Traditional retail inventory management relies on planning, buying, and allocation, but long lead times often leave retailers struggling to align supply with real demand, writes Roei Raz, VP of Sales, Onebeat
Planning, buying and allocation are three key components of traditional retail inventory management. Planning is the foundational stage where retailers set the financial and merchandising strategies. Buying involves turning financial and merchandising strategy into actual purchases, accounting for vendors and supply chain constraints. Allocating is distributing 70-80% of merchandise to stores based on warehouse constraints, store open-to-buy (OTB), and last-minute updates.
In retail, orders for merchandise are often made a year in advance. The challenge: inventory commitments are made before retailers grasp the real demand signals, leaving them with minimal flexibility to optimise sell-though. On average, apparel retailers achieve a sell-through of 75 per cent and pushing this number to 90 per cent is essential to increasing profitability. Zara, for example, allocates only 50 per cent of its merchandise ahead of the season and maintains a sell-through in the 90s. Planners can’t expect to allocate 80 per cent of their merchandise in advance and still achieve a 90 per cent sell-through.
In a world of ever-changing consumer trends and increasing competition, it’s essential to act quickly. In a market like India, with its diverse culture and geography, consumer demand changes depending on the region. For example, warm clothing sells more in winters in northern India, while southern regions that are warm throughout the year experience different demand patterns. Supply chain delays and challenges including transportation delays, especially during festivals like Diwali or Eid, mean retailers purchase more merchandise before they receive the real demand signals.
Lean allocation, powered by AI, as a smarter strategy
Lean allocation is a great strategy to implement, but the transition is not easy. In India, allocating only 50 per cent ahead of the season strains replenishment operations and it can overwhelm merchandise and supply chain teams. The real challenge is aligning supply with actual demand. Lean allocation demands shipping smaller, more frequent quantities, which traditional replenishment teams aren’t equipped to handle every day.
This is where AI and automation make a great difference. Smart replenishment systems combine merchandise and supply constraints by continuously learning demand patterns down to the SKU level. AI can track thousands and even millions of SKU locations in real time, dynamically adjusting replenishment to maximize sell-through. For example, an outdoor company like Wildcraft can track regional preferences of specific products like trekking shoes in Himachal Pradesh and Uttarakhand during the climbing season. If the AI system spots a particular model of shoes selling faster in Manali, it automatically reallocates stock from nearby warehouses to meet demand. AI adjusts replenishment in real-time. This is inventory management beyond human scale.
Lean allocation addressed another issue — non-moving inventory. Underperforming products often exceed 50 per cent of total inventory, pinpointing inefficiencies in the replenishment process at the SKU-level. Ideally, stores must have inventory levels below the financial limit. This doesn’t happen in practice, leading to the lack of “Open-To-Buy” (OTB) — a strategy that helps retailers calculate how much inventory to purchase. When this happens, retailers struggle with introducing new collections on schedule, disrupting seasonal demand and supply.
Smart replenishment systems don’t replace the replenishment teams. Instead, they change the nature of their work by providing tools that allow replenishers to have a much greater impact on the flow of inventory throughout the product lifecycle – like optimising size consolidations and liquidation.
Lean allocation and smart replenishment improve store inventory flow. This translates to lesser daily friction and fewer stores that can’t receive new merchandise due to OTB limits, fewer inventory issues, fewer situations where stores struggle with display constraints, and maximises profitability. For example, Panasonic, a popular white appliances business based in Japan, integrated lean manufacturing with lean allocation in their supply chain. It resulted in a 36 per cent reduction in finished goods inventory, a decrease in mass retailers’ inventory from 26 days to 11 days, and an increase in same-day delivery rates from 60 per cent to 95 per cent.
