Back to List

Opportunities in Inventory;
America Must Invest Heavily in Its Transportation Infrastructure

Out of stock items create a bad impression with customers, reduce service levels — and cost retailers money in lost sales. Having more accurate inventory knowledge is key to improving customer perceptions and service levels. Critical process and systems improvements can reduce out of stocks and raise revenue.

By Chris Norek and Tom McHugh

IF YOU’VE EVER GONE to a store and the particular item/SKU (stock keeping unit) you were looking for wasn’t available on the shelf, did you go the customer service department and report an out of stock? If you did, you are a unique shopper and the store should have given you a reward. Significant lost sales result from out-of-stock situations in the retail industry. Knowing what is likely to become out–ofstock should trigger a response to ensure the stockout doesn’t occur. Having more accurate inventory knowledge is key to improving customer perceptions and service levels.

Another significant negative result of stockouts are lost sales. A retailer can’t sell what is not on the shelf. Inventory tracking and accuracy in the retail industry are important enablers to increasing revenue by reducing out of stocks. In fact, a key impetus for the use of RFID (radio-frequency identification) at the retail level is to improve inventory tracking and accuracy.

However, bit is going to be quite a while before RFID is pervasive and is viable at the individual item or SKU level.

New interfaces to existing technology platforms and recent collaboration opportunities, however, can help in ensuring store in-stock levels. Electronic communication systems can also be used to link the store, the DC (distribution center), central marketing and merchandising, and the supplier community to ensure increased service levels while minimizing inventory investment.

Output from one system becomes the input for the system immediately up or down line and the data hand offs are referred to as “integration” points. There are varying degrees of integration in the marketplace among retailers, ranging from loosely integrated with manual hand offs and process inputs to very tightly integrated systems. These integrated systems use sophisticated logic and data evaluation techniques to automate the supply chain and only require human interaction for the most important decisions.

The following are the systems that are involved in inventory tracking in the retail supply chain: sales systems, order management systems (OMS), warehouse management systems (WMS), slotting and optimization tools, forecasting and demand planning systems, ERP (enterprise resource planning) systems (including purchase order management), financial/cost accounting systems.

Let’s take a look at the different levels of technical sophistication and some critical process and systems improvements within each:

Little Technological Sophistication Required

Ensure proper training of cashiers – Cashiers should scan every item so that different “flavors” of a product aren’t scanned as a multiple. Often cashiers will see three similar items and ring in a multiple and scan only one of the items, thereby having the inventory record in the system be too high on some items and too low on others. The result is potential overstock of the items with too much inventory decremented and, worse, a potential out of stock on the item(s) not scanned.

Physical inventory counts and good housekeeping – In the absence of good tracking systems, frequent inventory counts/scans of product on the sales floor and good housekeeping can help avoid stockouts and reduce lost sales. Discrepancies between floor counts and systems estimates can be manually corrected after a physical inventory. In addition, keeping shelves clean, neat and blocked (“faced”) will allow customers to more easily find the items they seek.

Regular and direct communication between headquarters and the store – Communicate, communicate, and communicate, to the stores, the DCs and the suppliers about sales and marketing plans, their impact, and the execution requirements for making these programs successful.

Moderate Level of Technological Sophistication Required

Use an in-store order management system that can recommend re-order quantities based on sales information.

Ensure that the quantity in stock on an item is aligned with the sales profile of the item-- More sophisticated retailers will be integrating sales scan takeaway information in order to better support this alignment.

Use an in-store inventory system to keep a perpetual inventory – Combine this system with regular cycle counts to keep the perpetual inventory accurate, as well as to make timely adjustments to the perpetual for replenishment quantities and returns.

Ensure that service level and performance metrics are in place as a result of linking systems– Linking systems allows you to check what was delivered versus what was ordered. You can also monitor and set acceptable lead times as well as inventory and service targets for suppliers, DCs and stores.

High Level of Technological Sophistication Required

Employ automated replenishment systems at stores – This approach integrates sales takeaway with promotional planning in order to generate orders automatically. It should be used in conjunction with an in-store inventory system that keeps track of the in-stock position on each item to insure that out of stocks are minimized. These systems keep track of the inventory on the shelf, in the back room and on order or en route from the DC or supplier.

Provide for a significant degree of collaboration between the retailer and the suppliers in the replenishment process– Score-carding key service metrics will be the common management mechanism. Internet portal applications can also be employed as gateways to information, and as workflow mechanisms, enabling a single shared view of activities. Using these systems, incomplete or late shipments can be collectively identified as the deliveries are loaded to be shipped by the supplier and the trailers are en route.

By employing some or all of the previous suggestions discussed, retailers can significantly improve their in-stock positions at the store to reduce out of stocks, raise revenue, and increase customer loyalty.