SCDigest: A Unified Theory of Out-of-Stocks?
Through a special arrangement, presented here for discussion is a summary of a current article from Supply Chain Digest.
It is obvious to me that the out-of-stock (OOS) problem is getting worse for many retailers of late. Anyone else go to certain stores and see as much as 75 percent of the pegs on a wall display empty these days? Amazing, really, here in the 21st century supply chain.
E-commerce has added a wrinkle to the retail OOS challenge as now the issue isn’t just products not being on the store shelf, but now potentially "not in stock" at the e-store as well.
Here’s why this issue is so complex: it is an equation that involves forecasting, "long tail" management, retail in-store execution, uncertain and/or difficult to calculate financial impacts, different impacts depending on product category, different impacts on retailers versus manufacturers, the Bullwhip Effect, the Perfect Order, vendor variability, store inventory accuracy, overstocks, collaboration, etc.
What have I left out?
It is a complex ecosystem for sure, yet I believe a "unified theory" (with a nod to Einstein) can be developed.
Here’s a clue: In a videocast in earlier April, Joe Shamir, CEO of ToolsGroup, used a slide along these lines, which showed how less than 100 percent service levels at the vendor leads to more service degradation at downstream echelons all the way to the store shelf.
An important point from this graphic is that it isn’t just an OOS problem. There is an equal and opposite reaction in terms of overstocks — too much inventory — either from the same issues that cause OOS or as a tactic to minimize the level of out-of-stocks.
That latest Gruen study found out-of-stock rates in the CPG sector of 8.3 percent, slightly worse than the level found in 2002. The 2002 study also quantified consumer response to an OOS.
But of course, the response varies significantly by product/retailer type. If a can of soup is out of stock, a shopper might easily grab another flavor from the same vendor (good for the vendor and retailer), or the flavor they want from another brand (not good for the vendor, good for the retailer). If the size or color a shopper wants is missing at an apparel store, it is much more likely to result in no substitute purchase at all. As Mr. Shamir pointed out, for long tail items, where demand is very intermittent, a stock out might result in no lost sales for some period, because there is no demand.
My research and listening to some of these experts convinces me that we can better tie the store side issues with the supply chain issues, and move the OOS ball further down the field in a more integrated and mathematical way. More soon.
Discussion Questions
Where in the supply chain is the biggest obstacle to eliminating the out-of-stock problem in stores? What offers the most hope for improvement?
It appears from the graphic that a store is limited by the preceding distribution centers. But I’m thinking it’s mostly a combination of attitude/business practice and inefficient shelf sets. A store manager has to want low out-of-stocks, otherwise, the shelves don’t get stocked. And poor shelf management leads to out-of-stocks.
The promise of new technologies like RFID inventory tracking has not been met yet, since many retailers have not made the investments needed to make them work. So many retailers continued to be plagued by what I call the “black hole” of inventory management.
Specifically, stores may book receipts into their on-hand systems at the point of receipt at a distribution center (or even upon receiving an advance ship notice electronically from a vendor). There can be a gap of days between receipt in a store’s “system” and actual delivery of goods to a store. There may be additional delays if tight store payrolls (Walmart, anyone?) cause a breakdown in replenishment between the truck, the stockroom and the selling floor. Meanwhile, the buyer (or the replenishment system) thinks that goods are in stock and can’t figure out whey they aren’t selling.
Retailers are decades past the days where the solution to the “black hole” problem was out of reach. But it requires investments in technology and manpower to fix it.
The biggest challenge across supply networks to reduce OOS is still the “Last 100 Meters/Yards.” And, more often than not, this is a human training and staffing issue, rather than a logistics process or technology issue. This has been the case for decades, as illustrated in a a landmark study from the Coca-Cola Retail Research Council back in 1996, and revisited in 2003. The problem still exists.
We need not limit this discussion to grocery, by the way.
When items are sold at the point of purchase in stores, far too often the velocity of this product movement is rarely matched to the staffing that is scheduled to replenish it at the shelf level. Simple, right? It’s just not easy, of course, if this is still a problem.
I think you left out one of the most important elements—which is: turn objectives by department driving decisions on what to re-stock.
Here’s the problem: merchants are compensated based on sales and turn. When sales fall below plan in a category, receipt plans must be adjusted to keep weeks of supply or turn on target. The resulting problem is exactly as you describe: empty peg hooks on the selling floor coupled with an excess of other products in the back room (but you likely don’t see that half).
