On today’s episode, Kunle is joined by Axel Bukowski, Co-Founder & CEO of Madden Analytics, a tool that creates a systematic inventory for brands to provide data for better business decision-making.
Axel Bukowski found his interest in the eCommerce industry around 2010. He started his optical brand in Stockholm, Sweden in 2013 and has grown successful since. With his co-founder, Petter, they built Madden Analytics as a solution to the inventory pains of the optical brand which also became a successful venture. Axel and Petter are now focused on helping other eCommerce businesses with their analytics needs.
Madden Analytics can be used by any brand in any industry but works perfectly for fashion brands, which face challenges in efficient inventory. Fashion brands can manage their inventory better by providing them with real-time insights into customer demand, inventory levels, and pricing. This helps them make better decisions and optimize their operations.
It’s an insightful episode as you’d hear Kunle and Axel talk more about product inventory, the fashion industry, the trend of product demand, nearshoring, and solutions to inventory and forecasting problems.
Here is a summary of some of the most important points made:
On today’s interview, Kunle and Axel discuss:
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Axel, it’s an absolute pleasure having you on the 2X eCommerce podcast.
Thank you, Kunle. Nice to be here. I’m glad.
Let’s start with your backstory. I always love to hear the precursor to what brings you here. You’re the CEO and Co-founder of Madden Analytics, and inventory-planning SaaS tool for consumer brands, particularly in the fashion industry. It would be interesting to understand your journey.
I’m living and operating out of Stockholm, Sweden where I’m also born and raised. I’m turning 40 now. Time flies. That means I’ve had a career so far of around fifteen years or something. I studied economics at Stockholm School of Economics. I started my career as a management consultant at Boston Consulting Group years back. It’s a fun job working with strategy and different types of strategic projects for big companies but also a lot of hard work.
After around three years, I realized that maybe consulting wasn’t what I was supposed to do for the rest of my career. I was interested moving towards eCommerce and this was around 2010 or so when eCommerce was an existing market and it was growing a lot but it was not as big as it is today. I was curious to learn more about how eCommerce works.
I joined Rocket Internet at first. Rocket Internet is a German company and they were active in Europe years ago. The concept was to identify different successful eCommerce concepts in the US that were not existing in Europe and then try to, as quickly as possible, launch and execute similar models in Europe. It’s a fascinating business model and a fun year with Rocket Internet. I ran two different ventures for them in Scandinavia focusing on hyper growth and executing as quickly as possible. That’s where I first dipped my toes into eCommerce.
When I left Rocket Internet, because they were shutting down in the Sweden operations, it was a big office of around 150 persons but they were allocating resources to other places. I then left and joined CDON Group instead, which is a Swedish company and, at the time, it was the largest eCommerce player in Sweden. In the Nordics, they had twelve different portfolio companies selling everything from white goods, books, fashion, baby products, and toys, etc.
I worked with business development for that company, for all of the portfolio companies. It’s a good learning experience seeing everything from marketing to logistics to organizational questions, etc. I did that for a year or something as well. At that time, I became interested trying to start my own business and that’s also what I did. I started my first own venture and this was in 2013 or 2014. This was a DTC brand within the optical sector.
We were designing, producing, and selling eyewear so mainly prescription glasses but also sunglasses and reading glasses. As I’m sure you’re aware, in most markets, the same in Sweden and Nordics, the optical industry is driven by large players. At that time, it was a non-digital market. It was almost as if you couldn’t buy eyewear online in Sweden. We set out trying to disrupt the market. We didn’t manage to disrupt the whole market but we made a small dent at least in the industry.
We designed, produced, and sold our own glasses in our own channels, the channels being online and also a small chain of physical stores where we had opticians and everything to make eye exams. Interesting few years where I founded and ran that company. It’s fun to try to take something from zero to something. One of the main challenges that I had with that business was to calculate how much should we produce out of every collection and every single SKU.
Eyewear, as many other consumer goods products, are difficult to produce, and it takes a lot of time. There’s semi handmade. There’s a lot of manual processes involved in manufacturing eyewear frames. At least with the type of materials that we used, it takes at least three months for the production length but sometimes it can be up to 5 or 6 months if you’re unlucky. That makes it complicated to decide how much you should produce because you can’t just look at your current inventory saying, “We have too much or too little of this SKU. We need to produce this much.”
You need to calculate how much do you think you will sell until you get the next delivery, how long do you want the next delivery to last, and how much will you sell after the delivery has been made? We didn’t have that many products, it was maybe 50 different products, but every product came in different variants, different colors. For many of the variants, they also came in different sizes, meaning that 50 products turned out to be maybe 400 or 500 different SKUs. Trying to forecast and predict every SKU when you have that many, and that’s not that many even if you compare to other brands, I realized this was complex.
