Inventory Forecasting
Art?
Science?
Crystal Ball?
or ………..?
Presented by:
George J. Mollo, Jr.
GJM Associates
NCOF, May 2001
2001, George J. Mollo, Jr.
Topics to be Covered
• At least 10 factors to be considered
when forecasting
• Several methods of forecasting
• Ways to forecast new items and
repeat items
• How to improve inventory coverage to
achieve maximum fill rates
• Profitability considerations
• Ways to simplify the process
2001, George J. Mollo, Jr.
Inventory Forecasting
Art?
Science?
Crystal Ball?
or ………..?
UNDERSTANDING
RELATIONSHIPS !!
2001, George J. Mollo, Jr.
How Do We
Improve
“Forecasting” Accuracy?
2001, George J. Mollo, Jr.
Simple & General Approach
• Improve majority of items - Don’t try for
100% accuracy on all items
“ALMOST” Right NOW is better than…
“EXACTLY” Right Later !
• Reduce exceptions
• Take Small steps
2001, George J. Mollo, Jr.
Planning
• Formal Planning Process
• Historical Analysis
• 6-12+ months in advance
• Assortment Plans (Category, etc.)
• Category/Sub-Cat Relationships
2001, George J. Mollo, Jr.
Planning
• Item Counts (based on pages/density)
• New vs. Repeat Item relationships
• Space Allocation
• Margin Targets & Price Points
• Average Price Offered vs. Sold
• Vendor Performance History
• Estimated Item Profitability
2001, George J. Mollo, Jr.
Communication (Pre & In Season)
• Marketing (demand by drop, list
information, target audience, etc.)
• Merchandising (market, competition,
styles, etc.)
• Creative (Coordinate presentation to
audience, availability, add/drop items)
• Internal Relationships - Between
Departments
2001, George J. Mollo, Jr.
It’s All in RELATIONSHIPS !
• How Many Use These Measures –
Yet Independent of Each Other ??
• Category Share
• Item Count
• Page Space
• Demand (Book & Item)
• Page or Spread Average
• Etc…...
2001, George J. Mollo, Jr.
Forecasting Factors
• Presentation (Size) • Item Counts
• Creative Factors (Density)
• Location in Catalog • Space
(key positions) • Space Costs (Sell
• Competition (Internal Ratio)
& External) • Item Relationships
• Demand History (Ranking A - B - C)
• Price Points • Seasonality
• Circulation • Indices
(Qty/Target)
2001, George J. Mollo, Jr.
Methods of Forecasting
• Units
• Who’s unit forecast number?
• Dollars
• Forecast to dollars, buy to units
• $ per k circ **
• AII (Average Item Index)
• Forecasts “tied out” – Top Down
AND Bottoms Up
2001, George J. Mollo, Jr.
Methods of Forecasting
• Other “Tools” - or “Simple Checks”
• Productivity Index (Category)
• Space Index (Category)
• Ad to Sales Ratio (Sell Ratio)
• Page Average
• Top Item Forecast vs. Bottom Item
Forecast Relationship (within a
dept.)
2001, George J. Mollo, Jr.
$ per 1000 Circulated
(Projected item $$ demand /
circulation (k))
• Example: Item A Projected $23,000
demand / circulation 3.5mil)
• $23000 ÷ 3500 = $6.57 per 1000 circ.
** Caveat
2001, George J. Mollo, Jr.
$ per 1000 Circulated
• Advantage: Consistent Item Comparison
Base within same drop/catalog
• Disadvantage: Inconsistent Item
Comparison Base between drops/catalogs
• Marketing changes to “productivity” must be considered
2001, George J. Mollo, Jr.
AII (Average Item Index)
AII= Projected Item $$ Demand ÷
(Projected $$ demand in Offer/
Number of items)
2001, George J. Mollo, Jr.
AII (Average Item Index)
Projected Catalog Demand: $5,000.0
Total # of Items: 250
Average Item: $20,000
Item A = $ 30,000 1.5
Item B = $ 20,000 1.0
Item C = $ 14,000 0.7
2001, George J. Mollo, Jr.
AII (Average Item Index)
• Advantage: Consistent Item Comparison
Base within same drop/catalog
• Advantage: Consistent Item Comparison
Base between/across drops/catalogs
• Advantage: When forecast changes –
Index doesn’t change, only value does
• Demonstrates Relationships (To Overall
Average & Other Items)
2001, George J. Mollo, Jr.
AII (Average Item Index)
• Disadvantage: Space must be factored
(full page, cover vs. average)
• Disadvantage: Seasonality must be
factored
*However, Space and Seasonality changes
are easy to identify
2001, George J. Mollo, Jr.
