By  on January 12, 2005

Enacting a consumer-driven replenishment system represents a $325 billion opportunity for the retailing industry, according to research conducted by Cisco Systems’ Internet Business Solutions Group.

The research, a draft copy of which was obtained by WWD, charts the potential savings of moving from a supply chain driven largely by historical data to a replenishment model dominated by customer data, predictive technologies and integrated systems.

According to the report, highlights of which may be released next week at the National Retail Federation’s annual convention in New York, poor forecasting is responsible for enormous waste and missed opportunities. Specifically, the retailing industry in the United States loses $224 billion due to excess inventory, $56 billion from inventory carrying costs and $45 billion from out-of-stocks.

Much of the technology exists today to change that, with retailers such as Wal-Mart, Home Depot, Sears, REI, Best Buy, Barnes & Noble and Hannaford Bros. already taking steps to revamp the supply chain and rely on new criteria for forecasting consumer demand, Mohsen Moazami, vice president of the Internet Business Solutions Group at Cisco Systems, said.

“This involves a paradigm shift from ‘I made and you sell’ to more of a ‘sense and response’” environment in which retailers and manufacturers take into account a wide range of causal data to understand and predict consumer shopping behavior and trends, product demand at the stockkeeping unit and store level and other key metrics, Moazami said.

Such a “sense and response” consumer-driven replenishment system calls for collecting and analyzing “pre-shopping signals,” including customer searches on the Internet at home or inquires of associates in the store — all before product is purchased. Factors such as weather and important local events must also be taken into account. 

“The whole platform of consumer- driven replenishment — the premise and promise — is based on incorporating causal data that are key drivers [for forecasting demand], and then automatically updating all the key constituents throughout the pipeline, such as distribution centers, factories, headquarters and stores. Ultimately, this shift will address one of the biggest areas of customer dissatisfaction, which is out-of-stocks, and reduce the huge excess inventory problem in the extended retail value chain,” Moazami said.The industry average on out-of-stocks worldwide is about 8 percent, with out-of-stocks on promotional items reaching almost 15 percent, according to the draft report. “So how do we combine disciplined processes enabled by technology and decrease out-of-stocks, increase customer satisfaction and make sure everyone wins?” asked Moazami.

The report envisions retailers creating what Cisco terms “an intelligent hub” that would act as a rules-based analytic software application connected to a “robust” database and take into account all causal data as well as existing customer, product, allocation and replenishment information. The intelligent hub would then create a new “demand-driven” replenishment plan and distribute it to all value chain partners in near-real time — helping drive manufacturing and store-stocking decisions.

In one theoretical example, the report noted that an apparel retailer could analyze information about the buying habits of young women, associating their purchases with their Web surfing behavior. By using a reliable database of customers to test ideas and products, the retailer could forecast more accurately where certain fashions will be popular and where they will not be popular. The retailer could then define manufacturing requirements and distribute inventory worldwide more accurately.

The report estimates that by implementing such a demand-chain replenishment system a $15 billion retailer could increase profits by $1 billion. The report further estimates that a $20 billion consumer packaged goods manufacturer could increase revenue by $800 million.

Moazami admitted that turning the concept of a consumer-driven demand replenishment system into reality will not happen swiftly. The report, he noted, stated that fully integrated intelligence hubs would not be available for another two to three years. Moreover, retailers and trading partners that want to move in this direction need to do some significant work first, such an ensuring that all systems within a company access a single file or system regarding customers and product — a single view of the truth, so to speak. He also noted that backing from chief executive officers for such a product is an absolute must and that revising how people work is the biggest hurdle of all to overcome.

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