Retail

7 Ways to Optimize Inventory, Supply Chains and Operations for a Holiday Season Unlike Any Other

By Ian McCue for Brainyard
September 14, 2020
Man with cart

In short:

  • Forecast uncertainty + potential order volume increases = stress on your entire supply chain. How to cope?
  • To start, consider scaling back inventory options to avoid being left with stock you’ll need to liquidate.
  • Stress test everything, from your website to your supply chain to pick, pack and ship operations. Here more ideas to implement now.

The collective anxiety as we head into the all-important holiday season is almost palpable: There are far more unknowns than knowns, making it difficult to prepare for what is always retailers’ most demanding, and lucrative, stretch.

Predictions around total retail spending are nowhere to be found three months before Black Friday and Cyber Monday. More than ever, businesses have been forced to look inward and study their own data to forecast fourth-quarter sales and determine the best strategy for the holidays.

In fact, that dearth of predictions is actually predictable for two reasons: uncertainty, and the fact that retail has been a tale of two cities since the coronavirus turned the industry on its head in March.

For the most part, online-only or online-focused brands have thrived or at least held their own over the last five months. Ecommerce sales increased 78% in May and 76% in June year-over-year, per Adobe Analytics, and some businesses saw demand skyrocket in the late spring. Even as more retail stores reopened across the country, online sales were still up 55% in July.

On the other hand, many retailers that still rely primarily on brick-and-mortar sales — some of them already in deep financial holes — have reached their breaking points. Household names like J.Crew, J.C. Penney and Lord & Taylor have declared bankruptcy since May. IDC Retail Insights vice president Leslie Hand estimates that high-performing apparel retailers are doing only 60% to 80% of last year’s sales, while their lower-performing peers have seen revenues sink by 50% or more.

The three retailers we spoke with agree: Sales trends during the coronavirus are indicative of what’s to come for the rest of 2020, with an increase in sales leading up to the holidays comparable to that of previous years.

“I think there’s a general expectation that what we’re seeing now is a temporary new normal,” Hand said. “As long as consumers are under stay-at-home recommendations, are told to social distance and have a little bit of anxiety around being in crowded places, business will stay largely the same. That said, with a holiday increase in sales.”

At this point, most retailers have placed orders for the season, and many are receiving their first shipments. But given the underlying uncertainty, how are retailers preparing for this vital stretch, and what can they do before November to set themselves up for success?

Mind the Supply Chain

Supply chain disruptions became one of the most common and substantial challenges for not just retailers, but all businesses during the pandemic. In a May survey by the Institute for Supply Management, 97% of businesses had been or expected to be impacted by the coronavirus.

Procurement has been an issue. Many suppliers temporarily closed, shifted operations to produce products currently in demand or didn’t survive the economy’s nosedive, said Matt Rhodus, industry principal and director of strategic initiatives at Oracle NetSuite. That’s forced some businesses to turn to new, unproven suppliers, many of which want a bigger upfront financial commitment because they fear they won’t be paid, Rhodus said.

But that eats up even more of retailers’ precious cash on hand.

Apparel brand Pact is one retailer that’s struggled to get the inventory it needs. Pact manufactures all its products at seven factories in India, but government mandates have shut down its plants multiple times as the virus infected millions of people across that country. Fewer ships to bring the company’s clothing and bedding items to the United States has only exacerbated this problem, said CFO and head of operations Drew Cook. The delays continue after stock reaches U.S. ports — fulfillment times have increased at Pact’s third-party warehouse as it follows social distancing guidelines.

Meanwhile, order volume for the Boulder, Colorado retailer has increased 150% year-over-year since April, driven by its direct-to-consumer (D2C) channel that makes up the bulk of sales. That’s left Pact with about half the inventory it had at this time last year.

Oh, and the brand exclusively uses organic cotton, and its factories are fair-trade certified, so it was next to impossible to quickly find replacement suppliers.

It’s a nerve-wracking situation for a business that does 40% of its annual sales between October and December. But with large orders already on the water and more shipping soon, Cook expects his company to be in a better inventory position by the end of September.

“We’re watching production really closely,” Cook said. “If we can get product here, I think we’re pretty confident that we’ll be able to sell it. It’s mainly a supply chain challenge right now, so we’re doing all we can. But we also care about the people who are making our clothes, so we’re not going to force them into any reckless decisions to expedite production.”

The Uncertainty Factor

Retailers are also building contingency plans given that governments could once again shutter nonessential businesses. Cox & Cox, an online seller of home décor and furniture based in Southwest England, has mapped out scenarios where couriers cannot operate on their usual schedules, there’s an outbreak in its warehouse or a key inventory shipment is held up at an international port to understand how those would affect the bottom line.

