Toying With The ForecastsToying With The Forecasts

KB Toys operates 1,300 stores across the country, each with about 3,500 different items--in all, $2 billion worth of merchandise annually. The company's biggest challenge is predicting, months in advance, which toys the hordes of finicky kids will scream for come Christmastime.

"The whim of the 10-year-old certainly has a major impact on our business," says Bob E. Muller, the Pittsfield, Mass., company's VP of inventory management. "What becomes important then is to make sure you have the right inventory in the right stores."

Until recently, though, Muller says he didn't have the proper tools to judge how effectively his staff was managing the inventory, or if shelves were properly stocked. That's when the company decided to bring in demand-forecasting software.

Store planners at KB pick inventory by reviewing computer-generated recommendations, which are based on a particular store's size and selling trends. When Muller asked ProfitLogic in Cambridge, Mass., to look at the orders people ultimately sent in, the maker of software to forecast demand, allocation, and buying decisions told him the KB process was flawed.

"It found a significant difference in what the planners wrote," Muller says. "One of our objectives was to evaluate where the system was not making the best selection, and to minimize the time it takes an individual to make an order."

In that respect, the customized software, Allocation4Profit, has been a success in its first four months: Muller has been able to eliminate six of the 25 direct store planners in his 48-person inventory management group. Each store planner is responsible for roughly 60 stores.

But, Muller insists, the biggest benefit is improved inventory allocation in all stores, which will result in more sales, reduced markdowns, and fewer items out of stock. KB, the No. 2 toy seller with $1.7 billion in sales last year, has not set a revenue target for the software. Muller expects it will be six months to a year before he can clearly evaluate sales figures.

The company purposefully waited until after the crucial holiday period last year to implement the changes. And they were dramatic: KB Toys broadened its store rankings by volume from five levels to nine, which meant changing the mainframe system to accept new volume codes for each store, and preparing buying departments to stratify inventory over a larger group of stores.

"Our system understands the demand for Razor scooters in a particular KB Toy Outlet and understands the likelihood a given customer might increase purchases, and combines that with knowledge of the inventory level," says Scott C. Friend, ProfitLogic president and CEO. "Our markdown system helps to optimize the ultimate gross margin value a retailer receives in a given period of time."