Henry Ford once remarked, “You can have any colour of car, as long as it is black.” The quote highlighted what Ford offered its customers as a choice set in the early 20th century. Model T was produced only in black.  Today, no marketer can dare make a statement like Henry Ford did. They know that 21st-century customers are already spoiled for choice. As more and more categories and products move away from being just utility items to differentiated, preferred brands, marketers of competing brands are trying to beat each other while overwhelming customers with choices.  Our work with fashion companies showed us that even the colour black is not one shade! There are at least 10 different types of black shades. On the face of it, it looks crazy, but once you place all the shades (of a product category like fabric) in front of a customer who prefers the colour black, he will understand the nuances and select the one he likes, and at the same time will also be able to identify the shades which are not his preference. This means that if he had not seen the 10 different shades of black, he would not have known his own preferences. Similarly, there will be other customers who prefer the colour black and will zero in on a different shade. This means that exposure to variety creates new need-based niche segments in the market. At the same time, the demand for black, which would have aggregated into a single shade, is now disaggregated across 10 different shades. The explosion of variety is causing what can be seen as ‘disaggregation of demand’. Such <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/research-and-publication/articles/merchandising-grid-the-mechanism-for-product-portfolio-management/">demand disaggregation</a> is evident in almost every product category, driven by the desire for variety. As competition responds to increased variety, consumers are now witnessing an explosion of options across many product categories, including <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/industries/textile-garments/">garments</a>, shoes, furniture, consumer durables, automobiles, electronics, books, music, and even some industrial products.  Demand disaggregation is leading to the formation of what Chris Anderson calls the ‘long tail’ of demand. Chris Anderson, in his best-seller, The Long Tail, identified the problem across product categories. It is no longer the Pareto Principle, where 20% of SKUs are supposed to cover 80% of sales. Now, 20% of SKUs account for approximately 30%-40% of sales, while the remaining 60% of sales come from the addition of a small volume of sales, each from many SKUs, thus creating a long tail of demand.   <figure class="image"><img style="aspect-ratio:16648/8099;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//image_1779965465.png" width="16648" height="8099"></figure>Demand disaggregation poses a significant challenge for both production and distribution. With a large variety increasing over the years, production facilities are being loaded with less and less volume per SKU. At the same time, with more variety, the demand for individual SKUs also becomes erratic. The tussle between marketing and production has grown over the years, as production seeks to meet its efficiency targets and prefers larger batches per SKU, while marketing aims for smaller volumes per SKU to meet channel partners’ requirements, even though the company’s total volume sold does not increase dramatically.In distribution, the problem of erratic demand multiplies as the disaggregated variety is further ‘pushed’ to downstream channel partners, such as distributors and retailers. With the increasing variety and regular push of SKUs to downstream links, demand becomes even more erratic, resulting in a multiplier effect from the disaggregation of demand. This results in a deterioration of the channel partners’ inventory turns. With time and increasing variety, the turns are bound to deteriorate. With reduced inventory turns, the purchasing power (OTB, or Open-To-Buy, budget) will deteriorate over time. It has already begun to happen for some fashion manufacturing and distribution companies in India. The volume of business sold through their distribution channel is deteriorating over time, while the companies are looking to create new channels to achieve volume growth. Retail chains, particularly those in the fashion sector, are bearing the brunt of lower inventory turns and increased markdowns.  Statistically speaking, the best place to hold and sell a wide variety is a central warehouse, which can serve as both a warehouse location and a sales location. This means that if we cannot stop the demand disaggregation due to variety, we can prevent the deterioration (the multiplier effect) by holding it in one place. If, by a magic wand, we could get all customers in a country to visit the warehouse and buy from it, they would not only get the best variety, but the manufacturer’s inventory turns would also be the best due to aggregation benefits. Amazon has the magic wand, using the internet to fulfil demand at its central warehouse. Amazon can offer a huge variety and enjoys inventory turns much higher than those of any physical bookstore, which has to move the variety to meet the needs of a local catchment area. No doubt, we see many physical bookstores struggling to keep the business alive. Amazon was able to do this because, for books, DVDs, and music CDs, purchase decisions can be made virtually.  However, there are many product categories where buying decisions involve actual ‘look’, ‘feel’, or ‘trials’ with the physical product. Most customers would prefer to buy many products after experiencing them in terms of the ‘look’, ‘feel’ and ‘trials’ like garments, consumer electronics, etc. Therefore, producers of many such categories will have to rely on channel partners to reach the retail counters. Thus, these industries must send the variety downstream in the <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/research-and-publication/counterpoint/podcasts/end-to-end-pull-distribution-from-pilot-phase-to-scale-up/">supply chain</a>. However, can we prevent the multiplier effect of demand disaggregation with this inventory movement? Is there a way to move the inventory downstream to the point of sale without suffering from the problems associated with inventory deterioration and reduced inventory turns?  The way to deal with variety at the point of sale has to be a three-pronged strategy, depending on the type of product and the industry.  <h2>1. Supply chain strategy: From push to pull</h2>If one must have variety and suffer from desegregated demand, the least one can do is stop taking actions that further deteriorate the situation. If inventory needs to be moved downstream, we should move as little as possible and hold more at the central location. This means companies have to shift from a ‘push’ mode to a ‘pull’ mode. The supply lead time needs to be reduced, and we should develop the capability to replenish frequently and in small quantities for each SKU. This is the only pragmatic approach, as with increasing variety, most forecasting tools will fail miserably at forecasting desegregated, erratic demand patterns. So, instead of forecasting, push inventory based on the forecast. We should move inventory only based on consumption, while ensuring the replenishment lead time is significantly shorter than current levels.  