IT’s DAYS OF SUPPLY INSTEAD OF WEEKS OF SUPPLY FOR DIY RETAILERS LIKE HOME DEPOT

While the DIY retail segment is currently booming – Home Depot is targeting a 15% sales growth by 2018 – their strategies for inventory in their stores is changing. “Get comfortable with days of inventory, not weeks,” Tom Shortt, Home Depot’s senior vice president of supply chain, says is the message going out to stores. 

Rather than filling its warehouse stores with inventory, Home Depot wants fewer items on its shelves and wants those items within customers’ reach. Online shopping is making retailers think of better ways to profitably serve online shoppers and have inventory in stores, as well. They need to decide if they will ship to consumers from a distribution center or store.

WalMart and Target have also made changes to in-store inventory levels. WalMart’s inventory levels rose slower than sales, helping to improve their gross profit margins in the first quarter.  Boosting sales and stocking less items increase the percentage of cash they get back from the amount they invest in inventory. The strategy is to put less inventory in the stores and replenish more frequently based on demand instead of a forecast.

Home Depot’s strategy is called “Project Sync” which includes such changes as seeing suppliers send 2 trucks five days a week, versus 5 trucks 2 times per week.

Monitoring the return on invested inventory capital and tracking consumer demand closely in order to manage inventory and replenish based on demand can only be accomplished with frequent analysis of POS data in stores, looking at SKU-Store sales and on hands, trending days of supply and sales to stock ratios.

Source: Wall St. Journal

TARGET’S NEW RULES FOR VENDORS TO TIGHTEN UP SUPPLY CHAIN AND INVENTORY

Target Corp is tightening its supply chain requirements for its vendors as part of a multi-billion dollar plan. The rules, effective May 30, include tighter deadlines for deliveries to warehouses, and fines for late deliveries and inaccuracies in product information.

Says Target’s COO, John Mulligan, vendors need to help keep shelves stocked, maximize sales and control costs. A letter was sent to suppliers. In the letter, Target stated the goal to keep products stocked to “lower missed sales for all of us.” Target US stores in 2015 held 8 to 9 billion items on store floors, in transit or in warehouses at any point in time.

The new rules will be phased on over the summer, with household, paper, and pet products needing to comply in June, health and beauty complying by July and apparel, home and electronics in August.

Source: Reuters.com

Increase Sales by Managing Out of Stock Inventory

What is an out of stock?

A retail out of stock is when the inventory available on the shelf is either zero, or depending on the product category, when the inventory available for sale is less than the typical job lot quantity.   Conceptually an out of stock is not difficult to understand and therefore one might assume it would be fairly easy to monitor inventory and avoid an out of stock.  In reality however, out of stocks average 8% and much higher on promoted items. 

Why are out of stocks important?

Out of stocks are important for two reasons: (1) lost sales and (2) lost customers.   If your product is not available the obvious result is lost revenue.  We recently studied the average out of stock for two customers for a 52 week period and found a clothing manufacture of basics averages $1,669 per week in lost dollars sold at a major department store.  A consumer products company we studied averages $1,835 per week in lost dollars sold at a major DIY retailer.   Neither of these figures may raise any alarm bells on a week to week basis; however when you total the lost dollars due to out of stocks for a full year, the loss is 7.5% and 8.2% of sales respectively.  In a retail environment where low single digit comp store growth is typical, increasing sales 7% to 8% based on simply managing inventory better has the potential to make a large impact.   Even more compelling, these figures are for one of the many retailers these brands work with so the opportunity can be multiplied several times.  The bottom line: Out of Stock stores are costing your business a significant amount of sales.   The second impact of out of stocks is lost customers.  Studies show a consumer confronted with an out of stock product will substitute for another product at the same store.   What if that consumer decides the other product is the same or even better quality than your product?  Will they purchase your product the next time they are in the store or will they stick with the substitution?   A simple out of stock could cost you a customer and the repeat sales you might have otherwise enjoyed. 

Fixing Stock Out of Stock Issues

A multistep process is required to fix out of stock issues and increase sales.   The steps in the process are outlined in Figure 1 below.  

Calculate Dollars Lost to Stock Outs

Change in any organization rarely occurs until there is a financial incentive to invest in a solution.  In order to motivate the manufacturer and the retailer to invest into solving out of stock issues we recommend starting by calculating the dollars lost to stock outs.    The initial benchmarking can be accomplished through a fairly straightforward process.   An example is provided in Figure 2 below.    The analysis will require either four or eight weeks of sales in units and dollars, ending units on hand, and the unit retail price.  The decision to use four or eight weeks of sales for the analysis depends on the rate of sale of the products being analyzed.   If the products are fast moving, four weeks of sales should be sufficient, if the products are slow moving eight weeks of sales will yield a more accurate result.   The example below includes sales for both periods.    The data should be at UPC/SKU and store grain.  In order to identify the out of stock issues driving lost sales two filters should be applied to the data.  First, a minimum sales activity filter should be applied to make the estimate as conservative as possible.  A good rule of thumb is to apply a filter requiring an average of one unit sold per week over the period.  If your products have a high rate of sale then you can increase the average.  The second filter is used to limit the data to rows with OH = 0.  After applying the filters calculate the average weekly units sold over the sales period you selected.  E.g. total units sold / count of weeks.  The average weekly units sold is used for calculating the lost dollars sold since we are assuming in this example the store would have sold that number of units had it not been out of stock.  To calculate the estimated lost dollars sold multiple the average weekly units sold by the unit price. 