Like Pact, the holidays are a critical time of year for Cox & Cox, which starts selling Christmas tree decorations and other holiday-themed décor in the early fall, said head of ecommerce Aynsley Peet. The retailer’s order volume can jump by a multiple of five or six, and it counts on the fourth quarter for about 30% of its yearly revenue.

Similarly, Denver-based pack and bag company Topo Designs built “light, medium and heavy” plans for the holidays to ensure it’s in a stable financial situation regardless of how the holiday season plays out, said head of operations and finance Matt Williams.

Williams forecasted the fourth quarter cash flow as if few or no wholesale customers will place replenishment purchase orders (pre-coronavirus, the wholesale channel made up about one quarter of the company’s revenue). Although it’s unlikely that happens, Williams made this assumption based on the second quarter’s performance, when most wholesale accounts cancelled their replenishment orders.

That kind of scenario planning is well worth the time and effort.

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This scenario worksheet is designed to be used as a guide through the planning project and should help teams avoid common problems.

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Still, despite the uncertainty, there are a few trends retail experts believe will shape holidays 2020.

7 Suggestions for a Successful Holiday Season

It’s no surprise that ecommerce sales will grow substantially as a portion of total retail spend. Ecommerce made up almost 21% of all retail sales between April and June, a big jump from 14.7% a year ago. And, there is no doubt that online sales will increase at a much higher rate than 2019, when ecommerce orders increased about 14% in November and December compared with 2018 and made up 19% of all retail sales.

The number of customers opting for buy online, pick up in-store (BOPIS) — something retail insiders have recommended for years — will also increase dramatically. Many companies have added this capability since March, with curbside pickup particularly popular since customers don’t have to step foot in stores.

Finally, Hand thinks holiday sales will be spread across a longer period of time than usual. Online purchases reduce the need for daylong shopping trips leading up to the holidays.

“Sometimes families, friends, moms and daughters look forward to that mall shopping trip,” she said. “If they’ve got it in their head that they really don’t want to shop at the mall, then there’s no need to wait until everybody’s ready to go. So I do think that it’s more likely that more shopping happens online and earlier.”

Based on those trends and conversations with retailers and industry experts, here are a few ways retailers can position themselves for a successful 2020 holiday season:

Double down on direct to consumer: The rising importance of D2C is tied directly to the surge in ecommerce sales. In fact, almost overnight, ecommerce has become a necessity for even old-school retailers.

Aside from the fact that more consumers will shop online and therefore buy direct from manufacturers in the fourth quarter, D2C has higher margins and enables brands to build direct relationships with their customers. Retailers’ own ecommerce sites need to be the priority this year.

“As a brand, you’ve forged that relationship yourself and have created better websites,” Rhodus said. “If you have limited things that you can produce and you can procure, and you could sell it direct vs. deal with retail channels that you can’t even guarantee are going to get paid, it’s an easy decision to go direct.”

The unpredictability of the physical retail channel — especially with the possibility of a second wave of coronavirus and flu closing stores this fall — is another reason for businesses to double down on their own ecommerce sites. Even though wholesale orders are down for Topo, it expects to eclipse last year’s total holiday sales by 20% courtesy of a big spike in D2C sales. Online orders are up more than 40% in 2020, and Williams is confident the brand will carry that momentum into November and December.

“We planned to see a decrease in Q2 wholesale replenishment,” Williams said. “But with the overdrive in online-direct sales, we quickly made up for that dip in wholesale and that allowed us to rebound a lot faster than we anticipated.”

Better Late Than Never
If you’re just launching your ecommerce strategy, we won’t sugarcoat it: You’re behind. But companies have launched sites quickly. There are some must-dos:
As mentioned, start with BOPIS to capture sales to locals who may already know your brand. While most stores were not designed to be mini-warehouses for online orders, with foot traffic down or nonexistent, think about how to best use your space. Here are more BOPIS tips.
Mobile-optimize your site from the start. Statista says that mobile ecommerce sales will reach $3.5 trillion globally in 2021 — that represents 73% of all ecommerce activity.
If you decide to use a marketplace, like Amazon’s, follow our 5 best practices to come out as much on the upside as possible in terms of margins, IP protection, brand awareness and customer loyalty. We’ll discuss this more, below.

Think strategically to strike the right inventory balance: The difficulty of demand planning in 2020 makes inventory planning equally challenging. Retailers that still have the ability to get as much stock as they want must be careful to not overbuy to the point that they will be in financial trouble if they don’t sell through most of it. Large retail liquidators like TJ Maxx, Marshalls and certain Amazon sellers, once popular outlets for obsolete inventory, have scaled back purchasing, said Rhodus.

That means it’s harder than ever to recoup the cost of unsold inventory. And, more online shopping mean the volume of returns is already up, forcing retailers to get creative to wring out revenue.

