Inventory management specifics for DIY retail

The concept of DIY encompasses many areas of human activity, which accounts for a very wide range of stores in this vertical. In the modern world, this concept now covers primarily hardware stores that sell goods for the home and garden,  home improvement stores, craft and specialty stores. In today's blog, we will talk about how a DIY retailer can satisfy the most demanding tastes of customers while ensuring optimal inventory and how modern software solutions can help with this.

A large assortment means big tasks

The range of DIY retail is much wider than that of other supermarkets – an average of 40,000 unique items in one storage location. For example, one of Leafio's clients, a national chain of construction hypermarkets in Eastern Europe, has about 1,000,000 SKUs. It is clear that managing the inventory of such a large number of goods manually is an extremely difficult and sometimes unrealistic task. Unfortunately, many retail outlets still do this. And this provokes not only high labor costs, due to a large number of managers, but also increases the number of errors due to the high human factor.

"The inventory management system turned out to be the most vulnerable aspect of the supply chain. Inventory management processes were manual, product management methodology was inconsistent, and calculations of target quantities were absent. KPI analysis was fragmentary and did not give a complete picture", - says the project summary of one of Leafio's customers, a distributor and retailer of building materials.

When managing stocks manually, the procurement department is simultaneously focused on many tasks. In particular, the following should be considered:

• product balances;
• delivery schedules from various suppliers;
• seasonality factor, which is essential in DIY retail;
• packaging volume;
• availability of large-sized goods with special conditions of transportation and storage;
• Expensive offers and other parameters.

Therefore, companies increasingly automate these processes independently or with the help of external solutions.

Artificial intelligence comes to the rescue

An innovative solution for effective inventory management in the DIY sector is SaaS platforms for automation and multifactor analysis of inventory with a module for monitoring the work of managers involved in this, such as Leafio Inventory Optimization – an automated inventory management system, which is based on unique algorithms for different types of goods (depending on the demand structure, location, and other features, for example, fresh), as well as ML (machine learning) models for order generation. Such solutions ensure optimal inventory balance at every level of the supply chain.

LEAFIO's SaaS technologies have the functionality to automatically forecast basic sales, plan demand for promos, automatically form orders, ensure timely replenishment, and maintain the balance of each level of the supply chain in an environment of low predictability and constant change.

Self-adjusting algorithms allow you to minimize the impact of the human factor, guarantee the high accuracy of orders, prevent lost sales and avoid a surplus of goods. As a result, sales will increase and write-offs decrease. Accordingly, the company can free up capital, which positively affects the functioning of the entire business model and provides development opportunities.

"We are extremely satisfied with LEAFIO Inventory Optimization, not only because the product meets our critical inventory optimization troubleshooting requirements along with the debugging methodology and high functionality of the platform, but also because of the high awareness of LEAFIO's expert team about all inventory management processes in our company, which we have tested both during implementation and training and with post-implementation support. We also appreciate the ease of communication with the vendor's technical support and the in-depth and professional advice and assistance provided," – notes the head of the general construction department of the construction supermarket chain.

The user interface of the solution is intuitive, and all the necessary information and data can be seen on dashboards, which are designed to help the manager in making operational decisions, focusing his attention on "problem SKUs", "stones" or novelties. The manager's main working dashboard is divided into several parts. The first of them is the operational part with a focus on daily tasks, quick access to the most frequently used windows, and daily monitoring of the main indicators that influence decisions: surpluses and lost sales. Indicators are displayed in dynamics for the last 14 days, comparing specific days of the week.

The second part is strategic and consists of several pages. The first of them evaluates key performance indicators: sales, inventory, turnover, and availability, all indicators in dynamics and with additional filters. On the second page, you can estimate how effectively the system is used, how many products are automatically managed by the system, what percentage of orders are sent, etc. And the last page, the icing on the cake, is insights, where the system, depending on the company's indicators, provides recommendations for analyzing the situation.

There, companies can pay attention to the overall level of under-delivery and the top suppliers by this indicator, see the percentage and amount of dead stock, estimate how many goods have poor sales balances, and how this affects turnover. Of course, the dashboard gives a fairly general assessment of the situation, but for a detailed study, you can dive into the BI module, which has about 40 different reports.

Many typical operations for SKUs, which do not require immediate attention,  are completely automated. For example, the auto-order module in Leafio Inventory Optimization completely executes the process of ordering goods at all levels of the supply chain without manual intervention. And this is only a small part of the platform's capabilities. So, let's move on.

Great possibilities of a wide range

To understand the structure of the assortment, you can use the ABCD analysis in the analytics block. It can be built by gross profit or margin, by SKU or SKU-location, define a product group according to the entire network, or separately by category, all depending on your needs. It is very important to analyze not only the categories of the retail chain but also in the context of stores. This helps in decision-making regarding assortment matrices.