Although the analysis is fairly straightforward it has proven to be a reliable benchmark for quantifying the dollars lost on out of stocks.  Keep in mind in our example the lost dollars is for one week but it is often more compelling to repeat the analysis for additional weeks so a trend can be established. 

Identify Where to Focus

The next step in the process to fix out of stock issues is to review the lost dollars sold report and identify where to focus for the largest potential impact.  A good starting point is to sum the lost dollars by store and then analyze the stores on a percent contribution to the total lost dollars sold.   This will help to identify stores which are having the largest inventory issues.  You can also sum the lost dollars by item to identify which items are having the largest impact on out of stocks.   As you study the results look to see if there is a pattern to the lost dollars.  Is there a group of stores or items which are having a disproportionate impact on lost dollars?  If specific items are having a large impact on the total lost dollars this many indicate a fill rate problem or a promotion which created unexpected demand.  This should be further analyzed to ensure the root cause is identified.   The goal is to identify a subset of stores and/or SKU’s which are having a disproportionate impact on out of stocks.   Our experience shows retailers prefer to trouble shoot problems and develop new processes using a subset of stores and SKU’s for a pilot before agreeing to a broader adoption.   As we move forward in the process we will use this subset to craft the plan to improve inventory management and sales. 

Identify Data Gaps

A common problem encountered with managing out of stocks is a gap in the data available from the retailer.   The most common two gaps are the lack of units on order and week grain data instead of daily data.    Units on order are a very important data point as you move forward to creating a process to manage inventory more effectively.  When you have identified an out of stock, or an item that has less than the desired weeks of supply, the next question you need to answer is does the retailer know about the issue and have they placed an order.   If the answer is yes, then you simply need to ensure the order size is sufficient and then continue to monitor the on hand to ensure the inventory has been placed on the shelf.  If the answer is no, then you will need to work with the buyer to suggest an order quantity which will fix the issue.  The second gap in data for managing out of stocks is week grain instead of day grain data.  Week grain data provides a week ending sales and on hand value which means the out of stock could have been impacting sales for several days before you even receive the data.  When you add the time it takes to recommend an order and ship the product the problem only gets worse.   Some retailers have the ability to transmit daily sales and inventory which will greatly improve the visibility and ability to react quickly to an out of stock.   If your retailer does not provide units on order and daily data you should explore the benefits of closing these gaps with them.  The lost dollars sold report created earlier in the process is a good tool to put a financial impact on the table for discussion.  

Create a Monitoring Process

Creating a process to monitor inventory proactively is critical to reducing out of stocks.   All good processes need tools, and in this case the essential tool is an out of stock monitoring report.  An example can be seen in Figure 3.   The out of stock monitoring report should include the ending on hand units and inventory weeks of supply.  The OH value can be used to identify out of stocks which require immediate attention.  The inventory weeks of supply can assist in getting out in front of a stock out before it occurs.   We add a column for minimum inventory quantity on hand so that each individual store and SKU can be set uniquely if desired.  If that level of detail is not required you can simply fill the minimum quantity on hand at a SKU level across the board.  The minimum quantity on hand value should take into consideration the lead time necessary to process a new order and ship the product as well as job lot quantity if that applies to your business.     The recommended order quantity then is simply a function of minimum quantity OH – current OH.   If the inventory weeks of supply is below the total time it takes to process and ship an order to the store that indicates a possible future out of stock which should be addressed before it becomes an issue.    After the out of stock monitoring report is ready for use the organization should identify who will run the report, the day and time the report will be run, and the specific actions to be taken based on the report findings.  The actions should be arrived at based on a conversation with the retail buyer. 

