mollo, Jr.
Forecasting Factors
• Presentation (Size)
• Creative Factors
• Location in Catalog (key positions)
• Competition (Internal & External)
• Demand History
• Price Points
• Circulation (Qty/Target)
• Item Counts (Density)
• Space
• Space Costs (Sell Ratio)
• Item Relationships (Ranking A - B - C)
• Seasonality
• Indices
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2001, George J. Mollo, Jr.
Methods of Forecasting
• Units • Who’s unit forecast number?
• Dollars• Forecast to dollars, buy to units
• $ per k circ **
• AII (Average Item Index)
• Forecasts “tied out” – Top Down AND Bottoms Up
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2001, George J. Mollo, Jr.
Methods of Forecasting
• Other “Tools” - or “Simple Checks”
• Productivity Index (Category)
• Space Index (Category)
• Ad to Sales Ratio (Sell Ratio)
• Page Average
• Top Item Forecast vs. Bottom Item Forecast Relationship (within a dept.)
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2001, George J. Mollo, Jr.
$ per 1000 Circulated
(Projected item $$ demand / circulation (k))
• Example: Item A Projected $23,000 demand / circulation 3.5mil)
• $23000 ÷ 3500 = $6.57 per 1000 circ.
** Caveat
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2001, George J. Mollo, Jr.
$ per 1000 Circulated
• Advantage: Consistent Item Comparison Base within same drop/catalog
• Disadvantage: Inconsistent Item Comparison Base between drops/catalogs• Marketing changes to “productivity” must be considered
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2001, George J. Mollo, Jr.
AII (Average Item Index)
AII= Projected Item $$ Demand ÷÷÷÷(Projected $$ demand in Offer/ Number of items)
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2001, George J. Mollo, Jr.
AII (Average Item Index)
Projected Catalog Demand: $5,000.0
Total # of Items: 250
Average Item: $20,000
Item A = $ 30,000 1.5
Item B = $ 20,000 1.0
Item C = $ 14,000 0.7
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2001, George J. Mollo, Jr.
AII (Average Item Index)
• Advantage: Consistent Item Comparison Base within same drop/catalog
• Advantage: Consistent Item Comparison Base between/across drops/catalogs
• Advantage: When forecast changes –Index doesn’t change, only value does
• Demonstrates Relationships (To Overall Average & Other Items)
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2001, George J. Mollo, Jr.
AII (Average Item Index)
• Disadvantage: Space must be factored (full page, cover vs. average)
• Disadvantage: Seasonality must be factored
*However, Space and Seasonality changes are easy to identify
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2001, George J. Mollo, Jr.
Item # Description drop 1 drop 2 drop 3 drop 4 drop 5 drop 6
Item A l/s shirt 2.0 1.8 1.6 1.3
Item B s/s shirt 0.4 1.4 2.0 5.0 2.5 1.8
Item C plaid shirt 1.0 0.8 1.0
Item D henley shirt 0.9 1.0 1.0
Item E pique polo 2.0 2.0 2.2 2.1 2.1 2.0
Item F interlock polo 2.0 1.9 1.8 1.9 1.9 1.9
Average Item Index
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2001, George J. Mollo, Jr.
Item # Description drop 1 drop 2 drop 3 drop 4 drop 5 drop 6
Item A l/s shirt 2.0 1.8 1.6 1.3
Item B s/s shirt 0.4 1.4 2.0 5.0 2.5 1.8
Item C plaid shirt 1.0 0.8 1.0
Item D henley shirt 0.9 1.0 1.0
Item E pique polo 2.0 2.0 2.2 2.1 2.1 2.0
Item F interlock polo 2.0 1.9 1.8 1.9 1.9 1.9
Average Item Index
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2001, George J. Mollo, Jr.
Other Measures/Indices(Trends/Profitability Indicators)
• Performance Index (Category AII)
• Category Space Index
• Sell Ratio
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2001, George J. Mollo, Jr.
Performance Index:
(% of demand / % of items)
(a.k.a. - Category AII)
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2001, George J. Mollo, Jr.
This Year This Year TY TY
Description Items % Demand % Avg. Perf.
