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Strategies for Inventory Optimization

Sensing and predicting lucrative inventory-driven opportunities in the marketplace are some of the best ways to expand sales

I live close to a metro grocery store, a multitude of them have sprung up in the UK over the past few years, replacing the corner store independent retailer. In the US they would be akin to the convenience store but they're actually bigger and better than a convenience store and roughly twice the size. Every day, 3 ton delivery trucks arrive early in the morning and deliver fresh bread, chilled and frozen products and ambient inventory.

This metro supermarket does a brisk trade, the nearest competitors are all classic corner stores. The metro competes on brand, price and diversity. Having an ATM bolted into the wall helps too. Replenishment of the shelves is an ongoing battle. The community I live in is relatively diverse but constantly changing.  Almost all of the people work in the City so the weekend trade, early morning trade and early evening trade are brisk, and is open unsurprisingly from 7 to 11.

In recent years, supermarket retail has injected some significant cash into information systems. This store runs 4 manned cash registers and 4 self-checkouts. The self-checkouts are the busiest, in part because the only manned register is usually not working. The staff are almost all multi-skilled, doing everything from shelf packing and inventory rotation to checkout. Although they're part of a major supermarket chain, their operational concept is local.

The amount of information generated by their information systems is extraordinary, it has to be. When you're dealing with a volatile community and a lot of perishable inventory, you cannot afford to be stocking the wrong things.  This is probably why the independent grocer has such a tough time competing. Corner stores are synonymous with a lot of aging dusty ambient and dry goods; many of them have resorted to stocking mostly alcohol as a means to survive. These metro supermarkets conversely only have a small but diverse liquor section and spend most of their real estate on fresh produce and convenience foods that are perishable.

Yesterday, I went in to buy my ‘regular' supply of carbonated mineral water but because the store had recently been reorganized, it wasn't where I expected it to be. I asked an assistant and he scouted around and said that they appeared to be out. My choices were simple, go without, pick a superior more expensive brand or go for a cheaper alternative - soda water. Fortunately they also stock soda water, so I went for that. Although the net effect was the same, in reality they probably lost some margin because the carbonated mineral water I would have bought is their own brand.

Herein lies the challenge. Sensing and predicting lucrative inventory-driven opportunities in the marketplace are some of the best ways to expand sales volumes. I am a wholly unpredictable customer (or at least I like to think that I'm unique). On the one hand, I like to think of myself as fully representative. I use a loyalty card at this store and I spend more grocery money at this store than at any of the other stores in this chain. Their view of my buying profile should be pretty clear. But I don't shop for the same things regularly. If I did, I would be buying milk, bananas, bread or eggs or mineral water regularly. I don't, because sometimes their stocks are depleted and so I need to buy things in more than ‘just for now' quantities in order to avoid missing them when I really want them. You'd think this would be easy to address: the stock-outs, but it seems it isn't. So I thought I would pound out some ideas on inventory management exercises that I wish my supermarket would implement.

Analytics Granularity
For most retailers the largest asset on the balance sheet is inventory. And while executives often say that they know they are hurting their cash flow by carrying too much inventory, they also do not know how to reduce it without creating painful out-of-stock situations. The Bullwhip effect, also known as the Forrester effect describes how the further you are from the front line of retail, the more exaggerated the impact of stock outs. The remedy often adopted, is to implement safety stock numbers. But this is not really an appropriate approach when you're only working with relatively small numbers of inventory.

A more appropriate approach might be to consider moving more granular transactional information to the decision makers by given them the details rather than summary information. This is best achieved with the actual Point of Sale (POS) data rather than aggregated data. If you're running a loyalty card program then you should be making some attempt to perform cross analysis of your loyalty card results with your POS data.  My choice to shop at a different branch of the same chain may be because it was convenient. However if you see me shopping at two different branches on the same day and purchasing different profiles of products and you then determine that some of those products were not available at the first store, that tells you that you might have lost an opportunity to sell me more.