Collaborate with the Retail Buyer

There is very little benefit in creating out of stock reports and monitoring processes if the buyer is unwilling to accept and process a recommended order.  Some buyers are quite happy to collaborate with a vendor to better manage inventory.  However, our experience indicates buyers frequently need some convincing, and may even need to get buy-in from other people on their team, in order to collaborate with a vendor on inventory management.   This is where the tools which have been developed will be useful.   Create a business plan which starts with the lost dollars sold for a 13 to 26 week period as a way to highlight the financial impact of out of stocks.  Add a discussion on the long term impact stock outs may have on product substitution and possibly even causing the customer to shop at a competitor.   Use the subset of stores and/or SKU’s identified in the first step in our process to recommend a limited pilot for active inventory monitoring and include a detailed explanation of the tools and processes which will be used to manage the pilot and make order recommendations.   Include a forecast estimating the increase in sales which can be expected to result from the pilot by referencing the lost dollars sold report created earlier.  Be conservative with the forecast and propose that 70%-80% of the lost dollars on the report may be capture in new sales.  Work with the buyer to understand the steps involved in processing a recommended order as well as the people who are involved in the process and any deadlines which may impact the plan.  If there were gaps in the data as discussed earlier in this article have a discussion with the retailer about closing those gaps through a more rich set of data sent on a daily basis.   Finally, agree on the duration of the pilot, how the performance will be measured and what the rollout plan will look like after the pilot is successfully completed. 

Execute and Adjust the Plan

The tools for proactively monitoring out of stocks are now in place and you have an agreement with the buyer for a pilot.  Now it’s time to execute the plan.    Up to this point the planning process may have been directed primarily by the sales and account management team.  It’s important to connect with your production and supply chain teams to inform them about new orders that will be coming which are above the historical rate of sale.  After all, if the pilot goes as planned and sales are increased by several percentage points, you will need to ensure there is sufficient inventory ready to ship to keep your fill rate high.  We have seen many pilots successfully identify retail stock outs and retail orders placed only to be short shipped due to lack of inventory. 

Conclusion

Addressing retail out of stocks has the potential to increase sales by several percentage points.  The data analysis is manageable with the right tools in place and the benefits will accrue to both the retailer and the manufacturer.  It’s a classic win-win.  If you would like to explore how Accelerated Analytics can help your company address retail out of stocks simply complete our information request form. 

Additional reading on retail out of stocks

Reducing Out of Stocks

How Much are Out of Stocks Costing You?

Reducing Retail Stock Outs

How Much Do Retail Out of Stocks Cost?

Calculating the Cost of Out of Stocks

Retailer Product Logistics Planning Depends on how Consumers Buy

As Americans increased their borrowing in March, retailers hope this will result in increased sales. For retail planners of major supply chains, a big question is whether consumers will come back to the stores or get back to buying by going online. Online commerce is far outpacing storefront sales around the world, creating competition for traditional retailers. It is also creating a supply chain upheaval at brick and mortar stores. Walmart, Home Depot and others are trying to determine how to serve that online market as their own online sales are growing.

Moving truckloads of goods to stores is very different from putting together a lot of small shipments and parceling them out to buyers directly. Brick and mortar companies need to figure out how to make the logistics work without cutting into profitability. Many are testing the use of pickup centers in their stores, to see if customers can solve the logistics question themselves.

Source: The Wall Street Journal

Home Depot and Macy's Inventories Hit Hard by West Coast Port Gridlock

Home Depot and Macy’s both posted solid earnings for the fourth quarter 2014. However, both retailers report that the situation with the West Coast ports will begin to really affect them now. This is after a report that a tentative deal was reached in the dispute that has affected retailers, manufacturers, farmers and merchants.

“The West Coast situation has been tough, with 12- to 16-day delays in getting our imports in,” Mark Holifield, Home Depot’s executive vice president for supply chain and product development, said on a call with analysts. “There’s still a fair amount of uncertainty what the new normal will be, once the ports get back to normal.”

Karen M. Hoguet, Macy’s chief financial officer, said that shipment delays were only just starting to hit inventory levels, and that its apparel and accessories departments were the most affected. About 12 percent of the department store chain’s first-quarter merchandise was delayed, Ms. Hoguet said, which may affect sales, gross margins and expenses in the first few months of the year.

Department stores, like Macy’s, were somewhat protected by allowances that enabled them to return some late products to their vendors. Discount retailers could benefit from getting merchandise the traditional retailers cancelled due to late delivery.

Source: The New York Times

Dollar General Adds Another DC

October 16, 2014

Even if Dollar General doesn't prevail in its efforts to acquire Family Dollar, the company's expanding distribution infrastructure is positioned to support future growth.

Dollar General said it plans to build the 13th distribution center in its nationwide network in San Antonio.  The facility will measure more than 900,000 sq. ft., employ roughly 530 people and serve more than 1,000 stores when it opens in October 2015, the company said.

"This distribution center is another important investment in the growth of Dollar General and our substantial presence in Texas where we have nearly 1,200 stores and more than 9,400 employees," said Rick Dreiling, chairman and CEO of Dollar General.  "We operate more stores in the Lone Star state than in any other state and we have found Texas is a great place to do business.  We are proud to continue investing in the economic growth of Texas and we look forward to bringing an additional 530 jobs to Bexar County."

