Read and React: How DTCs are Learning to Deal with Inventory Uncertainty
Date: Tuesday, December 24, 2019
Source: Sourcing Journal
Cash flow and product flow are just two aspects of retail disrupted by the direct-to-consumer boom. Whether it’s digital natives or traditional brands adopting a DTC mindset, today’s businesses are developing new methods for handling the uncertainty that can come with fickle consumer demand.
Some DTCs skilled at drumming up intrigue through targeted digital strategies are still learning ways of ensuring products are in stock to meet demand. These companies sometimes stumble over the inventory planning issues that accompany spikes in consumer interest around the holidays, special promotions or summer sales.
In order to face these issues, they’re becoming experts at maneuvering marketing levers to manipulate product interest, establishing a data-first mindset that provides insight into future demand and on-boarding technology to aid in merchandising.
Together, these steps can help brands keep products in stock—and consumers coming back for more.
For size-inclusive fashion brand Eloquii, having an e-commerce platform that can handle spikes in traffic is a “non-negotiable.” According to Corinne Connolly, vice president of product development and sourcing, Eloquii uses historical data on its promotional events as a roadmap for inventory planning.
“We use learnings such as how the customer responded in the past and what styles were most purchased,” she said. “This information helps us decide the particular inventory, as well as the amount needed to maintain fast sell-through.”
Though the company develops these forecasts a year in advance, Connolly recognizes the importance of remaining agile with stock. “Our forecast demands are based on many factors, including day of week, timing with new product arrivals, marketing budget, CRM strategy and, of course, the promotion,” she said. “It’s all about defining the behavior you want to drive, and then using historical results to plan and forecast accordingly.”
The Walmart-owned brand operates on a read and react mantra from a sourcing and inventory standpoint, Connolly said, adding that being digitally native does have its advantages. “It allows us to read results in real-time and understand very quickly if something in the business isn’t working,” she said, adding that it’s not unusual for Eloquii to switch out digital marketing creative on a frequent basis to test what resonates most with consumers.
“There are significant advantages in the DTC model that allow us to be more proactive versus reactive,” agreed a spokesperson from technical running brand Tracksmith.
Rather than needing to rely on future order signals from retail partners, the company is empowered to determine through its own data which styles will be most important to consumers at any given time of the year. From there, Tracksmith quantifies the size of the demand and develops products and parallel communication plans, he said.
There absolutely are challenges to being a newcomer to the space, he noted.
“As a growing brand, the pitfalls we have encountered have been when the demand created has outpaced supply, with the result that we sold through more quickly than planned,” he said. Still, the learnings that accompany the misses have proven valuable as the brand moves forward.
“In these cases, we have noticed that while we may have missed some incremental sales, we also increase demand, particularly for those event-based products,” he said. These missteps become opportunities to course-correct for future seasons.
Having power over its own channels allows Tracksmith to drive demand to the products it wants to promote, when it wants to promote them, he added.
“While all brands benefit from seasonal spikes and events like Black Friday and Cyber Monday, we’re able to focus that energy into a selection of styles that we have planned incremental inventory to support,” he explained.
Beyond traditional holiday-oriented traffic spikes, the brand has also been able to create demand around major marathons and running seasons like cross country, spring track and summer travel.
Because Tracksmith is responsible for creating the interest in its well-supported products, it can better manage the inventory during peak times without missing sales, he said.
Consumer messaging also plays an integral role in managing demand and keeping shoppers satisfied. Historical data tells the brand when seasonal spikes might occur, and in addition to managing its supply chain to ensure that products are available at the right time and in the correct quantities, a communications strategy lets consumers know what they can expect.
“We align our inventory flow with the timing of our direct-to-consumer messaging,” he said.
In order for brands to manage the complicated and often chaotic processes of product development, they rely on product lifecycle management software solutions (PLMs) that allow end-to-end visibility into a product’s journey from conception through production and fulfillment. And determining an inventory strategy is based heavily on consumer data.
“The days of emotional ‘go with your gut’ merchandising and planning are out the window,” said Matthew Klein, CEO and founder of Backbone. “It’s about understanding the customer and delivering what they want, when they want it.”
While some spikes in traffic can be anticipated around back to school, holidays and the changing of the seasons, Klein said that most DTC brands aren’t sticking to the traditional fashion calendar.
Instead, they’re attempting to understand consumers’ buying behaviors and making data-backed decisions around inventory planning.
Although Backbone offers traditional PLM services today, Klein and his team are developing new program functionalities for merchandising and planning, to be launched in 2020. Those changes have largely been catalyzed by interest from DTC brands, who need ways to communicate with all of the stakeholders in their supply chains about the importance of certain styles.
One trend Klein is seeing throughout the space is the importance of having a hero product as a “gateway to understanding a brand.” This allows companies to launch with a small number or even just one thoughtfully designed item to test viability and drum up support before developing “wide and deep across an assortment.”
The DTC business model is even forcing heritage retailers to examine their own assortments with a critical eye to truly assess “what’s moving, what’s working and what consumers are coming to them for,” Klein said. “Consumers don’t want a catch-all retailer anymore,” he added.
Instead, he said, they’re turning to brands that specialize in making the best of a certain type of product.
For financial firms and banks working with DTC brands, retail’s new Wild West can be an exciting, if dangerous, place.
“The first challenge with DTC is that it’s still a relatively new business model,” said Adam Winters, CEO of Merchant Financial, a capital solutions firm specializing in entrepreneurial ventures. “There are many banks and financial institutions today that really don’t have a good grasp of the businesses, what their needs are and some of the challenges.”
Finding a lender with experience working with similar brands can be hugely advantageous, Winters stressed. “Clearly there are seasonality challenges with that model,” he said of DTC, which can require significant credit line increases around holidays and promotions.
While these requests can pose challenges for the lenders that are being asked to accommodate them, Winters said working with hungry, ambitious startups can also be a refreshing experience.
Because many companies in the space tend to have private equity investment or venture funds under their belts, “their balance sheets tend to be a bit stronger. The level of sophistication and reporting from the client tends to be greater,” he said.
Firms like Merchant rely heavily on reporting when determining risk, and DTC players have come to understand that their systems for inventory management must be impeccable to pass muster with lenders. “If that’s the case, it can also afford more flexibility on our part” when it comes to making loans, he said.