In the process of buying, not getting the size ratio right is a common issue. This translates into core sizes running out fast during the season and fringe sizes sitting in the warehouse for months.
With the goal of minimising the impact of this misalignment between stock available and actual demand, Nextail offers a feature that automatically calculates the ratio between the weight of each size in terms of sales across the network and its warehouse stock availability. That ratio is what we call “Residual Value”, and will be taken into account in all optimization decisions to try to keep a healthy balance of stock in the warehouse throughout the season.
Let’s see this concept with a numerical example:
As you can see, each size has a different ratio. In size L, for example, the Residual Value is very low because 40% of the stock in the warehouse is from this size, whereas only 15% of demand is generated by it. At the same time, size M is in the opposite situation: 30% of the demand is concentrated in this size, but only 5% of the stock available in the warehouse is from size M. As a consequence, the Residual Value will be very high.
Another example when extreme residual values can be observed is when a product has run out of most sizes in the warehouse. In these cases, it is common to have only fringe sizes left. As a consequence, the percentage of stock sitting in these remaining sizes would be very high (as all the other sizes would not be available anymore) but the percentage of demand generated by them will most likely be pretty low. As seen above, this translates into very low Residual Values and therefore extra units being sent out in replenishment.
How does this affect the optimisation decisions?
The optimisation engine will naturally try to protect the sizes that have a high Residual Value by sending them only to the stores where that size in particular is performing best. At the same time, when replenishing sizes that have a low Residual Value, the system will tend to propose a few extra units to the stores where there is at least some demand.
Both actions (protecting the best sizes and being more generous when replenishing the worst performing ones), will help maintain a balance in the warehouse during the season. However, keep in mind that this can also cause some complaints across the network (feeling the replenishment volumes on the best performing sizes are too tight but also seeing how “too much” stock might be shipped to low rotation ones). In case this behaviour causes too much noise, it can be switched off for all products. However, most of our customers decide to leave it activated as it tends to help the merchandising team a lot with the unbalances that come with inaccurate buys.
