In 2002, Billy Beane, the general manager of the Oakland Athletics, had a transformative insight into the sport of baseball. He noticed something that no one else in the sport saw: that players were being evaluated based on gut feelings, folk wisdom, and outdated standards of measurement. Beane’s simple yet radical idea was that rigorous statistical methods (known as sabermetrics) should be used to objectively evaluate baseball players.
With limited spots on the team’s roster and significant budget restraints, Beane used statistical evaluation to maximize each choice in his draft. He saw the real value of players where others did not, and as a result, he was able to recruit the best players. That season, the Oakland Athletics became competitive with teams like the New York Yankees—while operating on one third of the budget. Many other managers have followed Beane’s lead and use similar strategies today.
Retailers need to treat every inch of space on their shelves like a spot on Billy Beane’s roster by using rigorous statistical measures to ensure that each SKU earns its keep by positively contributing to weekly sales. Today, as much as 35-40 percent of retailers’ total inventory is stuck in non-performing, slow-moving SKUs whose total contribution to sales is less than 5 percent.
To optimize their inventory and eliminate waste, retailers need to implement SKU rationalization: the process of using analytics to determine the merits of adding, retaining, or deleting items from a retailer’s shelf. SKU rationalization is increasingly essential to the success of retailers and Consumer Packaged Goods (CPG) companies. It lays the groundwork for space planning, price optimization, and improving product availability.
But right now, SKU rationalization practices are painfully behind. Retailers and CPG companies take a periodic approach to managing their product portfolios, analyzing SKU performance at a high-level like a region or channel on an annual or bi-annual basis. This gives them, at best, a blurry picture of SKU performance. As a result, their inventories are slow to adapt to customer demand, and are weighed down by waste. Retailers and CPG companies lack detailed insight into what about their products makes them desirable in a particular market. In fact, 44 percent of CPG companies currently have inadequate resources to interpret output of analytical tools (EKN Outlook, 2016).
Introducing Inventory Optimization from Neal Analytics
Retailers need to make SKU decisions more than once or twice a year across an entire channel to keep their finger on the pulse of product performance. The Inventory Optimization solution from Neal Analytics, built on Microsoft Cloud technology, offers a new way to manage dynamic, responsive product portfolios. Inventory Optimization empowers CPG companies and retailers to carry the right products on every shelf in every outlet and store, satisfying customer demand and driving a significant increase in sales and revenue.
Inventory Optimization from Neal Analytics provides industry-leading, granular visibility into each individual SKU. Buyers and sellers can analyze sales and product characteristics to see what is trending now, and more accurately predict what will sell in the future.
For retailers, Inventory Optimization analyzes the characteristics of the products carried at each store and which markets those characteristics are preferred in, providing merchandise managers with quantitative forecasts that precisely predict sales lift for each possible product mix.
For CPG companies, it analyzes which SKUs perform best in each individual market, identifying peer groups of outlets for each channel, region, outlet size, or market demographic. The CPG company can then optimize which products are carried in each outlet to maximize the sales potential of their shelf space.
With granular insight into product characteristics and local demands, and precise quantitative projections into future sales possibilities, retailers and CPG companies have the ability to tailor a product portfolio to each individual store or market. Companies with an optimized inventory can truly marry customer preferences with product profiles, ensuring that customer demand is satisfied more often. Instead of keeping under-performing SKUs on the shelf longer than they need to be—eventually having to mark them down or move them to clearance—merchandisers can harness the guidance generated by Inventory Optimization’s machine learning capabilities to move it to a more appropriate market or eliminate the SKU if its contribution is consistently not worth the production cost.
In so doing, they can devote every square inch of shelf space to a product that is successful in that market. Retailers can order more accurately from their providers, and distribute more strategically between their stores. This lifts sales and profits, improves product availability to reduce stock-outs, and eliminates the waste of unsold products.
Neal Analytics is a leading Microsoft partner that develops solutions on the Microsoft Cloud. They focus on driving value through finished solutions such as Inventory Optimization and tailored Advanced Analytics projects leveraging the Cortana Intelligence Suite and Azure IoT Suite for immediate business impact.
You can try the Inventory Optimization solution on Microsoft’s AppSource marketplace here.
Looking to extend the transformative power of an intelligent cloud in your business? Neal Analytics’ Inventory Optimization is a part of Microsoft’s cloud solution portfolio for the retail industry, including AFS Retail Execution, AFS POP Retail Execution, Plexure Retail Personalization, and Dynamics 365. Keep an eye out for more innovation on the horizon.