Working on the margins

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The high street is a pretty cold place to be at the moment. Margins are under pressure as retailers markdown to clear stock in a lacklustre market. But pushing inventory through store at discount is no way to make the shareholders happy.

As we approach the all-important Christmas peak period, the pressure is on to ensure shelves are well stocked with tempting seasonal offerings early, however, no one wants to be left with piles of unsold items. Getting the balance right is the secret to successful retailing. So, how do you hedge your bets?

The supply chain plays a highly significant role in the overall success of a retail enterprise – the right sourcing strategy can transform the financial results, and improve customer service into the bargain. A notable example is fashion retailer Zara with its highly responsive model aimed at reacting quickly to the uptake of popular items. Making goods close to market in Europe ensures a fast response to the best selling items – no long supply chains, tiresome lead-times and vast amounts of inventory.

For Zara’s high value fashion goods this innovative supply model works well, as cost is not necessarily the issue. Holding too much stock of the wrong items would be far more of a problem here. In the fast moving fashion sector tastes change rapidly – a quick response is everything.

But for many leading retailers sourcing from the Far East, notably China and the Indian sub-continent, the tempting benefits of low-cost/high-quality items makes sense. The problem lies in the play off between long lead-times and cost of manufacture.

Well, perhaps life might be about to become a little easier for hard-pressed buyers. PA Consulting Group have developed a sophisticated model which evaluates the profitability of different sourcing decisions, incorporating factors such as forecast accuracy, sales volatility and mark-down policies, as well as the buying fundamentals of product cost and lead time. The results are often surprising, as indicated in Alastair Charatan’s article starting on page 18 of this issue.

The model has many variables that can be changed, providing thousands of different product and sourcing scenarios for testing. But the model should be regarded as a tool to help a well-trained buyer come to more considered views on highly complex issues.

With more sophisticated tools available to buyers the dangers of introducing too much inventory into the supply chain may be reduced and retailers may stand a greater chance of gauging the right response to current market conditions, which should advance margins. So, could it be the end of markdowns? Somehow, I doubt it.

Nick Allen, Editor

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