Favor more conservative inventory projections this year to increase the chances you sell through the majority of your stock — and avoid having an uncomfortable amount of cash tied up in inventory. Retail imports were down by about 10% in June and July, and NRF predicts August imports will be the lowest since 2016. NRF VP of supply chain and customs policy Jonathan Gold said the pandemic has led retailers to be “conservative with the amount of merchandise they import this year.”

Companies that have not already finalized purchasing for the holidays should also look beyond the upcoming season when inventory planning. Topo scaled back its purchase orders for spring 2021 with the thought that it could carry over some remaining inventory from the fall. For example, it might produce one fewer color of a certain pair of pants for 2021 and use a color from 2020 instead.

Strengthening the Supply Chain: 6 Keys
Here are top areas to address for supply chain resilience:
Sourcing materials: Strengthen relationships with current suppliers so you get preference if there is a disruption. Audit important suppliers to make sure they have adequate scale, geographic redundancy and downstream relationships. Add alternates where needed.
Demand planning: Understand how not receiving materials from a given supplier will affect production, especially of top-performing SKUs.
Manufacturing downtime: How could you meet demand when production teams and/or facilities are not operating at full capacity or face an unforeseen increase in orders? If the answer is “subcontractors or temp workers,” make sure agencies are lined up and preapproved.
Warehousing: Consider also having a third-party logistics (3PL) provider on call in case a warehouse becomes unusable or you need to increase production to meet surging demand.
Inventory management: Complete visibility into current inventory, including both finished and unfinished goods, is critical to making informed decisions.
Customer service: When orders are delayed or can’t be fulfilled due to a supply chain disruption, you need a clear line of communication with customers. Use crisis management best practices to explain what’s causing the disruption and what you’re doing to resolve the situation.

“We’ve tweaked our line plans for next spring and fall to factor in this year’s ending inventory rolling forward,” Williams said. “We are planning to protect our gross margin rather than face a massive liquidation this fall.”

Inventory management is all about retailers ordering the right products, too. Trends over the last several months, as well as historical data, should shape predictions about what product categories or items will be bestsellers and improve the accuracy of forecasts. We already know tops are outselling pants (thanks, Zoom meetings). What else will more intimate holiday celebrations and ongoing WFH bring?

Purchasing the right items also minimizes excess inventory.

“I think widespread across the industry, what we’re hearing is that companies are making decisions around their assortments and narrowing the assortments to try to be more focused to ensure good sell through on the products they do buy,” Hand, the IDC analyst, said.

Stress test your operations: When asked about potential risks heading into the holidays, Williams cited technology as one. Indeed, retailers have become reliant on technology to transact, fulfill and ship orders. Selecting leading, battle-tested solutions greatly reduces the risk of tech-induced failure, but all retailers should still stress test their systems before things get crazy.

Cox & Cox, for example, is load testing its ecommerce site and picking/packing systems to avoid unpleasant surprises when it’s flooded with orders.

The increase in online traffic and purchases over the last few months have put systems to the test for many retailers, but those same businesses should plan for even bigger surges as the holidays approach. A website or back-end system outage will be more costly than ever this year with the rise in ecommerce spend.

“Stress test early, and just make sure you’re ready for that volume, because you could receive spikes unlike anything you’ve seen before,” Rhodus said.

But technology is not the only component here. Retailers that own their own warehouses must make sure they have the right people and processes in place. For companies that previously relied on wholesale, what changes do you need to make to picking and packaging to accommodate a much larger number of small orders? Will couriers now pick up packages several times per day instead of just one bulk shipment at the end of the day?

This is an even more complicated equation in the age of COVID-19, as businesses must follow social distancing guidelines and sanitize frequently to keep staff safe and avoid shutdowns. That may require additional changes to the warehouse layout, staffing and processes.

Overcommunicate with vendors: Retailers should check in with their suppliers multiple times per week for status updates on all purchase orders, whether items are still being manufactured or in transit. This may have been overkill in the past, but it’s necessary given the speed at which things have changed since March.

“I’ve probably never had as frequent communication with our suppliers as I have recently,” Cook said. “They’re working in this unknown environment as well, where things change quickly for them, and they’re adapting as best as they can. So for us it’s mainly about information sharing so that we can plan as best as we can.”

As Cook suggests, it’s far better for a retailer to know about a problem sooner rather than later so it can figure out a solution. Frequent communication will also strengthen the business’ relationship with those suppliers, which can only help if it needs to put in a rush replenishment order this fall after a few products take off.

Communication is also key for organizations that use third-party logistics (3PL) providers. Although this eliminates many operational challenges, it’s important to give the 3PL clear expectations for demand and understand how that could affect order-to-ship times. If the fulfillment partner is not confident it will have the capacity to keep up, find a new or secondary 3PL right away.