I’m sure the challenge is different in pure grocery chains, but in most all other segments, I can guarantee this is the single largest source of the problem. I saw it somewhat stunningly during the Great Recession—at stores you would think knew better. Tons of empty shelves for some styles/sub-categories of shoes (for example), and piles of shoes in other sub-categories.
I find in retail, the supply chain is the tail and the merchant is the dog. The tail does not wag the dog. Instead, the dog wags his tail.
I think the biggest problem is math. If everyone hits their 98% SLA, the shelf in-stock maybe is 92%. Here is my simple observation. The forecast is 98% accurate; the Vendor fills 98% of the order, the DC picks 98% of the order correctly; then the retail store executes 98%—that’s 92% at the shelf. It is a simple exercise which is obviously even worse with today’s complex supply chain.
What ever happened to six sigma and the 5 nines?
The flip side of this is maybe it is a planned out-of-stock and the retailer is in a product transition.
The increasing gap between technology to understand inventory movement and human services to actually get inventory to the shelf continues to confuse me. Would it not be wise for store managers to walk their aisles daily and begin to log consistent problem areas for discovery of problem sources and action for solutions.
If, as Paula says, the merchant is the dog that wags his tail, then the merchant can and should be wagging with more attention and intention to get problems solved.
Hired merchandisers could also perform store audits that are tied to technology that, instead of just “logging” the problem, is programmed to start a chain of action to actually identify a fix for the problem.
Ultimately, out-of-stocks are the shopper’s fault. Their behavior changes constantly, and there simply is no way (currently) to tap into their minds to know exactly what they want when they want it. I don’t write this to be flippant, but to show the point that any solution needs to start with the consumer.
The better the supply chain can share consumer demand data back to the point of production and even back to ingredient and packaging suppliers, the more likely the product can get to the point of purchase when the shopper wants it. This isn’t to suggest the physical delivery process plays no role in the out of stock problem, but rather to propose that collaboration on shopper data is the place to start any inventory improvement initiative.
The biggest obstacle to eliminating OOS is the chains’ purchasing and distribution system. Tell me the last time you found a Coca-Cola OOS? If chains would encourage instead of fight DSD systems, they could make more money. What they lose in OOS would easily exceed what they think they save with self distribution and it could easily allow for the expansion of other in-store services like custom butcher shops, catering, etc. A contract to handle store brand items like Pizza could be handled by Schwans. Almost every category in the grocery store has a DSD supplier except canned goods and frankly, I see fewer OOS there than other places.
The farther you get chain bureaucrats away from the point of sale, the better off you are.
Two ares of innovation that present OPPORTUNITIES to (finally) make some progress on this seemingly intractable problem:
1) Big Data – improved predictions based on better, faster, more granular information about the key elements (where is the inventory, how much anticipated demand, etc.)
2) Collaboration – increased alignment and speed to decision with better and faster flow of information among value chain partners
Of course I agree with earlier points that short of execution at the store, the right incentives for merchants, and investments in technology these will remain interesting ideas in a world of 8% out-of-stocks.
For the past 20 years out-of-stocks have ranged from between 8%-10%. In-store merchandising execution accounts for approximately 50% of the problem, and the easiest to solve. The biggest obstacle when trying to address merchandising execution is the alignment of processes, roles and responsibilities within the store. Improving store execution requires a disciplined, coordinated and comprehensive approach. Three enablers must be developed sequentially and in place to produce the desired results. It is an all inclusive process, people, and tools approach. There must be effective merchandising processes and compliance standards, there must be vertical alignment of merchandising responsibilities and shopper centric priorities and finally tools to manage merchandising execution and compliance.
Combined with the realization that planograms cannot be based on averages, this is a definite fix to 50% of the out-of-stock problem. Yes, it’s time to address an issue that can deliver an immediate and high return on investment. Yes, it’s time to restructure the management of merchandising within the store.
The out-of-stocks issue is again a growing problem and there is simply no reason for it. You start by allocating the right amount of retail space. After that, the greatest contributing factor is the reorder process. Retailers are stuck in fixed schedules, but the world has gone dynamic with instant communication. Many store sections are only replenished once a week. Whether human or computer replenishment is used, they all include a forecast which is always wrong. This adds to the problem.
It is time to move to continuous review. This week it should be 4 days and next week maybe 6 days between replenishment. When retailers get off fixed schedules and replenish when needed, this problem can easily go away.
