(Editor’s Note: This is an online-only article attributed to the June/July 2018 issue.)
While grocery shopping, a consumer heads down the beverage aisle in search of a particular brand of soda for their summer get-together. But, alas, that brand is nowhere in sight—it is out of stock. As a result, the consumer will do one of three things: buy another brand at the same store; look for that brand in another store; or, simply, not buy anything. If you are the manufacturer of that product, you have just missed out on a sale. You have also provided an opportunity for competitors to gain your consumers’ business and loyalty.
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Out-of-stocks (OOS) are all too common in the retail grocery industry. The recent FMI/GMA Trading Partner Alliance On-shelf Availability (OSA) Study revealed that the OOS rate is consistently hovering between 8 and 10 percent. This means that 1 in 13 items on a consumer’s shopping list is not available on the shelf. While there are many OSA solutions on the market to help manage OOS, the challenge is that the industry has an outmoded way of thinking—legacy OSA practices focus on fixing today’s problems by reactively responding to out-of-stocks. However, if you are focused on fixing today’s problems, you are already missing sales. Moreover, attempts at intervention are often unsuccessful, ineffective, and expensive.
What if manufacturers knew the root cause of OOS? It would then be possible to monitor for these causes and easily replenish store shelves in a timely manner, as well as maintain optimal inventory levels. So, instead of fixing today’s problems, tomorrow’s losses are prevented. How is this so?
Thwarting Future Out-of-Stocks
By shifting the focus of OSA from triage to prevention, the percentage of available products on shelves is managed by identifying the root causes of product unavailability. Using a sophisticated, cloud-based supply chain management (SCM) system allows manufacturers to collaborate with retailers and suppliers to identify, track, understand, and act upon the root cause of OOS to maximize profitability and further synchronize the supply chain.
In order to proactively manage OOS, it is essential to first identify and understand the root cause of the situation. Out-of-stocks can be caused by a number of issues, including phantom stocks, disruptions in the supply chain, underestimating demand for a product, or in-store replenishment schedules. The primary goal of root cause analysis is to determine why and where the problems are occurring. In which store(s) did the OOS occur? Did an outage occur during a particular sales event (i.e. Labor Day sale)? Was there a new advertising campaign or product launch?
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After completing a root cause analysis, findings can be used to develop and implement specific action plans–ultimately preventing OOS from occurring altogether.
Maintaining an Accurate PI System
One of the main sources to OSA is the retailer’s perpetual inventory (PI) system, which drives the quantity and interval in which the product should be ordered. Unfortunately, however, according to industry studies, 65 percent of the PI data is inaccurate. These inaccuracies have less to do with technology and more to do with people and process.
A practical solution to recognize where errors occurred in the PI data is to use an exception-based, intelligent system. Given that “phantom inventories” are often the cause of OOS, it is critical to have the capability to both identify the root cause and determine the corrective action.
Upgrading to a Cloud-Based SCM System
Since determining the root cause of an OOS is dependent on data, the richer and more granular the data set, the more precise the understanding of the situation. This also means that the preventative action plan is more likely to succeed in preventing future OOS.