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There are often two sides to retail: What the customer sees on the shelves, and the process that gets the goods to the display.
Talk to anyone in the industry, and you’ll find no doubt that the presentation to the customer matters when it comes to driving sales. But go deeper on the balance sheet to examine business health metrics like profitability and cost of goods sold, and it is evident that there's more to success than what appears on the sales floor.
When it comes to these behind the scenes functions, there are few areas of a business more important than inventory.
In order to make money selling goods, retailers need to have products that are matched to demand.
“Inventory is all about selecting the right products, and making sure the right products are in the right place at the right time,” said Bob Debicki, senior director of global CPG and retail industry solutions at business planning software company Anaplan. “Any of those dimensions can be a challenge.”
Over the last three years, repeated and often overlapping swings in the global supply chain have only added complexity, while also bringing inventory challenges faced by retailers every day into public view like never before.
The pandemic brought a spike in demand for goods. By mid-2021, the supply chain was flooded with goods and facing slowdowns from COVID, leading to product shortages.
The next year, a mix of supply chain easing and over-ordering by retailers led to a glut of inventory.
Balancing inventory is often the result of sound planning. So when there are problems, the cause can come down to what was expected, and what came as a surprise. On Debicki’s reading, retailers, manufacturers and supply chain professionals were successful at predicting the pandemic-era demand based on the known consumer behavior associated with lockdowns and the money that was being injected into the economy. On the other hand, supply issues ended up choking the system because they weren’t anticipated.
“We weren't expecting slowdowns in distribution. We weren't expecting supply chain outages. We weren't expecting ships sitting in harbors not unloading their goods,” Debicki said. “Historically, if the product was available, and it was en route, it would get there. But now we had all of these other obstacles that were slowing us down.”
Now, manufacturers, brands and retailers are facing elevated costs, while consumers are pulling back discretionary spending as a result of higher prices from 40-year-high inflation.
“Figuring out what the right mix is, is more important now than ever,” Debicki said.
A retailer may change their assortment based on what consumers are willing to spend. However, they don’t want to over-order, because they could be left with products that don’t sell. That eats into profitability. Adding yet another challenge is the fact that these decisions are often made months ahead so that goods can be produced, and shipped across the globe.
In a complex environment, often what’s required is the weighing of a number of disparate factors, and decisionmaking based on a variety of options – none of which may be ideal.
This is only more acute with inventory and demand planning. While the orders are being placed well ahead of time, the decisions that govern what's in those buys are being made in real time.
The results of low visibility can be costly. In 2022, retailers ordered too much inventory out of panic that they would run out of products to sell. The markdowns and close-outs of the holiday season that cut into earnings were the medicine they had to take as a result.
Given this, Debicki said it’s important to take a holistic view of inventory that connects not only economic indicators and a retailer’s historical data to the number of products onhand and those being ordered, but also where they will be allocated across stores and ecommerce. In the end, this all must connect back to the financial implications of each decision. Each of these processes have different teams associated with it, so taking a collaborative approach is also important.
With models and teams working together, retailers can ensure they make decisions that not only cut through the complexity, but ultimately improve the business as a whole.
Trending in Operations
"Fashion ecommerce is one of the most cumbersome customer experiences that exists," said Rent the Runway CEO Jennifer Hyman.
The rise of generative AI is bringing with it a groundswell of interest and concern about how the capability to automatically synthesize information and create something new will change how we work.
Given that AI will sit within the architecture of our digital lives, it’s also worth considering how the technology will introduce new tools for other aspects of life, as well.
For two ecommerce innovators in the apparel space, it’s a time to explore how it will transform shopping. Rent the Runway is set to roll out new AI-powered search capabilities, while Stitch Fix is drawing on a long history with data science and machine learning to personalize the inventory buying process.
Here’s a look at the initiatives underway at each company, and their visions for the future:
Rent the Runway: From search to concierge
Rent the Runway is putting a focus on the customer experience this year as it seeks to retain more subscribers and continue a yearslong push toward profitability.
This is resulting in the introduction of a variety of new initiatives, from the addition of an extra item to all orders to speeding up page load times. Yet as CEO Jennifer Hyman zooms out, she sees change being necessary on an industry-wide level in fashion. Beyond adding new features, AI can play a transformational role.
“I think that fashion ecommerce is one of the most cumbersome customer experiences that exists. You are searching through pages and pages and pages of content to find the items that you like and no one likes doing this,” Hyman told analysts on the company’s earnings call this week. “As an industry that still is selling physical products, AI is going to be -- fashion is going to be a major beneficiary as an industry.”
