The Impact On PROFITS by Inventory Turns Based on POS Demand Replenishment
Since the inventory is virtual stocking, production decisions are based on velocity not space, storage cost or salvage value
Agile manufacturing and micro-merchandising are the basic
enablers for both Demand Replenishment (DR wholesale) and Purchase
Activated Manufacturing (retail), but the
real path to maximum profits is managing the movement at and after the
POA. When the manufacturer is producing
product at a rate matching sales, quick turns and detailed data integration reduce
risk and boosting profits. Management of the production path where the generic
physical inventory (Generic Stocking Unit: GSU) is transformed into an
individual SKU awaiting sale is the critical determinant of profitability. The unit production at this point must have real time POS sales demand integrated
with ERP production scheduling.
Demand Replenishment
B2B Sales
The first Principle of demand is; “follow the money” which
requires integrated Point-of-Sale (POS) systems that follows the money or in
this case the retail sales by unit, in real time. This POS data should be automatically
consolidated and compared to the DOS on hand.
Once the preset minimum is reached the ERP orders a replenishment DOS
from the demand manufacturer. At the brand
and manufacturer level the demand is based on “days-of-supply” (DOS). DOS is a
unit production schedule based on the retail sales velocity plus the time require
for the distribution pipeline to sort and transport product to the selling
location. Averaging the sold product take away for a week and adding the units
in the distribution pipeline determines the unit volume of the DOS for each
specific SKU. This calculation will
provide product availability with the risk of only minimal surplus units as the
product velocity accelerates, then peaks and decelerates through the product’s
sales life. The DOS calculation must be separated
buy SKU, including sizes and also separated by distribution path and selling
location. Once this is calculated, the units for production are re-consolidated
by sewing group and drawn from the virtual inventory as production groups. Each
unit is then image tagged with a production tracking bar-code in an area of cut
space outside the garment image along the seam allowance. The sewing group designation is defined by
the production sewing format required.
Most replenishment orders at the wholesale level will have multiple
units of the same SKU and therefore will use a modified progressive bundle
sewing system. The sewing system drives
the print layout, which in turn drives the cutting nest and the organization of
the cut pieces for delivery to the sewing station. This explanation may seem complex, but in
operation it is simple, efficient and capable of continuous individual or group
unit manufacturing without time consuming color changes or production retooling
and rerouting between SKU and design changes..
Purchase Activated
Manufacturing (PAM) Direct to Consumer Sales
The receiving of funds and selection of product from the
virtual inventory, initiates the production schedule for individual PAM direct
to consumer sales at any level (retail, brand or manufacturer). It is important to remember that online sales
from a virtual inventory can give every level direct access to the
consumer. This levels the playing field
and gives all players the opportunity to sell product at retail profit levels.
PAM sales can create low risk increased sustainable profits by linking retail
selling price directly to production.
The primary difference between wholesale Demand Replenishment
(DR) and consumer PAM is in the print layout which ultimately produces an
individual production bundle of each complete garment for a modular unit sewing
system. The PAM factory needs to be
fully integrated with technology for change-on-the-fly printing and dyeing as
well as single-ply cutting and a bundle delivery system. Quality control must be designed into the
process, because one error is 100% error when the order is for one unit. Note: QC will be covered in detail in a later
blog.
Both the DR and PAM production systems depend on timely,
accurate and detailed purchase information to drive an integrated ERP
scheduling module that matches the DOS of GSU usage to the velocity of SKU
units leaving the PAM facility. Keeping
the proper inventory of low risk GSU supplies on hand allows an efficient, fast
transformation to a pre purchased high profit SKU.
Why Does the Industry
Fail to Adopt Sustainable Profit Based DR and PAM Systems?
From direct observation over the last decade of systems
development, the major reasons the apparel trades have not embraced DR or PAM are:
First, the industry believes the product must be in the
store and available to touch and try on.
As more and more retailer close their doors and online sales grow it is
obvious that this is a fundamental misconception facing the traditional apparel
market. The antidote to this part of the
problem is simple, retail stores are still the best opportunity to provide
consumers a gateway to the virtual inventory.
Treating this supposed misconception as an excuse instead of an
opportunity is the problem. Retail stores are the only place that can provide
both the opportunity for instant gratification or the value of perfect
gratification, because the store can personalize product onsite, or act as a tailor
to produce the perfect fit and look for the customer, willing to wait three
days for the perfect garment. Proof of
this concept is the instant gratification of the paint counter at the local
home center and the success of online tailoring in specialty online clothing.
Second, Retail chains and brands have invested millions of
dollars in software and employees given the mission of out-smarting the market
trends months and sometimes years in advance.
With a consumer market bombarded by social media, cable channels,
personalized target advertising and fashion blogs at every traditional market
level, predictions are often a bigger risk than a Vegas table. The solution has been to focus on
“time-to-market” instead of customer value.
This ability to create product samples is an important step, but because
most technology stops with the visual sample the production still takes months
and minimums with the mass inventory still a risk. If even a fourth of those millions had been
spent on production technology integrated with the virtual sample and
integrated POS ordering, production times would be slashed and minimums would
disappear. Production would support real time inventory and distribution with
little risk of overstock or out-of-stock gambling.