Dollar General's 12 other distribution centers are located in Alabama, California, Florida, Indiana, Kentucky, Mississippi, Missouri, Ohio, Oklahoma, Pennsylvania, South Carolina and Virginia.  Those facilities served the company's more than 11,500 stores nationwide.

Source: Retailing Today

Imports To Set New Record Before Holidays

October 10, 2014

Import cargo volume at the nation's major retail container ports is expected to see a final surge and set a new monthly record in October as the holiday season approaches, according to the monthly Global Port Tracker report released late this week by the National Retail Federation.

"Increasing congestion at the nation's ports as well as the ongoing West Coast labor negotiations are ongoing concerns and retailers are making one last push to make sure they're stocked up for the holidays," said NRF VP for supply chain and customs policy Jonathan Gold.  "Retailers are working hard to make sure customers can find what they're looking for regardless of what happens at the ports."

Import volume at U.S. ports covered by the Global Port Tracker report is expected to total 1.53 million containers in October, topping the 1.52 million monthly record set in August.  Cargo volume has been well above average each month since spring as retailers have imported merchandise early in case of any disruption in the docks.

The contract between the Pacific Maritime Association and the International Longshore and Warehouse Union expired on July 1, prompting concerns about potential disruptions that could affect back-to-school and holiday merchandise.  Dockworkers remain on the job as negotiations continue but the lack of a contract and operational issues have led to record congestion at the ports.

The 1.52 million 20 ft. equivalent units handled in August, the latest month for which after-the-fact numbers are available, was up 1.5% from July and 2.1% from August 2013.  One TEU is one 20 ft. cargo container or its equivalent.

September was estimated at 1.48 million TEU, up 2.8% from the same month the prior year, and October's forecast of 1.53 million TEU would be up 6.4% from 2013.  November is forecast at 1.39 million TEU, up 3.7%, and December at 1.37 million TEU, up 3.9%.

Those numbers would bring 2014 to a total of 17.1 million TEU, an increase of 5.3% from 2013's 16.2 million.  Imports in 2012 totaled 15.8 million.  The first half of 2014 totaled 8.3 million TEU, up 7% from the previous year.

January 2015 is forecast at 1.42 million TEU, up 3.5% from January 2014, while February is forecast at 1.35 million TEU, up 8.5% from the previous year.

The import numbers come as NRF is forecasting 4.1% holiday season sales growth and 3.6% growth for 2014 overall.  Cargo volume does not correlate directly with sales but is a barometer of retailer's expectations.

Source: Retailing Today

Record Imports Expected In August

August 11, 2014

Import volume at major U.S. container ports is expected to hit an all-time record in August as retailers concerned about the lack of a West Coast longshoremen's contract rush to bring holiday season merchandise into the country, according to the monthly Global Port Tracker report released today by the National Retail Federation.

"The negotiations appear to be going well but each week that goes by makes the situation more critical as the holiday season approaches," NRF VP for supply chain and customs policy Jonathan Gold said.  "Retailers are making sure they are stocked up so shoppers won't be affected regardless of what happens at the ports."

Import volume at U.S. ports covered by the Global Port Tracker report is expected to total 1.54 million containers this month.  That's the highest monthly volume since NRF began tracking import volume in 2000, topping a previous record of 1.53 million set in July and unusually high numbers seen this spring as retailers began importing merchandise early in anticipation of this summer's contract talks.

The contract between the Pacific Maritime Association and the International Longshore and Warehouse Union expired on July 1.  Dockworkers remain on the job as both sides continue to negotiate a new agreement.  Both sides have reported that talks have been "productive," and NRF has urged both labor and management to avoid any disruptions that could affect the flow of back-to-school or holiday merchandise.

U.S. ports followed by the report handled 1.48 million 20 ft. equivalent units in June, the latest month for which after-the-fact numbers are available.  That was down 0.38% from May but up 9.1% from June 2013.  One TEU is one 20 foot cargo container or its equivalent.

July was estimated at 1.53 million TEU, up 5.8% from the same month last year, and August is forecast at 1.54 million TEU, up 3.6% from last year.  September is forecast at 1.48 million TEU, up 2.8% from last year; October also at 1.48 million TEU, up 3.3%; November at 1.37 million TEU, up 2%; and December at 1.34 million TEU, up 2.1%.

Those numbers would bring 2014 to a total of 17.1 million TEU, an increase of 5.2% over 2013's 16.2 million.  Imports in 2012 totaled 15.8 million.  The first half of 2014 totaled 8.3 million TEU, up 6.9% over last year.

The import numbers come as NRF is forecasting 3.6% sales growth in 2014.  Cargo volume does not correlate directly with sales but is a barometer of retailer's expectations.

The increases in volume reflect both improvements in the economy and retailers importing merchandise early because of the contract negotiations.

