By Krista Sterner-Oracle on Mar 11, 2016
Quickly replacing ad-hoc markdown procedures with a predictive, fact-based software tool benefits margins, sell-through, and operational efficiency.
For retailers, the need to mark down and clear out underperforming inventory is a fact of daily life. The overall goal is to clear merchandise out on schedule—before the season is over, before the end of the quarter, or whatever the deadline might be—while maintaining as much margin as possible. The depth and timing of markdowns is critical yet easy to get wrong. If you price an item too low and too early, you lose margin. If you price it too high for too long, the result is lost revenue and leftover unsalable merchandise.
Given the importance of the markdown process, a surprising number of retailers take a rather unstructured approach, basing their strategy on a mixture of arbitrary, ad-hoc procedures and gut feelings. Some use a time-based approach such as: if an item has been on the floor for 45 days, take 30% off; if it has been on the floor for 100 days, take 70% off. Others combine age of merchandise with seasonal considerations and sometimes emotional attachments to a particular product line or even a particular product.
Optimization Solutions Predict Success for Retailers
There is a better way to approach markdowns. Based on the results experienced by our customers, particularly in fashion and apparel, the replacement of an intuitive, time-based approach to markdowns with a predictive, fact-based tool such as the Oracle Clearance Optimization Engine (COE) can, in a reasonably short period of time, yield a 3-5% increase in gross margins and a 5-20% increase in sell-through. It can also streamline the workload of merchants, department managers, and other decision-makers by generating a markdown strategy—calibrated to the organization’s structure and KPIs—for every product in inventory, down to the SKU level.
Based on current and historical sales and inventory data, COE analyzes every item that is eligible during the optimization run. It eliminates guesswork by determining the most profitable depth and timing of the markdown and delivering the recommended strategy. With the strategy comes a complete set of analytics, so users at every level can understand exactly why COE is making a given recommendation. This is all done automatically, based on your markdown cadence. A theoretical user would come in on Monday morning and find a current set of markdown recommendations.
Implementation Barriers Are Eliminated
COE has recently been enhanced and is now a powerful consultation and software tool for item planners. The accelerated implementation model can be fully deployed in 14 weeks. Oracle Retail Consulting (ORC) has developed a proprietary Accelerated Clearance Optimization (ACOE) methodology and uses an experience-based, prescriptive approach along with configurable pre-built templates. This delivery approach is how ORC enables profitable results in less than four months. Prerequisites include a record of sales and inventory data for three years, at the item level, and the organization’s location/merchandise hierarchy.
The Oracle team will need the following information from the retailer in order to implement COE:
· An understanding of what the retailer would like the markdown process to look like, to ensure that this vision is compatible with ACOE’s prescriptive approach
· Who the project champion will be, on the business side of the house
· Who will lead any required internal change management
· Confirmation that in-house technical resources will be available to extract necessary data, and then integrate COE with the execution system that will be used
Increase Margins with Oracle Retail’s Optimization Solution
Given the realities of today’s ultracompetitive market, the ability to protect margins by scientifically managing the markdown and clearance process represents a significant competitive advantage for retailers. To discuss the possibility of implementing the Oracle Clearance Optimization Engine in your own organization, contact your sales representative or send an email to OneRetailVoice_ww@Oracle.com.