Data Quality
Even if you use the concept of safety stock, what are the guarantees that your fulfillment and stocking plans are using the same data that your macro planners are using? If you're using one system as the source of truth, such as SAP, and not using a number of systems then this problem is a little less pertinent. However, many organizations use a warehouse system, a POS system and an ERP system that all function independently of one another. In such circumstances, keeping the data consistent can be a challenge. If there are duplications of records this situation is made even worse.

Try to identify the duplicates and where they could be coming from.  If you don't have an approach to managing your master records it may well be time to get started on one and part of this approach could be the use of a product suite like that offered by Winshuttle, one that allows you to build custom workflows outside of your Inventory system but which give you flexibility to integrate the data after all the necessary data hygiene checks and balances have been made. It's essential that you figure out how to implement a company-wide effort to create a single version of the truth. Without it, your inventory goals will be much harder to achieve. This won't affect my personal experience as a shopper but it is interesting that I noted the other day that two items that were the same to me, as a consumer but which had slightly different packaging as a result of manufacturer rebranding, appeared as two separate items on my cash register slip and were charged at different prices.

Skinny Inventory
Only when you have good inventory master data and sound granular reporting on all drivers in your inventory chain can you accurately determine how lean your inventory should be.

In principle, the number of days that inventory is held measures the average numbers of days it takes to sell the average inventory held. It is calculated by dividing the average inventory holding by the average daily cost of sales. Average inventory can be calculated the same way that it is calculated for inventory turnover by simply adding the beginning inventory balance to the ending inventory balance and dividing by two.

In order to arrive at an average cost of sales, take the cost of sales figure and divide it by 365. For example, cost of goods sold at the end of the year is $3650; therefore average daily cost of goods sold is $10 ($3650/365). If the average inventory is $50 and the average daily cost of goods sold is $10 the number of days inventory is held is 5 days ($50/$10).

From an efficiency perspective, a low number of "days of inventory held" indicates efficient inventory management. The faster stock is sold the less cash is tied up in inventory. If the value is too low this could indicate under-stocking which can lead to loss of sales and revenue. Peer comparison and self-comparison to previous years and similar firms would be useful in assessing overall inventory management. Your local APICS chapter can probably help you with getting some metrics to compare your values with.

In the perishable grocery segment a low days of inventory held is key but for more durable products something with a longer tail is likely to be normal. This metric is however something that should be constantly under scrutiny and review. As a consumer I am not really fussed about how much your inventory is costing you, what I am concerned about is availability and price. If I have to pay a bit of a premium for a relatively infrequent buy then so be it, but I expect your high volume products to be very competitively priced especially when I compare them with the prices of the "mom and pop" up the road.

Partner Enablement
The world of retail is pretty cut-throat. One only has to look at how retailers gouge manufacturers and compete aggressively with one another to realize that it is wise in particular to re-evaluate strategic partners on a regular basis to ensure that they are creating and not slowing your business down. The better partners are those who are able to communicate effectively with you and have modern systems so that you can gain visibility into their inventories, manufacturing plans and distribution networks.

As a manufacturer, exposing my inventory to you comes at a price and I will expect the same inventory visibility and market information from you - all without even considering vendor managed inventory. This enablement should be considered a minimum these days. While this might sound somewhat risky and scary, the good news is that enabling and building these types of integration with industry-standard data structures and application program interfaces (APIs) is relatively easy and not extraordinarily expensive. If they are well designed, you can expose select dimensions of data to business partners for mutual benefit.

As a consumer, this is not so useful however for the retailer, your ability to tell me when I can expect restocking of a stock-out can help in promoting your brand to me and somewhat assure you that I will be back in your shop again.

Additional reading
http://www.sciencedirect.com/science/article/pii/S0305048303000288
http://merchantos.com/retaileasy/2011/05/turn-turn-turn-whats-your-inventory-turnover/
http://scm.ncsu.edu/scm-articles/article/background-an-analysis-of-supplier-evaluation

More Stories By Clinton Jones

Clinton Jones is a Product Manager at Winshuttle. He is experienced in international technology and business process with a focus on integrated business technologies. Clinton also services a technical consultant on technology and quality management as it relates to data and process management and governance. Before coming to Winshuttle, Clinton served as a Technical Quality Manager at SAP. Twitter @winshuttle