As a rental service, Rent the Runway has a distinct niche in fashion that lends itself to AI’s advantages, Hyman said. As opposed to a retailer that a consumer may visit a couple of times a year, RTR is used frequently by customers. So Hyman said there are opportunities to turn Rent the Runway into a “utility” by creating a more seamless experience.
This frequent use also provides a “highly unique” dataset, Hyman said. They know what a customer is planning to do based on what they rented. They know whether she liked or disliked an item, and many customers are reviewing 10 items per month. They know her size and how an item fits. This can be put to work in tools that allow customers to ask questions, and find answers.
The first application that combines AI and these advantages will appear in the coming weeks, when Rent the Runway plans to launch a beta of AI-driven search. The tool will allow customers to search for common terms or use cases for an item. So a person will be able to write “Miami vibe,” “‘clambake in Nantucket,” or “tropical motifs,” and receive results about what to wear for such an occasion.
The goal is to help customers sift through the endless aisle, and instantly finds what's right for them.
“I think that across all fashion sites, all over the world, the way that people are searching for product is fairly vanilla, it's fairly functional, right?" Hyman said. "You can go to a site and search for a T-shirt, you can go to a site and search for a black-tie gown. The fact that we're going to be able to enable our customers to search how they actually want to use this closet in the cloud, to search for items to wear to my beach bonfire this weekend, that is a completely different way to search, and I think that it really brings out the value proposition of what a closet in the cloud is all about."
Hyman sees this as a first step in the company using AI models to improve the product experience, and expects more tools to appear in the coming months. RTR is also introducing an SMS concierge experience for onboarding that allows customers to text with a member of the customer service team. The company is already exploring ways that AI can be incorporated into that tool, as well.
In the longer term, Hyman said the company has a vision that will leverage AI to allow customers to communicate with Rent the Runway asynchronously across different modalities, and have a stylist that is constantly available to recommend items, pick out new inventory and answer questions.
“If we are utilizing AI appropriately over the next few years, I see no reason why someone even has to come to our website,” Hyman said.
Stitch Fix: Inventory buying and beyond
Stitch Fix has long married AI with human curation to provide outfits on a subscription basis.
“For years, we have utilized capabilities in generative AI, injecting scores and language into our personalization engines and, more recently, automatically generated product descriptions,” CEO Katrina Lake told analysts. “We have also developed and implemented more advanced proprietary tools such as outfit generation and personalized style recommendations that create a unique and exciting experience we believe is unmatched in the market.”
A new area where the company is applying AI is inventory buying.
“We have historically utilized a number of tools to make data-informed decisions with our inventory purchases,” Lake said. “Now, directly leveraging our personalization algorithms, we have developed a new tool that creates an exciting paradigm shift, which will utilize math scores at the client level to drive company-level buying actions. We expect the clarity of demand signals at the individual client level to drive more proactive and efficient inventory decisions as a company. And because of this, we expect to see higher success rates on fixes and drive increases in keep rates and [average order value] over time.”
Early results are promising. When compared with existing buying tools, testing showed a 10% lift in keep rate and AOV. By the end of this quarter, Stitch Fix expects 20% of all purchase orders to be algorithmically informed.
With experience using AI and a team in place to build, Stitch Fix is investing in the technology. Like Rent the Runway, it also has a unique dataset that offers an immediate advantage.
Here are Lake’s thoughts about how Stitch Fix’s AI strategy:
One of the things that I love about our experience is that we have generative AI that's really in more of a visual format. And so, the outfits that we have in our app, those are actually taking into account your preferences, what we know about you, and then in combination with what we know that you own in your closet. And to be able to kind of continue to push that technology and to be able to continue to give people more value in their experience with Stitch Fix, that's a really good example of, I think, a capability that is, firstly, really aligned with our capabilities around data and personalization and really unique to us.
And then I think it's also really compelling because I really think that pushes us as we think about what that addressable market is. I think if we can push outfits to be something that can be an asset to everybody, I think that is a universal thing that people would love to be able to have, is to have access to advice on a daily basis around what to wear and how to wear it.
While these are distinct companies, their plans lead us to a common conclusion: While the talk around generative AI might be new, many technology-forward companies already have assets sitting inside them that can be leveraged to build new tools. Uncover what’s already there, learn about the AI’s capabilities and develop a solution that's right for your organization. Then, talk to customers to determine how to improve it. It might mean commerce looks different, but that’s okay. The point is to create a better experience.