Spring 99
TOTAL DROP: 218 100.0% 5500.0 100.0% 25,229 1.00
GIFTS 43 19.7% 1204.5 21.9% 28,012 1.11
HOME 54 24.8% 1353.0 24.6% 25,056 0.99
APPAREL 50 22.9% 1743.5 31.7% 34,870 1.38
ACCESSORIES 71 32.6% 1199.0 21.8% 16,887 0.67
Performance Index
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2001, George J. Mollo, Jr.
Category Space Index:
% of demand / % of space
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2001, George J. Mollo, Jr.
Space Index
This Year This Year TY
Description Pages % Demand % Perf.
Spring 99
TOTAL DROP: 64 100.0% 5500.0 100.0% 1.00
GIFTS 20 31.3% 1204.5 21.9% 0.70
HOME 14 21.9% 1353.0 24.6% 1.12
APPAREL 16 25.0% 1743.5 31.7% 1.27
ACCESSORIES 14 21.9% 1199.0 21.8% 1.00
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2001, George J. Mollo, Jr.
Sell Ratio:
(Item percent of page * cost per
page) / Projected item $$ demand
in Offer
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2001, George J. Mollo, Jr.
Sell Ratio
Projected Catalog Demand: $5,000.0
Total Pages: 64
Total Selling Costs: $1,370.0
(Creative, Paper, Printing, Postage, List Rental)
Selling Cost Per Page: (Editorial ?) $21,406
Item A = 25% of Page ($30k Demand) 17.7%
Item B = 25% of Page ($20k Demand) 26.5% Sell Ratios
Item C = 25% of Page ($14k Demand) 38.0%
(25% page = $5351.5 Ad Cost)
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2001, George J. Mollo, Jr.
Department View
Average item 25,229
Page Cost: 11,983
Description Cost Retail MU Dmd AII % Sell
% $$ space Ratio
l/s Shirt 7.50 18.00 58.3% 15.7 0.62 0.25 19.1%
s/s shirt 5.50 12.00 54.2% 22.7 0.90 0.25 13.2%
plaid shirt 7.80 20.00 61.0% 11.4 0.45 0.25 26.3%
henley shirt 8.00 22.00 63.6% 37.0 1.47 0.50 16.2%
pique polo 10.00 32.00 68.8% 32.2 1.28 0.40 14.9%
interlock polo 10.00 32.00 68.8% 25.3 1.00 0.25 11.8%
denim shirt 9.15 27.00 66.1% 18.5 0.73 0.25 16.2%
chambray shirt 15.00 38.00 60.5% 16.7 0.66 0.25 17.9%
dress shirt 17.75 40.00 55.6% 20.2 0.80 0.25 14.8%
Department Totals: 199.7 2.65 15.9%
Avg Price Offrd 26.78
Avg Price Sold 23.65 62.6%
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2001, George J. Mollo, Jr.
Forecasting Repeat Items
• What % of items will be planned
for Repeat vs. New Items• Review History
• Identify Similar Items
• Consider “Wear Out” factors
• Review Relationships to other product (especially competing new product)
• Profit Projections (Is the item still justified?)• Suggestion: Add inventory carrying cost to margin calculation…
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2001, George J. Mollo, Jr.
Forecasting New Items
• Identify Similar Items
• Varying Rules -- New Items should be
> 20% of average
• Review Relationships to other product
• Consider competition (Internal & External)
• Profit Projections (Is the item justified?)
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2001, George J. Mollo, Jr.
Other Forecasting Factors
• Final Item Forecasts should NEVER be done in isolation
• Sum of the parts will ALWAYS be Greater than the Whole = OVERSTOCK
• When using “trend curves” generally 3 to 5 will suffice (Keep it simple!)
• Forecasts should be done by drop AND revise balance of season (use of AII makes this relatively easy)
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2001, George J. Mollo, Jr.
