Most fashion brands or vendors were under pressure before the coronavirus crisis. Now there’s more uncertainty than ever as you start planning your next collection. Consumer spending is down, excess inventory is high and there’s massive competition for traffic as stores re-open. In the new normal, Vendor Managed Inventory (VMI) can put the odds in your favor to grow and improve your business.
The coronavirus has had a dramatic impact on every economic sector from aviation to hospitality, but the fashion industry has been particularly hard hit. According to a recent McKinsey report, “The average market capitalization of apparel, fashion, and luxury players dropped almost 40 percent between the start of January and March 24, 2020 – a much steeper decline than that of the overall stock market.”[1]
As stores begin reopening, vendors are facing a whole new fashion landscape. New social distancing rules, consumer behaviors, and inventory backlogs. The vendors who will succeed in this new landscape are those who get closer to their end customers and adapt their business models to efficiently meet their needs. Vendor Managed Inventory helps you do both.
“Don’t let innovation stop, because this could be the window of opportunity. Use this time to reinvent how you do what you do, bring consumers new alternatives, new value, and in the process even reinvent your own brand.” [1]
Doug Stephens, retail futurist
What is VMI?
Vendor Managed Inventory (VMI) is a successful business model used by Walmart and other retail giants. Simply put, with VMI the buyer of a product (a retailer in this case) provides information to a vendor about what products are in demand from end customers, and the vendor assumes the responsibility for maintaining a certain inventory of their product at the retailer’s location. Both partners share the risk around the inventory and the benefit from the turnover increase. Although the fashion industry has been slow to adopt VMI in the past, it is an effective way for vendors to get closer to their end customers, and gain more control over their sales turnover and profitability.
Shifting from sell-in to sell-out thinking
Why consider VMI? In today’s fashion landscape, vendors are traditionally in the lead. They decide what products will appeal to their end customers, they produce them and they focus on sell-in, selling as many products as possible to their retailers. The retailer puts their energy into selling the products they get, which may or may not be the products their end customers want.
With this approach, there is a big gap between the vendor and the end customer. In reality, the shop floor should be in the lead because they are the closest to the end customer. They understand better than anyone, what end customers want and how it changes over time. Feeding that information to their vendor, helps the vendor make better decisions. Vendors can then focus on sell-out, supplying retailers with products that are selling, so they can sell more of them. Vendors get valuable feedback on what end customers really want, to make better decisions about new products. Based on the products that are selling, the vendor can produce and replenish goods efficiently, without being concerned about out-of-stocks or surplus inventories. VMI puts more certainty into the entire equation.
VMI puts the odds in your favor
VMI helps vendors:
Improve production and budget planning
Send stock to where it has the best chance of being sold
Develop a better understanding of customer needs based on accurate sell-out data
VMI helps retail customers:
Improve stock availability
Reduce or eliminate stockouts with proactive replenishment
Reduce excess inventory and markdowns
Where do you start?
Based on our long experience in automating inventory management across the supply chain, the professionals at Chainbalance can offer you some advice on how to get started in VMI. It is essential to develop an efficient process that is ready for the future. Share data and think in terms of a connected supply chain instead of separate elements. Here’s what you will need to do:
Make a digital connection between the vendor’s ERP solution and the retail customer’s cash register and e-commerce systems to facilitate the flow of data between the partners.
Automate your inventory management with software designed for retail fashion. Accurate data is a prerequisite for making a realistic VMI agreement and year planning. The Smart Supply stock optimization software was developed by Chainbalance to automate (multi-channel) allocation and replenishment based on actual sales transactions. Customers have realized positive results within three months, including fewer missed sales, higher margins, and less excess inventory.
Change your mindset and way of working Think sell-out instead of sell-in if you are a vendor. Put more energy into your retail concept instead of your stock replenishment if you are a retail store. VMI also changes the roles and responsibilities of various people in the organization. For example, sales representatives take on a more consultative selling role, and account managers play a more strategic role, while merchandisers do strategic planning and reporting to the vendor organization. Read more about how VMI changes your way of working in the next blog in our series.
Smart Supply makes it easy to implement VMI Implementing an effective VMI solution requires extensive information sharing between the vendor and their retailers to ensure that the right stock is in the right place at the right time. That’s where an automated stock optimization solution like Smart Supply is essential. Unlike one-on-one replenishment solutions, Smart Supply determines stock targets based on actual sales transactions, available stock, and individual store settings. The software uses an advanced algorithm to calculate the stock target levels of every SKU on a daily basis, creating orders overnight to realize these levels in each store. This approach to replenishment better reflects actual consumer purchasing behavior for individual stores to boost profitability. Want to know more about VMI and how Chainbalance can help you succeed? Get in touch to discuss how to get started in VMI. References [1] McKinsey analysis based on data from Capital IQ. The State of Fashion 2020. Coronavirus Update. McKinsey & Company and The Business of Fashion.