Few would argue that demand planning directly and significantly impacts retail business profitability. Just think, how often can missed sales or excess inventory holdings – leading to lost revenue and wasted investment – be traced back to poor forecasting?
The quality of decision making in the areas of purchasing, replenishment and sales planning has a direct and undeniable impact on business ROI.
While employing effective demand planning processes in a retail environment is increasingly considered essential, the best approach is not always clear.
Top Down or Bottom Up?
Retail demand planning methodologies can be divided into two schools of thought: Top Down or Bottom Up. Top Down entails demand planning at a summary level and a subsequent allocation or ‘pushing down’ of demand to products and stores to support replenishing and purchasing activity. The Bottom Up methodology involves the generation of forecasts at the lowest possible level (e.g. product by location) to support execution activity and the aggregation of these forecast to support higher level demand planning requirements.
‘Top down’ is often the choice for retailers with short life cycle products and industries in which history has little relationship to the future, such as high fashion under certain circumstances. Note however, that these circumstances can easily be overstated; think of an established brand that sells business shirts – last year’s shirt sales can often be effectively used to predict next year’s sales. Even in cases where past performance is no predictor of future outcomes, businesses still need to purchase and replenish on a product basis so Bottom Up decision making must be entered into at some level.
In the majority of situations however, a Bottom Up demand planning methodology offers the potential for far superior business outcomes. Even so, a massively disproportionate number of retailers currently use the Top Down approach. Why is this? It is due in part to historical limitations in technologies and the sophistication of previous processes that did not support the more demanding (pun not intended!) Bottom Up methodology. However, with recent advancements in these areas, the Bottom Up method is gathering momentum with progressive and savvy businesses looking to reduce their cost to serve, improve service levels and reduce inventories.
As part of a series of articles we will discuss the suitability of Bottom Up demand planning for retail environments, examine challenges and pitfalls in its implementation and assess the benefits it offers over the traditional Top Down method.
Next month we frame some of the demand planning challenges that are common across retail businesses in ‘Retail Demand Planning – A Tough Sell’.
*Luke Tomkin is a Senior Consultant at GRA .