A major fashion retailer struggles with managing inventory across several brands while managing seasonal demand fluctuations. Retail leverages inventory optimization and network optimization to develop seasonal and brand-specific inventory strategies while improving service levels and cash flow.
Case Study: Utilizing Supply Chain Design to Drive Cost Savings and Enhance Customer Service through Optimal Inventory Placement
As a prominent retailer with billions in annual sales and a diverse portfolio of brands, this industry leader operates a vast network of over 3,000 stores across North America. However, rapid growth through acquisitions and organic expansion led to a fragmented inventory strategy. Some stock-keeping units (SKUs) were stored at all distribution centers (DCs), while others were centralized in only a few locations. This approach, influenced by practices inherited from acquired companies, resulted in ineffective inventory placement, excessive logistics costs, frequent stockouts, and compromised customer service levels. The retailer recognized the need to assess the appropriateness of its inventory strategy and develop an optimal plan that could address seasonality and improve overall supply chain efficiency.
The retailer faced several challenges stemming from its hybrid inventory strategy. The decentralized approach involved suppliers delivering products directly to DCs, while the centralized approach required products to flow from central DCs to store-facing DCs, incurring substantial transportation costs. Furthermore, the highly seasonal nature of demand, particularly during peak periods like back-to-school and holidays, necessitated improved inventory positioning to balance capacity utilization and prevent excess inventory and logistics costs during low-demand periods.
To tackle these challenges, the retailer leveraged an end-to-end supply chain optimization model. By leveraging the platform's inventory optimization capabilities, the retailer conducted a comprehensive evaluation of each inventory strategy. Multiple factors were considered, including product costs, inventory holding costs, demand patterns, forecast accuracy, service levels, supplier lead times, receiving frequency, and transportation times and costs. By assigning a total cost to each SKU under different strategies, the retailer could compare the results and identify the optimal inventory placement for each product category.
In addition, the retailer conducted sensitivity analyses to assess the impact of changing inventory holding costs and to evaluate the performance of different strategies during high-demand and low-demand seasons. Collaborating with third-party logistics firms, the retailer developed seasonal distribution networks tailored to each demand pattern, further optimizing operational efficiency.
The implementation of the recommended inventory strategy resulted in significant benefits for the retailer:
Cost Savings: By transitioning SKUs between centralized and decentralized inventory strategies based on the model's recommendations, the retailer projected annual savings of over U.S.$1.5 million. These savings primarily stemmed from reductions in transportation and inventory holding costs.
Improved Supply Chain Visibility: The extensive analysis provided the retailer with enhanced visibility into the downstream supply chain, increasing manufacturing flexibility, and allowing for further reduction in raw material inventories.
Enhanced Customer Service: By strategically aligning inventory with demand patterns, the retailer improved customer service levels, minimizing stockouts during peak seasons and optimizing product availability.
Cash-Flow Optimization: The retailer achieved a 50 percent reduction in the cash-flow cycle by implementing direct shipping to customers, further improving financial efficiency.
Conclusion: Through the implementation of an optimized supply chain design, this major retailer successfully addressed inventory challenges, reduced costs, enhanced customer service, and improved cash-flow management. By leveraging advanced inventory optimization models and partnering with third-party logistics firms, the retailer achieved substantial savings in distribution costs, increased visibility into the supply chain, and reduced inventory levels. This strategic transformation not only strengthened the retailer's competitive position but also positioned it for sustained growth and improved profitability in the dynamic retail landscape.