We tried to build a lot of different Excel models and we looked at different available SaaS solutions that we could purchase and start to use but we never found something that we thought made sense or worked for our type of business. That’s what led me and my colleague and co-founder, Petter, to start Madden Analytics. Petter didn’t come from the previous company I worked with or started. We actually met at Boston Consulting Group years back. We were colleagues back then. He stayed at BCG for a bit of a longer time and then we joined forces and started Madden Analytics.
What are your roles at this point in time? You’re the CEO. Is Petter a technical co-founder?
He’s the technical co-founder. I’m having more of a formal title. I’m the CEO. I’m working more on the commercial side. I call Petter the CPO or CTO. He is running the tech team. He is doing all the planning up all the development work, our roadmap, and the prioritization on a weekly basis, etc. His is the technical co-founder, which is a good mix because I don’t have a technical background so I can’t write code or anything like that. I’m interested in the forecasting side of our business but I can’t code our software.
Thank you for sharing your background, it gives me context. It’s my first-time hearing about your background from consulting. Boston Consulting is part of the big three, McKinsey and Boston, it doesn’t get any bigger. You have that global outlook to solving problems. Secondly, your immense and over a decade’s worth of operator experience with Rocket Internet. You talked about your eyewear brand, Nividas Eyewear, and also the CEO exposure.
You have a lot to pack in and a lot of insights from an inventory management standpoint. I also picked up the fact that in the lead times, 5 to 6 months was quite a big window to plan, meaning that you only have two opportunities every year to get inventory right, which is tough. We’re in 2023 now and you’ve been running Madden Analytics since 2020. What are you seeing? What’s been your experience thus far in the world of inventory management from the verticals that require inventory planning and the macro trends you’re seeing at Madden Analytics?
The one big trend that we see, and this is probably what a lot of other people are seeing as well, is there has been a lot of focus, in the past maybe ten years, on growth at any cost. There are many brands out there that has been funded by venture capital firms or other types of investments. DTC has been a hot area for a lot of investors and founders. The North star has been growth at almost any cost previously. A major shift that we’re seeing since years back is a shift from focusing on growth to focusing on profitability and cashflow.
I’m biased because I’m working with inventory planning but we’re glad that this shift is happening because this means that more companies and more brands out there need to focus a lot more on inventory planning. Previously, the general feeling was that they could just buy anything and they would make sure to sell it through performance marketing campaigns or other types of initiatives.
Now, they can’t behave in that way. They need to make sure that their inventory is optimized and that they’re always buying the exact right amount of goods given all current circumstances and can’t build up inventory and risk having overstock going forward. Overstock ties up too much capital that is needed as cashflow in the business. We see a major shift from focusing on growth to focusing on profitability and cashflow and inventory planning is a huge part of that.
From what I hear, it seems like everybody is trying to get to this just-in-time model to be as efficient as possible but that has ramifying consequences like the way you produce. If your supply chain is with a third-party factory and it’s halfway around the world, there are few variables available to you to plan because you need to put things into production, their lead times for shipping, and all of that stuff.
How do you balance that over stock if you’re not a producer and you don’t have that much in your control? Particularly, when you’re now trying to be more efficient, meaning that the economies of scale and the purchase in power you typically have when you overstock are no longer there because you’re trying to say, “Factory, you guys need to be as efficient as possible,” or, “Suppliers, you guys need to be efficient.” What do you have to say about that?
On that topic, nearshoring or moving your production closer to home, there are more discussions around that right now than it has been during the past ten years. More and more companies are looking into moving their production closer to home in order to reduce lead times. This can be a good thing for the industry because, all else equal, the impact on environment, for example, can be can be smaller when you produce closer to home and you don’t have to ship across the world.
Mainly, the goal for the company is looking into nearshoring is to reduce lead times. Apart from that, there are a lot of companies looking into being able to plan further down the production line so not only ordering the finished goods but also starting to look at keeping raw materials or components in stock in order for their suppliers to be more agile and quicker when they ordered the finished goods. For example, if you’re producing shirts, you can perhaps keep the raw material in stock at your suppliers.
If you have maybe fifteen different colors or styles in material that you want to use, you keep that in stock and then you can cut everything from a few days to a few weeks or months on the lead time because the supplier doesn’t need to source the material when they get the order and they can just pick from the shelf. There are a lot of discussions and initiatives going on among the customers that we work with.