In addition to the category of demand (A, B, C, D), the assessment of the variability of demand for the product (XYZ-analysis) is equally important. This will help to quickly and almost unmistakably identify among the SKUs the first candidates for removal from the assortment - category D (dead product) and Z (with high demand volatility). After all, the more the demand for a product fluctuates, the larger its stocks need to be maintained. And this is an expensive pleasure, especially if the goods are not sold at all. 

A module for assortment rotation is implemented in the system functionality. This ensures the automatic removal of products from the range and the addition of new ones (for new products, the history of similar products is pulled up, which allows you to forecast the demand for a new SKU). The system has a special OUT procedure for the convenient removal of "unnecessary" products from the assortment. This procedure first blocks the order of such a product from external suppliers and optimally distributes its balances throughout the retail network (taking into account the internet channel), and after they expire automatically transfers the SKU to inactive status.

“The Leafio team has a deep understanding of all inventory management processes, a clear methodology, quality software, and very competent consulting and technical support both during and after implementation. Don't be afraid to use Leafio. Everything will work out. Each of your employees will work more efficiently, staying in their comfort zone. I would like to encourage future customers to be confident that the Leafio team will help you with inventory optimization and process automation as they have already done for us", - comments the head of the construction department of the DIY-market chain on the implemented project.

Demand vagaries in the DIY segment

The demand for DIY segment products has a pronounced seasonality (in the summer, the demand for garden products, lawnmowers, etc. increases, in the winter, Christmas trees, toys, decorations, snow removal equipment, etc.). There are also intra-week fluctuations in demand – sales are higher on weekends.

In LEAFIO Inventory Optimization, the demand forecasting function is implemented. The system includes a demand forecasting module intended for short-, medium- and long-term sales forecasting. When managing stocks of goods with irregular demand, analysts calculate seasonality by categories and alternative goods under several scenarios (the Multi Scenario Seasonality Planning function) in terms of months or weeks (depending on the characteristics of the category), as well as daily.

For intra-week fluctuations, CDW is used – the coefficient of the days of the week, which are automatically calculated by the system and allow tracking and forecasting fluctuations in demand (sales) of certain goods depending on the day of the week. This is especially true for products with short supply lines and chains with limited space in warehouses or store shelves.

In the DIY segment, there are two more groups of products whose inventory and order management are associated with difficulties due to problems with demand forecasting and coefficient calculation. These are products with low turnover and new products without a sales history. With expertise in specific aspects of working with such product groups, we at LEAFIO have developed formulas and algorithms for each. The first products create and have "uneven" demand – they are rarely sold, but in large quantities (sometimes in packages of 50 pieces). For them, there is a special calculation in the system of average sales specifically for goods that rotate slowly, where the root mean square deviation is also taken into account.

For new products, we have several strategies, until the system accumulates statistics for analyzing work with such goods (orders, balances, and data on similar goods): average calculation for the group by the median and/or ordering the goods in the minimum packing capacity. Also, we are currently working on the problem of product clustering, which should eliminate the problem of selecting product analogs and automate this process using ML models.

Different formats for different stores

Besides the challenges associated with the specifics of demand in the segment, an additional burden in managing inventory and assortment on the shelves for retailers is the need to maintain the representation of products of the same type, but from different manufacturers and price categories.

In addition, it is necessary to determine which goods should be in stock on a permanent basis, which should be available to order, which should be in the store's warehouse, and which should only be in the distribution center. 

These problems are especially significant if the retail chain combines stores of different sizes and formats (from a hypermarket to a small neighborhood convenience store). LEAFIO Inventory Optimization has a functional "Shelves"  module that allows you to order goods only according to the size of the shelves of each specific retail outlet. Using artificial intelligence, the system analyzes data from past periods about fluctuations in demand and sales, and models and forecasts the optimal level of inventory.

Different customers - different approaches

Customers of DIY stores can be conditionally divided into two large groups, whose behavior is significantly different. Professionals – builders and repair specialists – make up the core of buyers in any DIY store. Products that are of interest to them are power tools and building materials for repair projects. The peculiarity of this group is also that they do not have much experience in online shopping. The second large group – ordinary owners and tenants of apartments and houses – are the main buyers of household goods. This demographic  is much younger and they buy more online, often from mobile devices.

Usually, the online assortment is much wider. Accordingly, it requires additional efforts in managing SKUs and product availability. If your sales are omnichannel, analyze demand, manage inventory, and place orders for each channel separately. The functionality of the LEAFIO platform lets managers do this.