There is a solution from the shopper’s point of view: virtual shelf extension. VSE functions when a shopper encounters an OOS. If she is using a “storemode” app (geo-fenced app, that knows where you are), the shopper can toggle to back to non-store mode and order the item to be sent her house. This is especially useful for small footprint “big box,” which is why Walmart’s app has this feature.
However, this is a poor answer to respond to daily OOS…much better to improve the shelf set.
This topic has certainly been examined and probed from many directions in the past—and this flurry of discussion continues to perpetuate the blame game. We’ve heard it before: it’s retail execution failure (i.e., staffing, training, and systems); it’s the manufacturer’s part because their supply chain efficiency is inadequate; it stems from misalignment; and this latest thread has even placed blame on the shopper.
Bottom line is that retailers can’t sell what they don’t stock and consumers will be disappointed by out-of-stocks. I truly think technology, and virtual aisles with efficient at-home delivery, is an option. What if the shelf set had an actual picture of the product that a consumer could “zap” with their smartphone and seek same day delivery? Problem potentially solved. I’d be calling an in-store solutions partner like Vestcom today and ordering shelf strips and life-size planogram pics. What are we waiting for?
Are OOS issues not that painful, or are they too painful to solve. I think it’s both.
First, I do not believe that if all stores were fully stocked, retail sales and consumer purchases would go up by 8% or anything close to that. There are no appreciable “lost sales” that anyone can measure.
Second, the problem is nearly intractable as litanized by all the experts who weighed in. The variables and dependencies among consumer intent, retail promotions, supply chain management and the local economy, to name a few, change continuously.
So, while the benefits of a solution are unquantifiable and the problem is known to be extremely difficult, little will be done—except conversing. Change either of those and there will be action.
Well there was at least one other variable left out: DC mis-picks.
In all my retail work around this issue, when you add all the variables together, the STORE still accounts for almost half the OOS percent through shrink, POS errors, inventory count errors, misplaced backstock, and inaccurate ad ordering.
What usually happens is the finger pointing between store operations, supply chain and the merchants often leads to “0” action. Sound like a government we know?
Well I thought about this one and turned to some of our SC experts. A few comments worth sharing:
1. Many retailers still don’t use sophisticated forecast based ordering solutions like core forecasting and replenishment. In today’s retail space, tools like this—no matter where a retailer gets them—are key to staying in stock and on shelf.
2. Database quality – the main area we decided here is the on hand accuracy information related to all channels, but especially the stores.
3. We also discussed that some retailers decide for very slow selling products, especially in fresh, not to have a facing, so once the product is sold, the shelf is empty until the next delivery arrives.
4. Backroom/stockroom problems. We are seeing more retailers with the “stuff in the store,” but not in the shelf available for the customer. Nothing new, but more of it.
5. Promotion processes. The promo space is moving so fast that it is a constant re-balance effort and moving the right stock to the right SPOT, right on time.
Back in the old days—the 80s or 90s (I forget), the SCM area was all the talk. Then it became integrated and end to end and then the noise faded and we went POS crazy, etc. Well, with the way retail has changed—from port to shopper in a flash, the SC is back in the front of mind and a critical area to focus on, that is if a retailer wants to be a winner in this retail war.
Tom…Pvt 1st Class SCM….
A lot of effort has been put into providing analytics [to address] supply chain effectiveness. The real issue is one of execution and few solutions offer practical answers to store level execution, which in the supermarket industry — with its predominately pull-based replenishment — is critical. This is true of DSD as well as internal distribution.
Store walk-throughs are a part of the culture and have been for decades. The recognition of a problem doesn’t solve the problem. Solutions that react after an OOS occurs do not reduce OOS’s. Many retailers have solutions in place that react to an OOS after it occurs, “solving” the issue by the next delivery cycle, only to have other items go OOS because of changes in demand due to the original OOS. So the effective rate remains unchanged. These revolving door OOS’s or single day OOS are a great percentage of the total.
Overstocks also, surprisingly, lead to OOS’s because they often overface product leading to a failure to order or cause a non execution based solution to wait until there is zero movement on a stocked item to signal an issue. Yes, it’s a complicated issue to resolve but forecasting tools alone won’t do it. Associates have to be provided operational tools to not only recognize issues before they occur but to effectively react and remove the dysfunction.
Depends on the company. My most recent employer’s system of “assumed receipt” for shipments from the D.C. to the stores was the biggest opportunity for both shrink and inventory integrity issues. This was an uncontrollable issue at store level, so we managed our backroom inventory process 100% to control the owned inventory for replenishment and cycle counts in key categories to improve in-stocks.