Third, the basic relationship between the three parties in
the sourcing path needs to change. The
current relationship fostered by mass production and cost based purchasing
creates an adversarial relationship between manufacturers who must produce
volume to reach contract cost levels required by retailers who, in turn, only
want enough product to fill the shelves unless they have a hit. This leaves brands in the middle trying to satisfy
both parties of this unsustainable triangle.
Unfortunately, this belief that volume lowers cost and lower cost is the
basis of profit has caused manufacturers and distributors to sink millions more
into efficient repetition mass production technology instead of agile
technology that produces only what the consumer wants on demand.
Fourth, the industry has created a set of business formulas
that artificially support the continuation of unsustainable mass production. None of the standard inventory, sales and
margin formulas account for the actual sales income compared to the potential
sales income. Current formulas all start with a fixed inventory level defined
by units or dollar value. The ability of
the manufacturer to provide production and delivery directly related to the
demand for the product and the effect on potential profit or loss is not
calculated.
As an example take an average apparel sell-through percentage
as published by Accelerated Analytics, a highly respected firm that provides
retail reporting services across the product spectrum. Starting from the fixed initial inventory, apparel
on an 8 week cycle has an average sell through of 24.3%, after the initial
cycle stores will begin a discount cycle resulting in an additional 4.2% for a
total sell-through of 28.5% by week 13. After
week 13 retailers will clear product at heavy discount or resell product to
discount outlets resulting a sell-through of 45.5%at 26 weeks and a reported
sell-through of 68.7% of the initial stock by the end of the year. Remember these sell through percentages, they
will be used to calculate the profit difference between fixed inventory and DR
inventory replenishment in a spreadsheet example.
Fifth and the most pervasive argument from the defenders of
the current mass production paradigm is that, “no purchase activated
manufacturing technology can support the volume required by the market”. The argument is rooted in the idea that
mini-factories cannot be efficient enough in cost to compete in the
market. So while big brands and mass
retailers loose billions in lost profits from over production and risky forecasts
months before actual sales, small demand mini factories continue to flourish
online.
Looking for an example of the impact of demand based micro-factories. Visit your local micro-brewery pub. These small demand based breweries scaled to
fit product demand have flourished because their product is produced to match
the demand and the distribution is direct to the consumer. According to U.S. News & World Report,
these thousands of micro-factories have carved out a $22 billion share or 21%
of the $105.9 billion U.S. beer market. In addition the large brands have been
forced to merge and consolidate even though they are experts at the cost
efficiency of mass manufacturing. Yet
the little guys continue to grow at nearly 13% per year while the big mass
manufacturers lost another .02% of the market.
This is just another example of the billions poured down the drain by
domestic companies that believe they can drive the market to match their cost
based production, rather than capture the billions in lost profits by matching
real time production to demand.
Examples Based on a
Real Purchase Activated Mini-Factory
The examples below are based on the production volumes and
delivery cost from a prototype integrated mini-factory built in southern
California in 2011 and operated through 2015.
The cost per unit difference is inflated to demonstrate the profit
impact of flexible demand sourcing. The
factory run by AM4U, Inc. is pictured at the top of the blog and featured in
the linked videos.
Example of overstock and discount from a fixed inventory ordered months in advance:
Example of the same product ordered from a flexible virtual inventory ordered on demand with two weeks delivery. No risk of overstock or insufficient GP to support operations cost.
Example of overstock and discount from a fixed inventory ordered months in advance:
Example of the same product selling hot and replenished every two weeks based on a DOS formula developed from POS history. Only inventory remaining is orphan sizes. High profit with no risk of surplus inventory and wasted production and pollution.
Key lessons learned from this prototype PAM facility are:
- The integration of design, marketing, production prep, raster image processing(RIP), printing, cutting and fulfillment software is the key missing link to adoption of DR and PAM production. The hardest development task of this project was to link the separate software company’s products in a seamless chain of marketing, production and fulfillment. The resistance of single task technology “silo’s” to understand their interdependence is the primary roadblock to the return of domestic production.
- The concept that domestic manufacturing cannot compete with overseas is entirely based on a comparison of labor costs. It is not a realistic comparison of cost at the point of sale. The cost of bulk transportation, multiple factory sourcing surcharges and minimums, duties (as high as 40% on some apparel), domestic inventory storage and unsold stock are not accounted for in most sourcing formulas. According to FORBES "United States still maintains tariffs on clothing that amount to 10-times the average U.S. tariff." After years of piecing together cost and estimates from experts and internet sources there is no reason to believe labor costs actually make more than a 5% difference in the total cost of product at the point-of-sale.
- The impact of attacking overstock and out-of-stock inventory losses has more impact on profits than a 30% lower cost of product. The overstock and out-of-stock examples above detail the difference between attacking costs only and attacking losses with a virtual inventory and demand activated production. The path to sustainable profit is make what you sell and sell everything you make!
- The myths, that demand digital production cannot deliver timely product to replenish retail and online sales is another myth of misunderstanding. From personal experience and early mistakes to today’s integrated mini-factory there has been a huge evolution in capacity, scalability and cost.
An integrated digital apparel system from merchandising to fulfillment for DR and/or PAM can be assembled and in operation in less than eight months at a cost of less than a million dollars and pay back with a profit in less than a year. You can contact me at: bgrier@am4u.com, for live spreadsheets and a full project plan.