It should be noted that the scheme "choose online, buy in an offline store" often works in DIY. Buyers want to examine many products in person and study their texture, material, and quality. Professional builders often choose certain materials together with customers in an online store window, and then purchase the goods and deliver them to the site themselves. In addition, customers often want to buy everything at once in one store, and the lack of this opportunity creates a high risk of lost sales and financial losses for the outlet.

Related: Special features and challenges of liquor stores' inventory management

There is another feature of orders that is typical for the DIY segment. From time to time, a large number of orders arise for a specific client, who, for example, makes a large purchase for the construction and commissioning of a residence. As a result, we observe "abnormally large" sales at individual retail outlets, which can affect the average sales of certain products, if they are not excluded from the calculation of ADU (average sales). In LEAFIO Inventory Optimization, there is a functionality for wholesale sales. This helps not only to single out similar orders, thus not distorting the demand statistics, but also to reserve product balances for them.

Omnichannel, different sizes of stores, demand characteristics, as well as the high cost and low turnover of certain goods quite often leads to an imbalance of inventory in the retail chain.

At the same time, a certain product may be in excess at one point of sale and in short supply or not available at all at another store. Rather than compensating for this disparity by placing new orders to suppliers, you should move goods. This will save you time and money. The functionality of the platform will quickly and almost automatically help to identify such an imbalance and create a document for moving goods.

Each client is worth its weight in gold

The DIY market is highly competitive and price-sensitive. Most buyers will look where it's cheaper, without favoring any particular store. Therefore, retailers should make maximum efforts to retain customers.

Promotions and loyalty programs for offline and online, product personalization, and remarketing of "abandoned carts" for online - these tools will help not only to get the most from each buyer but also to catch an almost lost customer on the way to a competitor. To do this, LEAFIO Inventory Optimization has a promo module - a functional unit that will help you prepare for a planned promotion in a timely manner, automatically receive a calculated forecast, adapt the inventory to real promotional sales, and analyze their effectiveness.

This module, like other modules, is constantly self-improving with the help of machine learning, taking into account all the main factors: sales of goods with discounts, seasonality, types of promotions and techniques, advertising, etc.

What about the suppliers?

A review of the key features and challenges in inventory management in DIY retail would not be complete without addressing supply chains and supplier interactions in general.

The first characteristic difference is the predominance of imported suppliers with very long delivery arms. Therefore, the main role in reducing logistics costs is played by consolidated orders that take into account the needs of all stores and the influence of planned promotions and seasonality. The DFO algorithm built into LEAFIO Inventory Optimization creates orders, taking into account the current demand and the level of inventory in stores, as well as the specifics of the supply of goods. As a result, a highly accurate forecast is made for inventory management at regional and central warehouses and distribution centers. All calculations are performed automatically by the system without human intervention.

A second problem with DIY supply chains is that retailers often have to adapt to suppliers and order from them what they have in stock. Large networks use various methods to solve it. Among them are even the creation of own brands and direct cooperation with manufacturers, own imports, etc. However, this is the subject of a separate blog. Today, it is worth emphasizing that in order to avoid situations where you are dictated by conditions, it is necessary to set up a competent system of distributing goods to stores and creating a target inventory.

Long supply lines and high order volume in case of delivery time failures or other logistical problems can lead to negative consequences, not only in the context of the sales figures of your stores, but also to the outflow of regular customers and, accordingly, a negative impact on your brand image. Therefore, work with suppliers. And the LEAFIO Inventory Optimization supplier reliability report module will give you suggestions for arguments in negotiations with partners. This will help you evaluate each supplier, their contribution, and reliability according to two factors: timeliness and compliance with delivery of the ordered products.  This report is frequently used by our clients.

Business Intelligence is your trump card and the foundation of development

Today's retailers need to store and analyze data about transactions and interactions with consumers both online and offline. The data archive is the basis for modern platforms for the automation of inventory management. And the larger and more detailed it is, the more accurate the analysis and forecasts will be made by artificial intelligence in the software product. 

The LEAFIO Inventory Optimization platform has a BI module where you can generate more than 40 different analytical reports. All of them help the managers of different branches to make the right tactical and strategic decisions.

The result is a new, completely different level of efficiency in the relationship between managers and suppliers, significant optimization of the inventory rotation period, reduction of warehouse balances (and, therefore, the release of working capital), and reduction of the share of lost sales.  In the end, you retain customer loyalty and maintain a competitive advantage over your competitors.

"During the implementation of the project, the management of our company noted a huge practical benefit from the availability of analytical reports, which not only signal surpluses and shortages in warehouses and ensure the rapid movement of goods but also support optimal sales and the capacity of stores of various sizes and formats," comments the top manager of a chain of construction supermarkets.

So, collect the data and we at LEAFIO will together turn it into your trump cards in the competition!