U.S. GDP has increased in 11 out of the last 12 quarters, confirming that we are in a sustained period of expansion.  A significant portion of the strong upswing in imports has been due to the labor negotiations, with importers moving up shipments just in case.

Global Port Tracker covers the U.S. ports of Los Angeles/Long Beach, Oakland, Seattle and Tacoma on the West Coast; New York/New Jersey, Hampton Roads, Charleston, Savannah, Port Everglades and Miami on the East Coast, and Houston on the Gulf Coast.

Source: Retailing Today

Home Depot Bolsters Online Business With New Direct Fulfillment Center

February 10, 2014

The Home Depot has opened a new direct fulfillment center (DFC) in the Locust Grove suburb of Atlanta. 

It is the first of three new DFC's the company will open across the U.S. in the next two years, adding more than 3 million sq. ft. and approximately 1,000 jobs to its supply chain. The new distribution centers will increase the number of orders the company can ship the day they are received, increasing the speed of delivery for HomeDepot.com orders.

The company is also enabling faster order picking and shipping through new warehouse management and material handling systems. 

"This is a significant investment in our ability to say yes to customers with confidence," said Mark Holifield, SVP, supply chain.  "Yes, you have access to our entire inventory to fulfill your order.  Yes, you can expect a speedy delivery.  And yes, you can rely on information updates about your delivery."

The DFC's will stock approximately 100,000 products, extending The Home Depot aisle beyond the 35,000 products typically available at the average physical store.

The Locust Grove DFC will initially employ approximately 125 people, and will eventually employ approximately 300.  Future DFCs are scheduled to open in Perris, California and Troy, Ohio.

The Home Depot has 2,263 retail stores in all 50 states, the District of Columbia, Puerto Rico, U.S. Virgin Islands, Guam, 10 Canadian provinces and Mexico.  In fiscal 2012, The Home Depot had sales of $74.8 billion and earnings of $4.5 billion.  The company employs more than 300,000 people.

Source: Retailing Today

Home Depot To Invest In Tech And Supply Chain Upgrades

December 12, 2014

The Home Depot reportedly plans to invest $300 million on technology and supply chain upgrades during its fiscal year 2014, which begins in February 2014.  According to the Wall Street Journal, the results will include three new fulfillment centers in California, Atlanta and Ohio by 2016, as well as same-day shipping for some online orders.

The new centers will dramatically increase the number of orders the chain can ship the same day they are received, which significantly expands the number of orders it will be able to deliver within two days or less.  With this same day shipping capability, these centers are geographically positioned to leverage parcel freight carriers' networks to deliver 90% of customers' parcel orders within two days, using economical ground service.  For example, when the network is complete, most customers will be able to order on a Wednesday by 5 p.m. with the product delivered by Friday, according to Home Depot.

Home Depot's total sales are expected to reach $79 billion during fiscal 2013, aided by a boost in online sales.  Other new programs for the upcoming fiscal year may include expanded in-home assembly and installation services.

Source: Retailing Today

NRF Leads Fight Against Unfair Trucking Regulations

The National Retail Federation joined a coalition of manufacturers, shippers and transportation providers opposing new federal trucking regulations on drivers' hours of service.

"The retail industry is at the crossroads of the supply chain, interconnecting manufacturers and suppliers with vendors and customers," NRF president and CEO Matthew Shay said.  "It is the retail industry's responsibility to get products to market and into consumers' hands in a safe and timely manner.  It is a responsiblity that we hold dear.  Any new regulation that impedes that ability increases our transportation costs, increases consumer prices, and jeopardizes the fragile economic recovery."

The joint brief challenges the Federal Motor Carrier Safety Administration's new hours of service regulations.  The new rules require mandatory and specified truck driver work breaks, rest periods, and changes the existing 34 hour restart period to include consecutive nights off.  NRF had previously filed comments with the FMCSA during the rulemaking process to express the retail industry's concerns.

"The Administration failed to take into account the serious economic ramifications faced by the broader supply chain community when drafting these rules," Shay said.  "NRF believes that the new requirements will only drive up costs, make trucking less safe, increase congestion, and ultimately hurt job growth and the economy.  Any change in supply chain policy should be based solely on science and fact."

Source: retailingtoday.com

Using Retail data for Forecasting Demand and Merchandising Planning

Many vendors have started to using EDI 852 data or retailer portal data for sales and retail merchandising, but so far, only a few are using EDI 852 data for forecasting of demand.  But the reality is, vendor inventory at stores is often too low to meet demand and the rates of out of stocks have been increasing. It’s not a big surprise that retailers are maintaining less inventory in stores in this retail environment; the cost of excess inventory is simply too high and open to buy dollars are at an all time low. But with proper forecasting of demand, a vendor can help the retailer to better manage inventory and avoid out of stocks. The great benefit of EDI 852 for merchandising planning is that it is store/SKU level data. Since a typical retailer is forecasting demand at a category and market level, the variability in the rate of sales among stores in a market can be large.