Item # Description drop 1 drop 2 drop 3 drop 4 drop 5 drop 6
Item A l/s shirt 2.0 1.8 1.6 1.3
Item B s/s shirt 0.4 1.4 2.0 5.0 2.5 1.8
Item C plaid shirt 1.0 0.8 1.0
Item D henley shirt 0.9 1.0 1.0
Item E pique polo 2.0 2.0 2.2 2.1 2.1 2.0
Item F interlock polo 2.0 1.9 1.8 1.9 1.9 1.9
Average Item Index
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2001, George J. Mollo, Jr.
Other Forecasting Factors
• Life of Item (> 1 Campaign)
•• Realistic EstimatingRealistic Estimating **
• Based on Demand NOT on Availability
• Maintain Relationship to Buy Plan
• Don’t Spend $$ Twice
• Assortment Plan is the CONTROL
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2001, George J. Mollo, Jr.
Improving Inventory Coverage
• Better Planning & Forecasting allows increased “Just in Time” Buying
• Longer Range Planning - Identifies “Horizon” of Need• Plan by “Horizon/Season” rather than “Drop”
• Inherent “Creative Merchant” hurdle –overcome with 80/20 rule
• Planning Reduces “hidden costs”• Impact on Creative Schedules
• Some DC issues
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2001, George J. Mollo, Jr.
Improving Inventory Coverage
• Buys can be Scheduled
• Based on “Horizons” and “Lead Times” –allows greater flexibility for change
• Allows forecasts to be modified to improve
fill rates (lower backorder costs, lower overstock, increased turns)
• Risk/Rewards of Overbuying Can be Considered - In Advance
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2001, George J. Mollo, Jr.
Internet Forecasting
• New Medium/Channel
• Standard Catalog Benchmarks?
• Demand, Response Rates?
• How to Measure?
• Hits, Click-thru, Traffic, Actual Sales?
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2001, George J. Mollo, Jr.
Internet Forecasting
• Plan Assortment
• Plan Sell-Thru
• Constantly Moving the Floor – and
Adapting to Sales (Pull items on/off the
Web Page)
• Approach
• Combination of Retail & Catalog – (ratio of
days/views offered to sell-thru/sales at base
level??)
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2001, George J. Mollo, Jr.
Possible Metrics for eCommerce
• Modify AII to account for Average Days On Line
• Same relationship as AII, HOWEVER factoring Days on Line to obtain a NEW Average or Index
• Modify AII to account for Average Views On Line
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2001, George J. Mollo, Jr.
SUMMARY
• Simplify the Process
• Reduce exceptions
• Use Averages
• Use of Indices• Indices Offer a Simplified Approach
• Indices create a Reference Base of 1.0
• “Simple Checks” (Compare to Various Averages, Simple references, etc.)
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2001, George J. Mollo, Jr.
Relationship Reviews !!
Multiple Measures (or Indices) Used Together - Will Improve the Reliability of the Forecast & Increase Profitability
For example:
• Performance Index with Space Index
• Space & Item Demand with Sell Ratio
• Average Item with Item Count (and Demand)
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2001, George J. Mollo, Jr.
Benefits to Other Areas(Positive Profit Impacts)
• Inventory Buying can be “Scheduled” on a “Horizon”
• Horizon forecasts help DC in “bin profiling”
• Dramatic positive impacts to cash flow
• Reduced inbound freight expense (less expedited shipments)
• Reduced backorders & reduced overstock
• Higher fill rates (both initial and final)
• Increased “Bottom Line”
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2001, George J. Mollo, Jr.
Inventory Forecasting
Art? Science?
Crystal Ball?or ………..?
RELATIONSHIPS !!!!
With Work, Planning Discipline & Internal Communications
– Forecast Accuracy will Improve !
![Page 43: Forecasting - GJM · PDF file2001, George J. Mollo, Jr. Topics to be Covered •At least 10 factors to be considered when forecasting •Several methods of forecasting •Ways to forecast](https://reader031.vdocuments.us/reader031/viewer/2022022006/5abdaf727f8b9a3a428c0df5/html5/thumbnails/43.jpg)
2001, George J. Mollo, Jr.
Inventory Forecasting
Art?
Science?
Crystal Ball?
or ………..
RELATIONSHIPS !!!
Presented by:
George J. Mollo, Jr.
GJM Associates
NCOF, May 2001