Average Item Index
Item # Description drop 1 drop 2 drop 3 drop 4 drop 5 drop 6
Item A l/s shirt 2.0 1.8 1.6 1.3
Item B s/s shirt 0.4 1.4 2.0 5.0 2.5 1.8
Item C plaid shirt 1.0 0.8 1.0
Item D henley shirt 0.9 1.0 1.0
Item E pique polo 2.0 2.0 2.2 2.1 2.1 2.0
Item F interlock polo 2.0 1.9 1.8 1.9 1.9 1.9
2001, George J. Mollo, Jr.
Average Item Index
Item # Description drop 1 drop 2 drop 3 drop 4 drop 5 drop 6
Item A l/s shirt 2.0 1.8 1.6 1.3
Item B s/s shirt 0.4 1.4 2.0 5.0 2.5 1.8
Item C plaid shirt 1.0 0.8 1.0
Item D henley shirt 0.9 1.0 1.0
Item E pique polo 2.0 2.0 2.2 2.1 2.1 2.0
Item F interlock polo 2.0 1.9 1.8 1.9 1.9 1.9
2001, George J. Mollo, Jr.
Other Measures/Indices
(Trends/Profitability Indicators)
• Performance Index (Category AII)
• Category Space Index
• Sell Ratio
2001, George J. Mollo, Jr.
Performance Index:
(% of demand / % of items)
(a.k.a. - Category AII)
2001, George J. Mollo, Jr.
Performance Index
This Year This Year TY TY
Description Items % Demand % Avg. Perf.
Spring 99
TOTAL DROP: 218 100.0% 5500.0 100.0% 25,229 1.00
GIFTS 43 19.7% 1204.5 21.9% 28,012 1.11
HOME 54 24.8% 1353.0 24.6% 25,056 0.99
APPAREL 50 22.9% 1743.5 31.7% 34,870 1.38
ACCESSORIES 71 32.6% 1199.0 21.8% 16,887 0.67
2001, George J. Mollo, Jr.
Category Space Index:
% of demand / % of space
2001, George J. Mollo, Jr.
Space Index
This Year This Year TY
Description Pages % Demand % Perf.
Spring 99
TOTAL DROP: 64 100.0% 5500.0 100.0% 1.00
GIFTS 20 31.3% 1204.5 21.9% 0.70
HOME 14 21.9% 1353.0 24.6% 1.12
APPAREL 16 25.0% 1743.5 31.7% 1.27
ACCESSORIES 14 21.9% 1199.0 21.8% 1.00
2001, George J. Mollo, Jr.
Sell Ratio:
(Item percent of page * cost per
page) / Projected item $$ demand
in Offer
2001, George J. Mollo, Jr.
Sell Ratio
Projected Catalog Demand: $5,000.0
Total Pages: 64
Total Selling Costs: $1,370.0
(Creative, Paper, Printing, Postage, List Rental)
Selling Cost Per Page: (Editorial ?) $21,406
Item A = 25% of Page ($30k Demand) 17.7%
Item B = 25% of Page ($20k Demand) 26.5% Sell Ratios
Item C = 25% of Page ($14k Demand) 38.0%
(25% page = $5351.5 Ad Cost)
2001, George J. Mollo, Jr.
Department View
Average item 25,229
Page Cost: 11,983
Description Cost Retail MU Dmd AII % Sell
% $$ space Ratio
l/s Shirt 7.50 18.00 58.3% 15.7 0.62 0.25 19.1%
s/s shirt 5.50 12.00 54.2% 22.7 0.90 0.25 13.2%
plaid shirt 7.80 20.00 61.0% 11.4 0.45 0.25 26.3%
henley shirt 8.00 22.00 63.6% 37.0 1.47 0.50 16.2%
pique polo 10.00 32.00 68.8% 32.2 1.28 0.40 14.9%
interlock polo 10.00 32.00 68.8% 25.3 1.00 0.25 11.8%
denim shirt 9.15 27.00 66.1% 18.5 0.73 0.25 16.2%
chambray shirt 15.00 38.00 60.5% 16.7 0.66 0.25 17.9%
dress shirt 17.75 40.00 55.6% 20.2 0.80 0.25 14.8%
Department Totals: 199.7 2.65 15.9%
Avg Price Offrd 26.78
Avg Price Sold 23.65 62.6%
2001, George J. Mollo, Jr.
Forecasting Repeat Items
• What % of items will be planned
for Repeat vs. New Items
• Review History
• Identify Similar Items
• Consider “Wear Out” factors
• Review Relationships to other product
(especially competing new product)
• Profit Projections (Is the item still justified?)
• Suggestion: Add inventory carrying cost to
margin calculation…
2001, George J. Mollo, Jr.