A more accurate model for forecasting of demand is to start at the store/SKU level, calculating an average rate of sale for the store/SKU and then based on the inventory on hand at that store, a weeks of supply. When the weeks of supply for a store/SKU has been calculated, the vendor can compare against the lead time to replenish the store and work to put a true demand driven supply chain in place. This model, while more intensive for the vendor to manage, usually creates a far different picture of inventory needs than simply market level min/max replenishment.

Manufacturing Indicators Rise Sharply

The quarterly Manufacturers Alliance just released their survey of manufacturing indicators and the results are very encouraging. The composite index rose from 57% to 78%, which is the highest reading registered since the June, 2004 survey. New orders, backlog and shipments are improved.

Read the full survey results http://www.mhia.org/news/industry/9709/manufacturers-report-significant-improvement

Supply Chain Analytics: Challenges and Solutions

Retailers and vendors in today’s retail market face the unenviable challenge of reducing costs and maintaining margins, despite falling overall sales and slow-to-recover consumer demand. One of the areas in which retailers are pushing back onto vendors is inventory management, which for vendors too often translates into retail partners that reduce overall inventories and require tightened delivery deadlines.  Retailers view the supply chain as one of the key places in which costs can be reduced—or better yet, passed off onto someone else—as a means of keeping shareholders happy despite reduced POS sales.  Wal-Mart continues to set the pace in this area, reducing its overall inventories across the board, reducing its brand assortments[1], adjusting its purchasing methods[2] and imposing tough penalties on those that miss their Must Arrive By Date (MABD).[3]

Thus, the impetus has fallen to vendors to manage their supply chains more efficiently, so that the cost-savings being realized by their retailers’ inventory adjustments might trickle down to them as well instead of becoming a proverbial albatross.  And while the “glass pipeline” may remain elusive, industry experts postulate that, “Visibility of supply chain costs have never been better.”[4] Since, then, there remains continued pressure on everyone in the industry to reduce costs, there exists an opportunity now to address supply chain optimization unlike any time before.

As in all such processes, the first step in addressing this optimization is identifying the major challenges, which, while not simple by any means, can be boiled down to three major focal points:

1. Reduce supply chain costs
2. Improving the responsiveness of the supply chain
3. Managing demand volatility and Variability[5]

From an IT perspective, there are things that can be done with the data already being generated or received by most companies (even small ones!) to address some significant portion of each of these.

Reducing Supply Chain costs

While the operating costs of a supply chain are often the easiest numbers to point to, and the most difficult for IT to address, there are data sources that can be leveraged to reduce costs.  For example, purchase orders, shipping data and RTV (return to vendor) data is either generated internally or is received from retail partners (sometimes in a very straightforward EDI 812 document).  Unfortunately, for many companies, these data sources come from disparate business systems and are stored in multiple locations, so tracking a single PO from the time the order was received through the supply chain to its delivery at a store or in a DC, is an arduous task requiring proficiency in Excel and fraught with the potential for human error.  Further, when compounded by the volume of orders received that many vendors keep up with, the task of tracking becomes futile, since the actionable information it generates rarely is identified in time to take the given action, but rather is often merely a confirmation of what has already been made known by the retail partner that fined the vendor the late delivery or shorted pallet.  Thus, the lost efficiency of the analysts and the fees assessed by the retailers become additional costs in too many cases, and analysis of this data is simply not conducted.  However, those vendors that are able to aggressively track this data and address issues that may arise in a timely manner, can avoid fees and improve their relationships with their retailers.  Unfortunately, upper management often struggles to see beyond the concrete costs figures and consider these less concrete, but no less important opportunities for increased revenues or avoided fees.

Improving Responsiveness and Managing Demand Volatility and Variability

The delayed turnaround inherent in the difficulties discussed above relate directly to improving the responsiveness of the supply chain.  That is, supply chain utilization must address two areas of responsiveness:

1. Responding to existing issues
2. Responding to potential issues

Existing issues, as already discussed, are difficult to ID, due to the disparate sources of data and the corresponding amount of time it takes to collate the information and determine what issues actually exist, since addressing existing issues is time-sensitive.

