## May 25, 2018

**How smart is your supply chain?**

For fashion company managers and executives, inventory that doesn’t move is a problem. Managing the supply chain to balance stock between stores can make all the difference. How?

Stock transfers are the undiscovered gem of ROI. C executives deal with supply management every day – finding ways to increase return on investment.

**How can our supply chain management tool increase your ROI?**

What happens when you move items from a place where there’s a 20% to 30% chance of selling to one where there’s a 60% to 70% chance? More sales happen. The ROI is potentially enormous. Spending the MAXIMUM amount to move as much stock as you can boosts sales.

When you follow the right model, the more store-to-store transhipments you make, the happier you make your shareholders.

The right model doesn’t just mean knowing which garments will sell better elsewhere. You also want to know how many need to remain in place. We’re not aiming to increase the sale of full price items by creating stock outs at ‘exporting’ stores. A retail store is a consumer ecosystem. A lack of choice can lead customers to take their business elsewhere.

Our aim is to optimize transhipments between stores to hit the sweet spot of optimal full price sales without stock outs.

The process is similar to straightforward restocking. Here’s how the Evo Replenishment tool does it.

**Optimize sales with Evo Replenishment supply chain strategies: 3 steps**

- Our system collects data for sales, inventory, weather, and competition. It combines this data with the business rules decided by headquarters and the supply chain logistics for shipments between stores.
- It processes the data, estimating the impact of stock-outs and promotions. Then it measures the potential for sales for article, size, and store. By comparing the sales potential with the stock, the system calculates the orders for the missing items. Then it calculates the release of excess in shops caused by lack of customer demand.
- The optimization algorithm allocates the goods by moving them to the point of sales with the greatest potential. And, according to the constraints the head office specifies, it minimizes logistics costs between the shops and the number of packages to be readied.

The result? A list of transhipments to be made between shop pairs, organized by item and size.

**Creating transhipment parameters for your supply chain**

Supply chain management helps you balance stock and transhipments. How? Our system uses three main parameters to regulate transhipments: the maximum number of packages per store, the minimum number of pieces per pack, and the minimum value of each package.

Our first parameter imposes a ceiling on the number of packages each store can send to recipients. Limiting the number of shipments limits shop workload too.

Here, we set the number to 3.

Our second and third parameters ensure that each package contains a minimum of items and value. This means shipping is worthwhile, even when set against the logistical costs. In our example, each package must contain at least seven pieces with a minimum value based on list prices equal to €150.

The choice of parameters allows us to check the number of transhipments carried out. Transhipments mean costs for the company, in terms of both logistics and extra labor.

**Does the added value justify shipping costs? **

Let’s start from the benefits of transhipments in terms of sell-through. Here’s a graph that uses historical customer analysis to compare the sell-through of the goods handled and the baseline sell-through.

The sell-through of the transhipped goods is calculated as the percentage sold within 30 days of their arrival. The baseline sell-through is the percentage of the same inventory sold within 30 days in stores where there’s no movement.

**Analyzing costs and benefits using supply chain logistics**

You can see that the transhipments increase sell-through. Sales increase by more than 30 % at full price. And this increase, as the analysis below shows, justifies the shipping costs.

The cost of the store managers’ input in the process also needs to be judged on ROI. Our research shows that store managers’ experience and intuition add value to machine-generated suggestions.

Now we want to analyze the impact of transhipments on each item. We assume an ASP (average selling price) of €100, net of discounts. Then we subtract the average cost of the item. This gives us an average net margin of €55 per item.

Transhipments increase the chance of selling each item by about 32%. The net benefit from transhipment is given by the product between the two values, in this case €17.53.

To estimate the shipping cost of each item, divide the shipping cost of each pack, €7 in our example, by the average number of items per package, estimated at 10 pieces.

Preparing packages means extra work for store managers too. Assuming it takes an hour to prepare a package with 10 pieces at €20 hourly, the cost of packing is around €2 per item.

Imagine that in one hour at a cost of €20 a shopkeeper can rework 20 options. And take into account the time stores spend viewing and editing the proposal for re-allocation and transhipments. This means we get an additional cost of €1 per item.

**What’s the impact of transhipment costs?**

We can see that the total costs for the transfer of a moving item are given by the sum of the three costs just analyzed, for a total of €3.74.

The net margin for each item moved is €13.80. That’s about 80% of the benefit obtainable from the transhipment. In other words, transhipment costs have only a 20% impact on the benefit obtained through the movements.

The extra margin is strictly related to the average margin per item, and therefore to the average selling price of the items.

**How do you find the threshold for profit?**

Once our model’s in place, we establish a level at which transfers bring profits. Then we create forecasts showing the margins available at different average selling prices.

This graph shows a simulation of the incremental margin trend as the average selling price of items changes.

The higher the article’s price, the greater the margin obtainable from the transhipments. A greater margin means moving items is more viable.

Conversely, if the price is too low, transhipments may not be viable. The threshold value highlighted by this simulation is about €20. That means any higher price is enough to justify transhipment.

Obviously, to limit delivery costs, it’s also necessary to adjust the number of pieces in each package. As the price goes up, the optimal minimum number of pieces per package drops. And that makes shipments of a few items at a time viable.

How do business rules and the automatic optimization help improve your supply chain? They allow easy control of delivery costs when the average selling price changes. And they enable adaptation of the algorithm from time to time depending on the context.

**Happy shipping!**

**Happy shipping!**

Far from being an expensive worry, stock transfers can actually be a source of increased margins and greater profitability.

Once you adjust imbalances and set your transhipment parameters, you’ll never look back.

*Want to find out more about Evo Replenish? It’s just one of many solutions we offer to our retail clients.*

#### About the authors

Elena Marocco joined Evo as data scientist in 2016 after a very successful internship experience. A cum-laude graduate in Mathematics at the University of Turin, she defended an MSc with an innovative solution for Fashion Inventory Management.

She is excited about the world of probability, statistics and, more generally, in discovering useful maths that can have a significant impact through real life applications.

Ben Thomas is the Chief Writer and Brand Strategist at Evo, with a core focus on emerging technologies, Big Data, and the Internet of Things (IoT).

He loves to engage audiences about the frontiers of science, culture and technology — and the ways these all come together.