(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.
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?
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.
Most legacy SCM systems are built around optimizing a distinct and discrete function. While these systems may optimize a local function or a local capability, not being connected to the entire supply chain can have adverse effects, such as a lack of enterprise-wide decision making. In most instances, these legacy systems are driven by a push-based supply chain model. Cloud-based SCM systems are flexible enough to support a pull-based supply chain model that is more responsive to consumer demand. With replenishment based on actual consumption, grocers can reduce OOS at the store level, while decreasing excess inventory for optimal OSA and profit.
In addition, a cloud-based SCM system can easily integrate with systems both up and downstream, providing the supply chain data visibility needed to both measure and manage OSA. These systems have the ability to gather, consolidate, and standardize point of sale (POS) data at the store level in order to calculate key performance indicators—such as sales, OOS, and OSA. Additionally, advanced OOS management capabilities allow manufacturers to ensure product availability on store shelves by identifying and addressing the root causes of unavailability.
Having the capability to view inventory levels, as well as measure and compare actual sales to expected sales in real time exposes gaps that can then be analyzed to determine if they were caused by an OOS. If a product outage has occurred, it is flagged in the system. Once flagged, data is gathered to determine the root cause of the outage, ultimately allowing users to create workflows within the SCM system. This predetermined best course of action, from the manufacturer to the individual store, is the key in preventing future OOS.
Improving Retail Insights at Point of Sale
Getting accurate information about products’ performance at POS are essential to avoiding OOS and excess inventories. While legacy system software may still fundamentally work, this is one area where it fails or underperforms. However, an integrated, cloud-based SCM system provides access to current, accurate data throughout the supply chain–including POS.
A cloud-based SCM system can turn complex data into simple, actionable information by consolidating information from multiple POSs into a single dashboard. By using algorithms, these systems can generate immediate calls to action for purchase and transfer teams. This system results in higher product availability and reduced OOS and overstocks. POS information can be used to personalize the in-store shopping experience and for loyalty programs to increase consumer engagement.
Increasing Profits with Vendor-Managed Inventory
Vendor-managed inventory (VMI) can be a powerful business tool. While the VMI concept has been around for years, it is only recently that the technology needed to support a successful VMI program was available. Now, with the advances of cloud-based VMI solutions, it is the perfect time for manufacturers and retailers to take advantage of its benefits.
Since it is demand driven, VMI enables the ability to respond much more quickly to what is happening at the store and/or distribution center level. This provides the end consumer with optimum service, while cutting down on excess inventory and OOS–leading to increased customer satisfaction and increased revenue.
Every VMI partnership is unique, therefore a flexible VMI solution is essential. As the program grows to include multiple retailers and suppliers, the VMI solution must be easily scalable to accommodate additional partners in order to achieve the best possible results.
Along with the technical aspects of the solution, having a trusted VMI service provider is important to the success of a VMI program. Involving a VMI service provider during the planning phase benefits both the manufacturers and retailers.
Look for a service provider that has implemented many different VMI programs, from both the manufacturer and retailer side. This implies they understand the complexity of dealing with different technology, business, and process terminology, and can work with all parties to translate those frameworks so the manufacturer and the retailer are able to better collaborate. They can share general best practices, as well as concepts and processes that would enable you to reach your program’s specific goals.
By implementing proactive OSA practices, manufactures can prevent tomorrow’s loss through a scalable, repeatable, collaborative, and cost-effective process. Implementing OSA can lead to a 2-3 percent sales increase for manufacturers due to the prevention of OOS. To support these practices, manufacturers and retailers should consider upgrading legacy SCM systems to one that is flexible enough to meet business needs.
Taking these steps will improve efficiency throughout your supply chain network by eliminating data silos and giving you access to accurate data, arming you to make demand-driven decisions and implement or increase your VMI program. With the availability to fully meet consumer demand, retailers and manufactures realize a decrease in OOS–while increasing both customer satisfaction and profitability.
Gogos is vice president of marketing and sales engineering for Neogrid North America, a global technology provider of end-to-end supply chain management solutions. Reach him at firstname.lastname@example.org.