Don’t be afraid to sell products early: While the “Cyber 5” stretch that runs from Thanksgiving through Cyber Monday will still be critical to retailers’ success, the longer holiday shopping season could mean sales are not as back-loaded as usual. Cox & Cox received its Christmas products a few months earlier than usual and will start promoting them in late August, earlier than in past years. The hope is that this will help the retailer turn its inventory quickly.

“For us, providing we get all of the stock, get it all in on time, I think this year we’ll probably sell it earlier, and that’s what we’re hoping to do,” Peet said. “We’re hoping to sell our products as soon as we can to just take the pressure off us toward the end of the year.”

Selling through inventory quickly reduces the chances that a second lockdown in the United Kingdom has a major impact on Cox & Cox’s sales. The sooner sales start rolling in, the less opportunity for additional disruptions that prevent the company from meeting its goals.

The reduced pressure should lessen the “pinch points” that Peet said massive order surges create in the warehouse — it’s common for Cox & Cox to receive 10,000 orders in one weekend during the busy season. That will help the company better meet customer expectations and drive repeat business.

Consider selling on online marketplaces: Retailers new to ecommerce may not have the advantage of a recognized brand that will pull in shoppers looking for gifts during the holidays. Digital advertising can help increase brand awareness, but it may not be enough to make up for cancelled orders from large retailers.

They need an alternative to capitalize on the spike in online sales.

This is where marketplaces come in. They already have a huge audience and are where many consumers start their searches for a product. Amazon, eBay, Walmart and Wish, the United States’ largest online marketplaces, are good places to start.

“Most retailers are looking for ways to diversify and find other means and channels through which to sell inventory, as a backup, in case they’re not able to generate enough sales through their own sites,” Rhodus said.

There are countless other marketplaces specific to certain product categories, like software, electronics or furniture, that these distributors and retailers should evaluate, as well.

Most marketplaces have seller programs that make it easy to get started and manage an online storefront. While the marketplace collects a commission on every sale, this channel could become a steady revenue generator, and the barrier to entry is low.

Be ready to adapt quickly: The reality of 2020 is that much remains unknown about how this holiday season will shape up. That means retailers will have to adapt on the fly.

“[Planning] is a lot harder,” Cook said. “You’re making a lot more last-minute decisions, and you don’t have a ton of foresight or confidence in what you’re going to be able to sell two months from now.”

There is no single formula that ensures retailers will not run out of product quickly or have too much left over. Purchasing and inventory management is “as much of an art this year as it has ever been science,” Rhodus said.

Pay close attention to the data that comes in during September and October to see if it sheds light on what will happen in November and December. If the wholesale channel starts to take off, an organization may need to rethink its workflows to efficiently pick and ship pallets rather than eaches. If sales continue to be much higher for online-focused brands, they may need to scale back Cyber Monday and Black Friday promotions to avoid running out of inventory too quickly while also preserving unit margins.

Retail leaders should stress the importance of employees being ready to shift gears quickly and help out where needed as the season plays out.

“We try to be as dynamic and as fluid as we can at Cox & Cox, and our business is growing,” Peet said. “But I think we’re still small enough, we’re dynamic enough that we can make changes quite quickly, and we will be prepared to do so when we need to.”

Signs of Retail Recovery

Although 2020 has been an immensely challenging year for many retailers, it’s not all doom and gloom. Consumer spending climbed 8.2% in May and then an additional 5.6% in June after dropping 12.6% in April. And, driven by ecommerce, total retail sales increased slightly in the second quarter compared with 2019. Month-over-month sales grew for two-thirds of retail categories, and year-over-year sales were higher in July for about half of those categories, according to Gold.

“June retail numbers are encouraging and reflect that retail spending is helping fuel economic recovery,” he said.

Then there is the rising adoption of ecommerce, which has generated record sales for brands like Cox & Cox, Pact and Topo. Smaller retailers with a strong online presence are in an advantageous position to capitalize on consumers’ rapidly shifting preferences.

“You don’t have to have a huge erosion of brick and mortar if it flows directly into ecommerce for ecommerce to feel a huge growth,” Cook said. “I think our hope — and this is where I don’t know how the two different factors will balance each other out — is that the ecommerce tailwinds will more than offset the larger economic headwind.”

The lessons learned and creativity demonstrated throughout the pandemic provided valuable practice for the holiday rush. Retailers will need to harness that same ingenuity and ability to respond quickly to business-shifting developments to thrive in November and December.

Ian McCue is a content manager at NetSuite who also contributes to the NetSuite blog and Grow Wire. He previously wrote about supply chain challenges and technology at HighJump Software after starting his career as a sports writer. Reach Ian here.

Mark Bianco

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