Fundamental Strategies for Getting It Rightby Rob Oglesby
In Parker Avery's recent Channel Integration in the Store research study,
88% of respondents reported inventory accuracy as a primary challenge when trying to integrate stores into an overall channel strategy.
This finding should come as no surprise to any seasoned store operator. Managing inventory to stay in stock for the customer and control shrink is a near all-consuming endeavor. Couple this with the pressures of managing labor and integrating new processes to accommodate channel integration (or "omnichannel") initiatives, and it makes one wonder how there is time left over for customer service. The typical process is to constantly react to issues as they arise – for those retailers lucky enough to even have some sort of "warning" system that alerts them of problems.
It is often assumed that companies who have implemented a certified receiving process driven off Advanced Shipping Notifications (ASNs), are using UPCs to scan all items sold at the Point of Sale (POS) to capture outbound inventory movements, and have solid processes in between to capture markdowns and obvious shrink episodes (the dreaded "empty package"), that they would be able to keep inventory reasonably accurate.
Alas, that is not the case.
The retail store is an extremely volatile environment requiring constant vigilance to ensure it remains "shoppable"…and accurate. While processes and planograms for a store may specify precise merchandise location(s), a store is rarely in a state where everything is "in its place" – and the bigger and busier the store environment, the harder it is to keep together. Operators constantly need to adjust inventory counts based on what they are able to "see" – all in the name of staying in-stock. When more product arrives, inventory levels increase and the labor required to deal with it is once again shifted away from direct interaction with customers.
The question is: How to get out of this vicious cycle? What types of in-store processes are helping versus hurting? What about outside the store? Is inventory accuracy really just a "store problem?"
Let's explore some of these root causes – and some ways to ultimately combat them...
Counting too much
Retailers typically count too much...and usually at the wrong time. While it makes sense to react to an inventory "issue" such as a negative on-hand by initiating some sort of count on the item in question – the fact is, there is a good chance the reason the item went negative is because the last time it was counted, not all quantities were found...and this wasn't realized until a customer found it, bought it and sent the perpetual count negative. And now, it's time to react by counting that item again. The other wonderful side-effect of this little activity is that by adjusting the inventory in question down, a process was most likely triggered to re-order the item (since the system now thinks it is out-of-stock or at least low enough to warrant a reorder). This series of events further perpetuates the accuracy issue with this item.
Parker Avery is not suggesting eliminating inventory counts. But operators must realize they run a risk every time counts are performed without ensuring a couple of pre-requisites are in place:
Undoubtedly, there should be a report operators can run on a periodic basis, which details all of the adjustments made to inventory (not including sales or receipts) over the course of some period of time (for example, 30 days). The thicker this report, the bigger the problem. Controlling the counting process is just one critical element to improved inventory accuracy.
Let's consider another aspect...
Treating the store as one big bucket
It's easy to say, "We're a small format store – we don't need to differentiate inventory by location". That may be true on some level, but the fact is, even 1,000 square feet – with a sales floor and a back room – is ample space to "lose" inventory. Take a page from distribution partners, who more likely than not have a slot and a location for everything – even when merchandise is in transit from one location to the next – and it's all updated in real time. Many retailers lose this discipline when it comes to the final step in the inventory life cycle – the store
Here are some thoughts on what can be done to make the inventory more granular and easier to manage within the store environment:
The back room is about precision – the inventory in this location should only move when the system indicates a need, which also means that it is imperative to consistently scan products in and out of back room locations.
Consider in-transit as separate inventory – these items are in "limbo" because they are not secure in a specific storage location, and they are also not easily accessible for customers to purchase. Examples of in-transit inventory are in receiving (just coming off the truck), on re-stock carts (back room to sales floor), in returns and in RTV staging area(s).
The more specific a retailer can be with where items should be (and are), the greater the chance of ensuring inventory stays accurate. While it is not realistic to implement the same degree of precision found in a distribution center, controlling inventory within the store can make a huge difference. It does require more discipline and dedication to process execution, but that can pay dividends in reducing overall inventory levels, increasing turns and driving greater profitability.
Now let's look at one of the biggest areas of inventory grief...