Forecasting New Items
• Identify Similar Items
• Varying Rules -- New Items should be
> 20% of average
• Review Relationships to other product
• Consider competition (Internal & External)
• Profit Projections (Is the item justified?)
2001, George J. Mollo, Jr.
Other Forecasting Factors
• Final Item Forecasts should NEVER be
done in isolation
• Sum of the parts will ALWAYS be Greater
than the Whole = OVERSTOCK
• When using “trend curves” generally
3 to 5 will suffice (Keep it simple!)
• Forecasts should be done by drop AND
revise balance of season (use of AII
makes this relatively easy)
2001, George J. Mollo, Jr.
Average Item Index
Item # Description drop 1 drop 2 drop 3 drop 4 drop 5 drop 6
Item A l/s shirt 2.0 1.8 1.6 1.3
Item B s/s shirt 0.4 1.4 2.0 5.0 2.5 1.8
Item C plaid shirt 1.0 0.8 1.0
Item D henley shirt 0.9 1.0 1.0
Item E pique polo 2.0 2.0 2.2 2.1 2.1 2.0
Item F interlock polo 2.0 1.9 1.8 1.9 1.9 1.9
2001, George J. Mollo, Jr.
Other Forecasting Factors
• Life of Item (> 1 Campaign)
• Realistic Estimating **
• Based on Demand NOT on Availability
• Maintain Relationship to Buy Plan
• Don’t Spend $$ Twice
• Assortment Plan is the CONTROL
2001, George J. Mollo, Jr.
Improving Inventory Coverage
• Better Planning & Forecasting allows
increased “Just in Time” Buying
• Longer Range Planning - Identifies
“Horizon” of Need
• Plan by “Horizon/Season” rather than “Drop”
• Inherent “Creative Merchant” hurdle –
overcome with 80/20 rule
• Planning Reduces “hidden costs”
• Impact on Creative Schedules
• Some DC issues
2001, George J. Mollo, Jr.
Improving Inventory Coverage
• Buys can be Scheduled
• Based on “Horizons” and “Lead Times” –
allows greater flexibility for change
• Allows forecasts to be modified to improve
fill rates (lower backorder costs, lower
overstock, increased turns)
• Risk/Rewards of Overbuying Can be
Considered - In Advance
2001, George J. Mollo, Jr.
Internet Forecasting
• New Medium/Channel
• Standard Catalog Benchmarks?
• Demand, Response Rates?
• How to Measure?
• Hits, Click-thru, Traffic, Actual Sales?
2001, George J. Mollo, Jr.
Internet Forecasting
• Plan Assortment
• Plan Sell-Thru
• Constantly Moving the Floor – and
Adapting to Sales (Pull items on/off the
Web Page)
• Approach
• Combination of Retail & Catalog – (ratio of
days/views offered to sell-thru/sales at base
level??)
2001, George J. Mollo, Jr.
Possible Metrics for eCommerce
• Modify AII to account for Average Days
On Line
• Same relationship as AII, HOWEVER factoring
Days on Line to obtain a NEW Average or
Index
• Modify AII to account for Average Views
On Line
2001, George J. Mollo, Jr.
SUMMARY
• Simplify the Process
• Reduce exceptions
• Use Averages
• Use of Indices
• Indices Offer a Simplified Approach
• Indices create a Reference Base of 1.0
• “Simple Checks” (Compare to Various
Averages, Simple references, etc.)
2001, George J. Mollo, Jr.
Relationship Reviews !!
Multiple Measures (or Indices) Used
Together - Will Improve the Reliability of
the Forecast & Increase Profitability
For example:
• Performance Index with Space Index
• Space & Item Demand with Sell Ratio
• Average Item with Item Count (and
Demand)
2001, George J. Mollo, Jr.
Benefits to Other Areas
(Positive Profit Impacts)
• Inventory Buying can be “Scheduled” on a
“Horizon”
• Horizon forecasts help DC in “bin profiling”
• Dramatic positive impacts to cash flow
• Reduced inbound freight expense (less
expedited shipments)
• Reduced backorders & reduced overstock
• Higher fill rates (both initial and final)
• Increased “Bottom Line”
2001, George J. Mollo, Jr.
Inventory Forecasting
Art?
Science?
Crystal Ball?
or ………..?
RELATIONSHIPS !!!!
With Work, Planning Discipline &
Internal Communications
– Forecast Accuracy will Improve !
2001, George J. Mollo, Jr.
Inventory Forecasting
Art?
Science?
Crystal Ball?
or ………..
RELATIONSHIPS !!!
Presented by:
George J. Mollo, Jr.
GJM Associates
NCOF, May 2001
2001, George J. Mollo, Jr.
