The retail tightrope of balancing inventory and keeping shelves stocked
So, you decide you will go to the store after all to make a purchase. You want see the color, style and touch the actual product. After fighting through traffic, you finally reach the shelf only to find empty space. Unfortunately, the % of items out of stock is increasing in many areas of retail. In trying to balance inventory costs, retailers are willing to risk being out of stock. As a result, both retailers and suppliers are losing significant sales. And, the real question is will you, the consumer, come back to the store after being disappointed multiple times?
Collaboration 3.0 – If ever there was a time, now is a great opportunity
This week I had an opportunity to make another presentation at the Fall VCF Conference. At this year's conference, it was announced that the Vendor Compliance Federation (VCF) is changing its name to the Retail Value Chain Federation. This new name is certainly more reflective of the sponsor, its mission and the conference participants. The theme of this year's conference was especially timely and appropriate: "Collaboration 3.0 Transforming the Trading Partner Dynamic".
In speaking with Kim Zablocky, Chairman of RVCF, there are least 863 ways retailers charge back vendors who do not comply with retailer supply chain requirements. While it is understandable that retailers want to recover expenses in supply costs, there are strategic issues which transcend orders and shipping execution. The mission of RVCF is to promote ways and means the retailers move beyond compliance to be more effective and achieve value through collaborating on sharing data, scorecards and integrating processes.
Perfect 3.0 Opportunity – Reducing out of stocks to grow revenue
When the product is not on the shelf at the moment of purchase, not only is the consumer dissatisfied, the retailer and the supplier lose an immediate sale opportunity. This is an especially profitable sale that is lost, because all the marketing and promotion has been spent and the consumer is already in the store poised to make a purchase. In these days of "showrooming" and growing online sales, neither partner can afford to repeatedly disappoint the consumer by being out of stock on preferred items on the shelf.
Yet, our research with retailers indicates that the % of items out of stock is in fact growing. In highly seasonal and fashion categories, the out of stock items may range from 10% to more than 20%. Some cash flow conscious retailers have even announced this holiday season that rather than risk markdowns, they will be very lean on inventory risking out of stocks in stores.
There are a myriad of reasons driving up out of stock rates including:
- Proliferation of SKUs results in too many to accurately manage
- Credit constraints resulting in less open to buy cash to stock shelves
- Poor forecasts of both supply and demand resulting in stock imbalance
- Poor life cycle management resulting in the wrong items on the shelf
- Increased shipping costs reduces frequency of shipping and fulfillment
- Lack of data sharing and collaboration to act in time to reduce stock outs
The list could go on. At the end of the day, the consumer doesn't care! They just want to purchase the product they came into buy. Untold millions of dollars of sales are being lost in store, and frustrated consumers are increasingly not coming back.
More rules and fines for vendor compliance won't fix out of stocks
Historically, retail supply chain managers have instituted policies and procedures to improve their efficiency and costs of fulfillment. Most major retailers have vendor scorecards with metrics focused on order fill rate, on time delivery, accuracy, etc. Suppliers that don't meet the benchmarks are subject to "charge backs" to cover the retailer costs. The best in fact use the metrics as a means to collaborate on improving processes and creating greater alignment.
However, the root causes of many out of stock issues are not inherent in the supply chain execution. The supplier can execute perfect orders, with 100% accuracy, with on time fulfillment as prescribed and the item can still be out of stock on the shelf. The root cause could be related to the retailer changing orders too late in the cycle, forecasting the wrong demand, or they themselves not getting product from their warehouse inventory to the shelf.
To capture lost revenue there are least three legs that must be balanced
To capture lost revenue means dynamic management of SKUs (item level inventory) at the shelf in each store. There are at least four key players making decisions that impact whether there will be too much stock or nothing on the shelf:
- Merchants who decide the assortment, mix and product lifecycles
- Inventory planners/managers who are responsible for forecasting supply & demand
- Supply chain managers who get the forecasted orders to ship on time accurately
The Collaboration 3.0 theme of the RVCF conference is right on the mark. To reduce out of stocks will require all three decision makers. 3.0 Collaboration will also require new "trading partner dynamics" focused on sharing data to address new metrics for in stock inventory.
The devil is in the details … and success will require new metrics
Supply chain managers will rightfully drive supply chain efficiency by continuing to measure compliance on fill rate, accuracy and on time delivery. But, those traditional metrics will not begin to address the 100s of millions of lost sales from out of stocks. All of the internal and external players comprising the assortment decisions, supply/demand forecasting and merchandising must have a role and be accountable for in stock rates.
In my presentation at VCF this week, I illustrated how Collaboration 3.0 will be best served by measuring both the out of stock units and the value of what that means in terms of lost opportunity. Both the retailer managers and the suppliers must be aligned on these same metrics to tackle the root causes of out of stocks. There are a number of ways to capture millions of $ in lost sales if the "three legs of the stool" align around metrics for collaboration versus only punitive metrics and charges for non-compliance.
I predict that RVCF's new focus on value will significantly engage new membership from the merchant and inventory manager communities, in order achieve its new mission of "Transforming the Trading Partner Dynamic".
IF you are interested in receiving a copy of Dr. Petersen's complete slide deck on "Capturing Lost Sales Opportunity" presented at the RVCF conference, please click here.