However, with the implementation of perfect pull systems, we do not expect the problem to disappear completely. At a retail point, an inventory of 1 unit of an SKU can translate into many months’ worth of an inventory! This means we need to not only have fast replenishment but also rapid replacement to take back what isn’t selling at the desired frequency. Taking back slow-moving inventory at one store provides an opportunity to make it available at another store, where it can be fast-selling. The extra freight costs will be more than compensated for by increased sales and reduced inventory.  <h2>2. Bounded creativity: Differential supply chains</h2>Now comes the million-dollar question: Do we need so much variety to excite our customers? On the one hand, we know that an increase in variety creates new niche segments, which emerge only after customers are actually exposed to it. This definitely helps beat the competition and divert demand to one’s products. But the pressure to add more and more variety also leads to situations where more variety does not create more niche segments or, even worse, the customer becomes indifferent to the variety (and for her, any one of the choice sets meets her need). This means the variety beyond a point does not create new niche segments but desegregates the demand.<figure class="image"><img style="aspect-ratio:16655/10621;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//image_1779965515.png" width="16655" height="10621"></figure>Today, most designers are under pressure to show variety. Hence, they are also churning out designs in large quantities to meet the numbers. So, there are designs which create disaggregation without creating new niche customer segments. At the same time, it is difficult to predict which designs will be a hit and which will be a flop. Nobody really knows at what point an increase in variety becomes irrelevant to customers. The best way out of the conflict is to incorporate the designer’s intuition and integrate the design strategy with the supply chain strategy.  Most fashion products have plants, which are ‘V’ types (many end items are created from few common raw materials, and as we progress in the manufacturing flow, each step in manufacturing creates more variety using the work-in-progress (WIP) sent from the previous department), or ‘T’ plants (where variety is created at the assembly point in manufacturing as a mix and match of standard components).  The way to integrate designs with supply chain strategy is to limit the boundary of creativity for designers by restricting the palette of designs from the divergent point of the ‘V’ plant or the common component palette of the ‘T’ plant. Awareness among designers of the supply chain’s advantages will help them make better decisions about how to use ingredients in a final product. However, they are also allowed to create new designs from the start of the manufacturing process, fully aware that this adds to the supply’s lead time. For example, in the case of garments, it can mean restricting designs to a yarn pallet or to limited fabric types. Our experience shows that a clear awareness of the supply chain’s impact on decisions helps designers make effective choices.  The same differential lead-time strategy can be implemented by adjusting the stocking points of SKUs at different levels of the supply chain hierarchy. Some items can be stored and replenished only at the central warehouse, while others are available not only there but also at downstream points. The rule of consumption-based ‘pull’ replenishment (instead of forecast-based ‘push’) applies to any stock movement between any two points in the supply chain.  In the case of books/retailing, the differential lead time can be implemented with some items being stored at the central warehouse and replenished to the shops, which the customer can pick up instantly, while others are only at the central warehouse and sold directly through the internet, the customer has to wait for a period.  The differential lead time should help in aggregating demand into a ‘meaningful’ variety (that creates new niche segments), which always enjoys the best service. The other variety is available, but only with a longer delivery lead time.  This approach also requires the ability to move items between the two categories based on which sell more, and to exit products based on sale rates.    <h2>3. Managing merchandise: Selling without the inventory</h2>The decision to offer differing service levels across products presents a challenge for sales, particularly in cases where the product is stored only at the aggregated location. The problem becomes more severe, particularly when the product must be experienced before the actual sale.  The buying experience usually consists of three components for decision-making: <figure class="image"><img style="aspect-ratio:16635/10344;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//image_1779965585.png" width="16635" height="10344"></figure>Buying a consumer product involves one or more combinations of the above three factors. In many products, the actual inventory of the SKU is used to provide the experience. We can provide the above three experiences without having a specific inventory. In that case, we can afford to keep the inventory at a central location while having effective props to provide the customer with an experience at the time of purchase. Amazon can provide a ‘sample’ experience for a book by allowing people to read a few pages before placing an order online.  Our work with furniture retail companies has shown that such props can be easily developed. For example, in the case of furniture, the retail point typically offers one furniture type but showcases a variety of upholstery options by displaying large fabric samples that can be placed on the sofa, allowing users to examine and feel them as well. This prop is different from a catalogue because a catalogue may not be able to provide the 'real' experiences.  Not only do we need props, but the retail store salespeople also need to be trained to sell them. They must be confident in the availability of such items at the central location. Remember that a retail salesperson is always cautious about selling items whose availability is unreliable. He is always the first point of contact for any customer experiencing negative issues. The sales team should be confident of the availability of such items; otherwise, it is impossible to expect the sales of 'virtual' variety at the retail point. The supply chain must be optimised to ensure very high availability at all times, regardless of the SKU’s designated storage location.  Once the salespeople are trained to sell a 'virtual' variety, we will know the actual demand for such items. If they pick up volumes, we can decide to move the items physically to the retail point.  The variety war between marketing and supply chain managers is chronic in many supply chains. The way out of this conflict is not a unilateral decision to trim SKUs. The only way to trim SKUs is to give them a fair chance to stand the test of the market. The end customer is given the opportunity to experience the product at the point of sale. The above approaches help provide the experience while preventing the problem of high inventory. Who said one cannot have the cake and eat it, too?

Key Takeaways

Variety is a double-edged sword for the fashion industry. Every additional choice fragments volumes, placing greater pressure on production and distribution. The need of the hour is to master the art of selling variety without carrying the burden of excess inventory.

Dealing with variety in the supply chain

<h4>Dealing with variety in the supply chain</h4>

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<h4>Dealing with variety in the supply chain  </h4>

There is often a chronic war over the variety of a company’s products between marketing and supply chain managers. Find out how there can be a win-win. Read to know more.