Apart from trying to decrease lead times, there are a lot of other factors or initiatives that can be made. For example, trying to negotiate MOQs or Minimum Order Quantities so you don’t have to order as much every time you order and instead having smaller but more frequent orders so the cashflow effect is not as big every time you order and other initiatives like that. Nearshoring is perhaps the bigger theme that is discussed by a lot of different brands and customers.
Nearshoring is great for efficiencies and also great for the environment. That is an interesting insight right there. With all that we do from an inventory planning standpoint, everything is determined by demand, demand forecasting, and how people buy. Given the fact that most Western economies have been in an inflationary mode, how is demand forecasting? How has that affected demand in general? If we go to economics 101, it’s dependent on the kind of product whether it’s elastic and all of that stuff. From the data you’re seeing at Madden Analytics, how has demand changed and what are the cascading effects on inventory planning and supply chain?
For sure, general demand for consumer goods product has decreased over the past years, that’s just the truth for most consumer goods companies out there. There are exceptions in certain specific categories that are growing significantly still. Overall demand has definitely decreased and this is a big problem for most brands out there and retailers. Combined with the fact that most brands and retailers, they stocked up a lot during the previous years when times were better. There’s a double effect of historical inventory levels going up because most brands thought that previous demand and previous growth rates were going to be stable forever.
Coupled with the demand suddenly going down, that means that there are a lot of companies out there that are overstocked right now and this is visible in a lot of data. I read a report looking at the overall price campaigns across. This was a report on the Nordics. They were analyzing, on an overall level, 100 or 200 big companies participating in the survey exactly what were the general discount levels throughout different months going back a few years?
What was visible in the data was that from May 2022, after the Russian war in Ukraine started and inflation started to take off interest rates and energy prices continue to be high, companies started to discount a lot. Discount rates went up a significant number, it was above 100% increase in average discounts across these companies. This is a factor of the companies building up overstock and then suddenly hitting a wall where demand is suddenly decreasing.
They’re locked in with a lot of overstock and suddenly a decreasing demand. They have to do something with the overstock and they started to discount them and campaign. This is also an overall theme over two years back that. There are a lot of discounts out there and there are a lot of campaigns out there and it’s going to be super interesting to see now in Black Friday and other single’s day and everything what the effects will be like and how much will brands and then retailers discount. There’s potential that this can be one of the biggest campaign months ever existed.
That’s another interesting insight in regards to the heavy discounting and reaction to the overstock situation. This is to create an equilibrium so by 2024, inventory planning is much more balanced and aligned with potential demand.
I hope so. Of course, no one has the magical crystal ball where you can look into the future and with 100% certainty say what next year is going to be like. I hope that demand is not going down further. I hope that a lot of companies are starting to manage their overstock and inventory levels in a better way. However, managing your inventory and your potential overstock is usually a quite long process. There’s no single initiative that you can make in 1 week or 1 month to get rid of all your overstock.
Usually, at least, you can have a big clearance sale or something trying to get rid of all your overstock but that’s not usually how brands and retailers are doing it. You have to work continuously with both trying to manage the current overstock but also making sure that you’re not building additional overstock. All your current and future purchase orders that you place right now are not further down the line also building up overstock. It is a process that takes time. I hope that in 2024, inventory levels will be slightly better than in the current climate.
You’re a specialist in the fashion industry. If we zoom into the fashion industry, is this affecting luxury fashion, is this an entire fashion industry issue, or is luxury fashion unaffected?
I would say it affects the whole industry. Perhaps the luxury part of the industry is a bit more resilient. The old saying that luxury goods are not as affected as cheaper goods in a downturn because people who buy luxury goods are usually not the most affected individuals by lower demand or higher interest rates and so on. Luxury brands are affected as well.
For a lot of high margin brands, sometimes they are the brands that have the most problems because, historically, they’ve been able to hide bad operations and bad decisions under the fact that they have high margins. Historically, perhaps it hasn’t mattered that much if they’ve had some overstock because they have high margins on the goods that they sell, meaning that they don’t have cashflow issues. For brands like that, they will also face a reality where they need to manage overstocking and can’t hide behind high margins anymore.
You started to touch on the topic of fashion industry. On a general level, why the fashion industry perhaps has more problems than other industries when it comes to having efficient inventory planning and facing more overstock issues, it’s because fashion products are inherently more complex to work with compared to many other products and this is because a number of reasons. One is being that the production lead times are often long.
Three months is some standard but many brands have 4, 5, or 6 of production lead times and then you add shipping to that to get the goods home from your factory, which is usually 1 or 2 months. Other than that, you have seasonal product. You have your summer goods and you have your autumn or winter goods, meaning that you have a window of time where if you don’t sell your seasonal goods during that time period or that window, then you’re basically screwed, and you end up with overstock.