Assuming receipts are accurate
It's about saving time – and precious labor dollars. Checking in product is time consuming – especially if that product is coming from the distribution center. Shouldn't it just be assumed that because those facilities are accurate (99.9% is not uncommon in a DC), the store receipts should also be accurate? This isn't always the case, not necessarily at the macro level, but at the micro level. For instance, what if there was a weight problem on a shipment and a pallet or two had to be offloaded? If that merchandise was already on the manifest, it will also likely be on the ASN – and in the receipt the stores are blindly accepting as 100% accurate. It is likely the missing merchandise will get put on the next truck, but it is not in the store at the point in time the store systematically accepts responsibility for it. If the store staff were to go looking for it (because it came up on a count request), there would be nothing to count. Not a good scenario.
Here are some approaches to employ to keep the receiving process streamlined and efficient, without sacrificing accuracy.
• Identifying merchandise need – If the product won't fit on the shelf, why bother even taking it to the sales floor? Find a back room location for it immediately.
• Stock rotation – No inventory gets "better with age" (except perhaps for fine wine retailers), and some inventory is highly perishable, making it critical to follow a strict First In/First Out (FIFO) model.
The best time to identify a problem with inventory is upon arrival into the store. Receiving errors typically account for a significant portion of shrinkage, which impacts accuracy as well. By not assuming all receipts are perfect, there is a far greater chance to significantly improve the inventory accuracy and in-stock positions.
Lastly, let's explore an area where most merchant partners get nervous...
Thinking more is better
The typical answer to overcoming an accuracy issue is to increase safety stock levels – until the store is drowning in inventory. Out-of-stocks are among most operators' biggest challenges. Retail nirvana is being in stock with 100% of the assortment each and every day. The problem is if the store is so packed with unnecessary overstock, it is difficult and labor-intensive to find the items that would legitimately fill the hole on the shelf.
This problem has sweeping impacts across several process areas and critical metrics. Overstock impacts labor, because it requires more handling, i.e., every case and item gets touched more frequently. It impacts shrink, because the more inventory on hand, the more counts may be required. It impacts turns, because the more inventory carried, the slower it moves – especially with 20% of most assortments generating 80% of sales.
Addressing this one issue – overstock – is likely the most critically important tenant of this point of view. And it is one of the scariest, as it requires a leap of faith that the entire operation will act with more discipline and precision than ever before. The good news? Eliminating overstocks actually enables the store to operate in a much more efficient manner because resources are ultimately freed up.
Here are some concepts to consider when looking to reduce inventory and improve in-stock positions.
• Stop making on hand adjustments.
• Stop ordering any additional product (let replenishment do its job).
• Bleed down the inventory, while systematically cleaning up the store, restoring planogram integrity and improving overstock/back room organization.
• Find significant overstock and transfer the inventory out – either back to the DC, to other stores or even back to the vendor if possible.
• Execute a physical inventory (PI) after 4-6 weeks of these activities. The PI does not have to be booked financially, as long as it establishes a sweeping new baseline to perpetual inventory.
Not all stores will require this drastic of an approach, so do not be concerned that these measures are required universally.
• Pack size – Evaluate and adjust pack sizes so the stores can still handle full cases, but not be faced with 12 weeks of supply in each box.
• Shipping frequency – Reduce inventory so shipments are smaller – yes, this means more frequent shipments to replenish and maintain in-stock levels, but handling smaller amounts at a time is less error prone and easier to manage.
• Store-ready – Optimize shipments to enable more efficient stocking by sorting categories into single shipping containers, allowing the restocking process to occur with fewer errors and less labor.
• Implement an in-store inventory management solution, including location management.
• Implement greater controls over receiving and integrate that with the inventory management solution.
Reducing inventory is critical to improving overall accuracy, but it cannot be accomplished without a significant amount of effort: revamping traditional means of managing inventory and collaboration between various parts of the retail organization.
We did not address one of the most compelling technologies in the inventory management space today: Radio Frequency ID (RFID), also known as Electronic Product Code (EPC). While this technology holds a significant key in the ability of a retailer to maintain greater inventory accuracy with less effort, we believe there are enough challenges to its implementation to warrant addressing it separately.
In the mean time, "traditional" retailers who have significant investments in their brick and mortar presence, also have substantial investments in inventory. To successfully compete in additional channels, inventory must be closely managed and utilized to its fullest, and that requires instilling standard processes and executing these with more accuracy and precision than ever before. Greater accuracy enables more optimal in-stock positions, which provides retailers the ability to maximize sales in the traditional store channel, while providing better capabilities to support other channels.
If you’d like to learn more about our vision or understand how you might take advantage of this strategy, contact us at Contact@parkeravery.com or call 770.882.2205.Download PDF Version (2 MB)