Why Markdown Optimization is Important More Than Ever



Markdown Optimization – also referred as Clearance Optimization – is a crucial aspect of retail and supply chain management that helps businesses efficiently manage their inventory and maximize profits. This process involves clearing out remaining stock within a certain timeframe by offering discounts to increase demand. This is especially important when products approach the end of their lifecycle or season, and the business needs to make room for new stock. In such situations, markdown optimization can help businesses to recover some of their investment by quickly liquidating the remaining inventory.

One of the key business needs for markdown optimization is to increase demand for products. By offering discounted prices, businesses can stimulate demand and ensure that the remaining inventory is sold before it becomes obsolete or expires. The optimization process involves analyzing price elasticity, which is the relationship between price and demand, to calculate the optimal price change that would achieve the desired business outcome. This helps businesses to set prices that are attractive enough to consumers while still generating profits for the business. Another critical business need for markdown optimization is margin optimization. This involves changing the price so that the expected margin of the product is maximized. The margin can also consider the leftover stock value, which determines how aggressively the optimization tries to get rid of it. By considering the leftover stock value in the optimization process, businesses can balance the need to clear the inventory with the need to maximize profits.

How to be successful in markdown optimization?

To successfully implement markdown optimization, businesses need to consider factors such as spoilage, inventory value, and turnover. Spoilage refers to the cost of damaged or expired inventory, which can significantly impact profits. Inventory value and turnover are critical KPIs that businesses must monitor to optimize their clearance process effectively.

The SAMPO process framework provides detailed guidance on the implementation of clearance optimization, including the necessary data models and configuration steps. It involves several clearance optimization runs, including monthly and nightly runs, that help businesses monitor the optimization process and ensure that it is achieving the desired outcome.

Markdown Optimization Software

Markdown optimization is a functionality included in RELEX 6.7 and onwards that can automatically detect items needing markdown to be sold out before expiration or termination and calculate the optimal price reduction to maximize the margin and clear the remaining stock,

taking into account differences in sales performance.

The module requires data for forecasting, balances, product current sales price, and price changes, as well as product master data and lifecycle information. Mandatory parameters for calculating optimal price reduction include the product-location, price optimization start and end dates, quantity to be markdown, forecast between price optimization start and end date, result type, and rounding logic. Optional parameters include maximum and minimum price change thresholds and salvage value.

The output of the markdown optimization is an optimized price or price change for the product-location after applying pricing rules. It also provides several metrics to evaluate markdown optimization results, including effective forecast, external addition, forecast value, projected end balance, forecast margin, and forecast margin percent.

The markdown optimization calculation includes several workflows from identifying markdown products to applying pricing rules and updating forecasts and projections for review. The module can be configured to work on different levels, including product-location, product, or any other hierarchical level. Workflows and views are visible to the user when the Unified Markdown Optimization module is activated, and the functionality can increase process automation and free time for other tasks.

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