Also, a third factor, which I mentioned as well from my previous eyewear company, is that most fashion brands have sizes. They have they have products and they have variants of products, which is usually different colors or different materials. Out of the variants, they have maybe seven sizes on average and that means that one product can be twenty different SKUs. There are a lot of different products to forecast and trying to make informed decisions on how much of the small, extra small, medium, large, and extra-large, etc. should be bought. If you don’t get that right, you quickly end up with products being overstocked.
If you go to a clearance sale of a fashion brand, you always see the edge sizes, and they’re always the ones still hanging in the racks like the extra small, extra-large, or size 46 shoes. That’s because it’s hard to calculate how much you should produce out of every single size. In that case, probably the brand produced too much of the edge sizes and too little or too few of the more common sizes. That’s why they end up having the edge sizes still in stock when the clearance comes up.
I’m going to start from the pretext that the fashion industry obviously has the highest return rates when it comes to any retail vertical. It’s ridden with a lot of problems. There are people who would buy various sizes or buy various colors, try it at home, and then return. Others buy to wear once and then return. With all of that’s going on in the fashion industry, how do you efficiently plan from an inventory planning standpoint? How do you balance it out? Are you privy to return rates data Madden Analytics? Is that another variable you work with to produce suggestions?
Definitely and we need to because if you have 30%, 40%, or 50% return rates, what you’re selling today will come back. If you have a 50% return rate, half of the goods you’re selling today will come back to your warehouses and you’ll be able to sell that again, hopefully. From an inventory planning perspective, it’s important to take that into account.
With the high return rates in fashion, how do you balance out inventory planning to ensure that you’re not in that situation where you’re overstocked or you’re not in a situation in which you have these extremes coming to your clearance? You’re minimizing your clearance events because there’s more efficiency taking all those data points. Even besides return rates, what other data points do you factor in to accurately suggest a way forward for operators?
The fashion industry has some big issues and big problems. It’s estimated that up to 30% or even, by some estimates, up to 40% of all the clothing items that are produced annually are never sold because there’s no demand for it. Companies have to get rid of them and they end up in either landfills or being burnt because there’s no buyer for them and the companies need to get rid of them. That’s a huge problem for the industry as a whole and that’s something that the whole industry needs to work much more closely on and a lot of brands are.
Returns are a big part of the problem. Products are being returned and some of the returns are not in good shape so they can’t be sold and some are returned after the time window where the product is supposed to be sold so the demand is not there anymore when the return comes back, etc. There are a lot of small initiatives that the industry as a whole can work with. For example, charging for returns. It’s a bit weird that, from a lot of retailers and brands returns, has been free of charge and that’s changing. That’s one factor that could help out decreasing return rates going forward.
A lot of brands are working more with carryover collections and never out of stock collections instead of working with seasonal collections or at least increasing the share of never-out-of-stock products compared to seasonal products. This is a good thing from a return perspective because the products that are being most returned are the seasonal products, the products that are constantly dropped where customers are having a demand artificial or not when they want to try the new seasonal style and it didn’t work out for them so they ship it back. That’s a good thing.
What a lot of multi-brand retailers are doing, at least in the Nordics and at least from the big multi-brand retailers, they are cancelling out or blocking customers that are returning the most items. There’s usually a smaller set of customers those accounts for a large share of all the returns. Blocking those customers or canceling those customers is a bit controversial but for the industry and companies, it’s a good thing.
Another initiative is working much more with finding true sizes. One of the return issues is that the size doesn’t fit. If you’re ordering a shoe in size 43 and it doesn’t fit you, you send it back. That shouldn’t be the case because if you know that you have 43, buying a 43 from any type of shoe brand should fit you. A lot of brands are trying to work more actively with finding true sizes, which is also super important. From an industry perspective, there’s a lot that can be done to try to minimize returns.
To your question on what different data points do we account for when we forecast sales and inventory going forward, returns obviously is one thing but there are a lot of other things such as seasonal patterns. We look at all the historical data for your products trying to identify different patterns. Is this a product or a category or a collection that is selling more or less during different periods of the year?
On a product level, we try to identify where in the growth phase of the product does this product belong in its life cycle. Is it taking off or is it stagnating or is it dying out and perhaps should be canceled? We look at the growth of the company. We look at the growth or decrease of different categories and allocate that to different products.
We look at the size curve of all your products trying to determine, did you have the right size split of your products previously? What type of size split should you have going forward? All this we do sort of automatically. We pull the data from the customers, ERP system, eComm platforms, point of sale systems, or whichever system is the most relevant. We run our forecast modules continuously on all the historical data.