Potential issues are no less difficult, since these are often identified by considering all the aforementioned data sources and then including additional data sources such as POS data (from which forecasts are derived).  Mike Griswold, VP Retail for AMR Research, says, supply chain optimization “involves better forecasting methods and moving away from looking at warehouse shipments and toward POS and online sales data.” He goes on: many vendors fail to utilize POS data effectively for addressing supply chain issues because “it’s easier to get your arms around warehouse shipments because you’re dealing with weekly or twice-weekly sources of data.  When you get to POS, you’re getting down to day-level granularity for items and stores, and creating a forecast for three or four weeks out requires a fair amount of processing power.”[6] Of course, Griswold qualifies his position—forecasting based on POS and other data sources isn’t the final step.  “Retail is not designed to be an inventory holding area,” he says. “You may [get] an order for 1,000 televisions to be deployed across 100 stores, but not every store can handle 10 of each item.”[7]

Thus, forecasts must be based on actual POS historical sales, current trends and other considered supply chain factors, and tempered by the limitations of the stores for which the forecasts are generated.  Retailers provide a shelf-space and assortment designation (called plan-o-grams, modulars, sets, etc.) for most vendors which allows vendors to consider these factors when filling orders, and combined with their own warehouse quantities and capacity, now a very comprehensive and useful picture emerges, from which one may then deduce those potential issues and act to address them, instead of reacting after they become a time-sensitive emergency.

How Accelerated Analytics® Can Help You Optimize Your Supply Chain

Unfortunately, University of Pennsylvania professor of Operations and Information Management Marshall Fisher says, the industry trend for vendors faced with the decision to have too little inventory and lose sales or have too much and be forced to liquidate, leans toward the former. “Most companies are just moving along with less inventory. They are downsizing to meet less demand and accepting higher stockouts. The risk of a lost sale is smaller than having lots of unsold inventory.”[8]

But, what if you had an integrated database solution that tied all of the disparate sources of data together into a single source of truth, from which actionable decisions could be made on timely, comprehensive data? Accelerated Analytics was first a business intelligence (BI) company and its expertise in BI solutions can be leveraged to create such an integrated database behind the Accelerated Analytics® interface, creating a powerful, yet user-friendly tool, that business users need and which management can understand.

Advantages offered by Accelerated Analytics®:

• Integrated database to tie together all your data sources (P.O. files, Shipping documents, POS data, Plan-o-gram files, and more!) in a single location from which may be derived a single source of truth.
• User-friendly reporting solution which provides rapid access to any of the data in the system and reduces the overhead normally associated with the collation and calculation of data
• Exceptions reporting to identify shipping delays, stockouts, etc. automatically as often as required.
• Proven forecasting methodology to generate proactive forecasts based on actual sales and inventory information

[1] Reda, Susan. "With SKU Reductions Under Way, Which Will Survive?" Stores.  http://www.stores.org/Merchandising/2010/03/cover.asp. March 4, 2010.

[2] Birchall, Jonathan. "Walmart Aims to Cut Supply Chain Cost," Financial Times. 3 Jan 2010.
[3] Cassidy, William. "Wal-Mart Tightens Delivery Deadlines."  The Journal of Commerce. http://www.joc.com/node/416490. 8 Feb 2009. 
[4] Lewis, Len.  “Delivering the World: Navigating obstacles in pursuit of global supply chain optimization.” STORES Magazine. http://www.stores.org/SupplyChain/2010/02/cover2.asp. February 2010.
[5] Based on the results of a Supply Chain Leaders’ survey conducted by IGD, a London-based consultancy.  Lewis, Len.
[6] Lewis, Len
[7] Lewis, Len
[8] Lewis, Len

BI in the Supply Chain

I read this very good article yesterday and wanted to share it. 

Business Intelligence and Performance Management Rising to the Top of the Supply Chain Executive’s Agenda

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By Viktoriya Sadlovska and Nari Viswanathan
 
In the context of today's complex demand-supply networks, in which visibility into key performance indicators across the entire network is key to business success, companies have begun focusing more strongly on their supply chain Business Intelligence (BI) capability, as a key enabler of strengthening or regaining control over their supply chain networks. Focus on supply chain BI will remain strong in 2010, contributing to operational and strategic supply chain improvements at the top-performing companies. 
 
The only way to ensure that a business is able to adapt to changes fast enough is to establish an adequate level of supply chain intelligence, i.e. put in place processes and tools to effectively monitor supply chain performance and notify specific process owners and managers before problems turn into disruptions. These capabilities should not only serve as each supply chain's operational "command and control" center, but also help uncover new revenue and savings opportunities with the help of advanced analytics.
 
In order to successfully monitor, capture and analyze performance data in a complex supply chain, top-performing companies across industries have implemented a series of capabilities and software enablers to help them in managing this mass of information. Having a supply chain business intelligence technology that is designed to integrate data and event flows across the broad array of departments, functions and roles within the global enterprise is an advantage versus an infrastructure that is not designed with such robust connectivity and functionality. A company needs to be able to integrate information across internal and external groups and trading partners and enhance collaboration and agility during tracking and responding to the myriad of supply chain events.

Dashboards and Scorecards
Multiple Aberdeen research studies have shown that Best-in-Class companies are more likely to use internal dashboards to measure supply chain performance, and external scorecards to measure their supply chain partners' performance. Scorecards help companies formalize the evaluation of supply chain partners’ performance in order to improve the supplier and services provider selection process, potentially adopt performance-based incentive programs, and improve overall supply chain partner relationships.
 