The art part of our tool is that the customer can always tweak and adjust the forecast so they get a baseline recommendation from Madden but then they can tweak that forecast saying, for example, “This is a product we’re going to cancel. We don’t want to have it in the forecast,” or, “This is a product where we will focus a lot more going forward. This is a product where we will add more colors, etc.” It’s a dynamic tool where the customer get a baseline recommendation but then they’re able to tweak based on their own insights and their own knowledge of the brand and the company.
It’s interesting data points. I want to go back to one of the points you made with regards to what brands are doing in regards to manufacturing or selling more not out-of-fashion type products, essentially staples. You leave fast fashion to the likes of Shein and Zara. Brands, if they move a bit slower, are able to be more efficient.
I’ll give you an example, True Classic is a t-shirt brand that started in 2019, a purely DTC Shopify store. As at the last count in August 2023, they have done revenues of $250 million, and this was not just a COVID bump, this is consistent. The fact is that they have a limited number of SKUs. They know their target markets. People know their fits. They’re good at what they do from a fitting standpoint, from a targeting standpoint, men, middle aged men,3 and quality standpoint. They produce, build a reputation, and execute with clever markets. I don’t know what their inventory situation is but on the face of it, it looks like they’re doing well.
They’ve aligned the company making sure that inventory planning shouldn’t be that complex because they don’t have that many products. They have a lot of data on each and every product because it’s a permanent collection so it lives through season after season. The more historical data you have on sales and inventory, the more accurate predictions and forecasts you can make going forward. Their prerequisites are good when it comes to making forecasts going forward.
I have no clue what their inventory situation is like but I hope they’re working closely on it. It’s easier for them than it is for Shein, Zara, or H&M, companies that have most of their sales from seasonal collections. They just have to take bets on every collection that they produce. They have to take new bets several times per year, “How much should we produce out of these products? We have no clue how much they will sell. We can make best guesses but we don’t know for sure.” That’s where you end up with, by mistake, ordering too much products that are not selling and ending up with overstock.
Moving more and more towards permanent collections, classics, carryovers, never-out-of-stock, or whatever you want to call it, that’s a good thing for brands in specific and for the industry as a whole and the environmental impact of the business as well not having products that are supposed to live for a few months but they’re permanent in your collection. That also means that you can constantly improve the products. You can constantly improve the price curve. You can constantly improve the quality, colors, materials, and everything. It benefits everyone.
When you plug Madden into an eCommerce system of a retailer or brand, do you have the ability of profiling? This is a fast-fashion brand so we’re going to work this way or the AI is going to work this way or this happens to be a permanent fashion brand so we’re going to tweak it this way. Does the data profile the retailer so you’re able to treat them slightly different based on those profiles?
Yes. When we plug into the ERP system, eComm platform, or whichever system it is, we pull all the historical data that is available. From that data, we can see how long has each and every product existed? Is this a product that has sold for just one season? Maybe two years back? Is it a product that has been sold for ten seasons? Of course, that affects the forecast going forward. It’s also a mix with what’s available in the data but also what the user does with Madden.
When a buying team or a business controller or whoever is using Madden within the company, when they’re making their forecasts, they’re merchandising the collection going forward so they can pick and choose. Here are 50 products that are carryovers, classics, or never-out-of-stocks. We’ve had them before and we’re going to continue to have them next season as well and next season after that, etc. We then want to add 50 products that are seasonal products or new products and they’re going to be dropped during these different time periods. It’s usually a mix of what we can see in the data but also what the user does with the data and how they predict going forward and plan sales from a collection perspective.
Any parting words? For those people who will be reading this at some point in November of 2023, meaning that they would have 45 days or less to go in a year to deliver the results, do you have any parting piece of advice?
Cashflow is the most important part of your business for any type of business but for consumer goods types of businesses specifically. A large part of handling your cashflow is having efficient and smart inventory planning. If you work in fashion and it is hard to forecast and hard to plan inventory, I strongly recommend that you use some system to help you with that. That system should of course be Madden Analytics. Those are my parting words.
For those who want to find out more about Madden Analytics, it’s MaddenAnalytics.com. Axel, are you active on any social media channels and would you like us to connect our audience and community to connect with you?
Please do. I’m active on LinkedIn and I’m happy to connect to more people in the industry.
It’s been an absolute pleasure having you on the podcast. I’m smarter with inventory management platform, particularly in the fashion industry. Thank you so much for sharing your insights and background. It’s a pleasure having you on the 2X eCommerce podcast.
Thank you, Kunle. It’s nice to be here. Thanks a lot.