It is important to ensure the adequate quality of the data feeding the above-described systems. Even if information is timely, it is worth nothing if it is inaccurate. In Aberdeen Group’s recent study - Supply Chain Intelligence: Adopt Role-Based Operational Business Intelligence and Improve Visibility - Best-in-Class performers dedicate a lot of effort to making sure that the data exchanged is accurate and complete, which enables them to make the right decisions for their supply chain. Best-in-Class performers in this study are 85% more likely than all others to report that data obtained during supply chain monitoring is accurate over 90% of the time (48% versus 26%). Some solution providers offer their customers help in cleansing the data, or even embed the data cleansing capability into the systems.
 
In the same study, when asked how companies planned to improve supply chain visibility software capabilities, responses included:

• Improve data quality and timeliness of status messages - 66%
• Enhance analytics capabilities - 56%
• Add warning alerts if actual events deviate from plan - 46%
• Incorporate additional status events - 40%
• Increase the number of trading partners providing status information - 40%
• Add escalation policies to help manage alerts - 30%
  

Best-in-Class respondents were 21% more likely than all others to focus on improving the analytics capabilities. Supply chain analytics (e.g. dashboards showing on-time versus late shipments along with detailed shipment information, charts and graphs with information on current shipment location and accumulated landed costs) are contributing to more effective decisions, improving both the quality of supply chain decision-making and time-to-response.
 
As a result of superior process and technology capabilities, coupled with a stronger focus on data quality and timeliness, Best-in-Class companies are between 19% and 42% more likely to respond to non-catastrophic supply chain disruptions within hours. The biggest differentiation is on the international inbound side: 51% of the Best-in-Class report this ability, versus 36% of all others. This means that if, for example, a shipment gets held up at a foreign port, they will be notified of this delay within hours and will not miss the opportunity to re-plan the route or resolve the issue fast enough to have the cargo shipped within the acceptable time window.
 
Companies need to obtain appropriate tools for tracking and managing network-wide supply chain performance and collaborative workflows. Network-wide supply chain intelligence paves the way for companies to have the most complete view of their business, including the potential impacts of their customers, suppliers, and other partners' performance on the company's bottom line. With such a 360-degree view of the business, executives can adopt the best supply chain strategies to meet the changing business needs.
 
The benchmark report Supply Chain Intelligence: Adopt Role-Based Operational Business Intelligence and Improve Visibility is available for free download for a limited time. Click here to download before April 23, 2010
 
Viktoriya Sadlovska is Researcher, Product Value Chain Benchmarking & Analysis at Aberdeen Group. Nari Viswanathan is VP/ Principal Analyst, Supply Chain Management at Aberdeen Group.

Calculating Weeks of Supply

A metric fundamental to managing the retail supply chain is weeks of supply (WOS). Weeks of supply tells the inventory manager how long the current on hand will last, based on current sales demand.  By keeping your eye on weeks of supply, you can avoid inventory stock outs and lost sales.  The basic calculation for weeks of supply is pretty simple: on hand inventory/average weekly units sold.  However, our work with vendors demonstrates that calculating an accurate and useful weeks of supply can be anything but simple.  Let me explain.  An EDI 852 document will provide units sold and on hand.   Very few EDI 852 documents provide data for inventory on order, inventory in transit or inventory in the warehouse.  More sophisticated systems like Wal-Mart’s Retail Link will provide the additional inventory data.  So ,the first issue an analyst working only with EDI 852 must overcome is to gain a complete picture of the inventory in the supply chain – all the inventory.  If you are working with a Home Depot 852 or a Lowe’s 852, you must also gather your purchase order and shipping data, so that you have the ability to understand on order and in transit inventory.  You must also decide how to apply inventory in the supply chain.  That is, will you sum on hand + on order + in transit  to use as the numerator in your calculation?  Or, perhaps you would prefer to ignore the on order due to long shipping lead times and use on hand + in transit. 

The next consideration is, how to calculate the average weekly units sold which is the denominator in the weeks of supply calculation. This requires some careful consideration.  If the number of weeks used to calculate the average is not selected correctly, you will arrive at a misleading result.  Consider, for example, the sales for two vendors, as seen in this chart.  One vendor has products which are non-seasonal and tend to have very steady and consistent sales.  The other vendor has products which are seasonal and sell much higher in the warm spring and summer months.  When choosing the number of weeks for calculating the weeks of supply, you want to consider the rate at which your demand changes.  If your demand is fairly steady, like the non-seasonal vendor, a larger number of weeks can be used.  If, however, your demand tends to change rapidly, due to seasonality or based on some event like selling licensed apparel during football season, then you should choose a smaller number of weeks.  Our experience shows that a seasonal vendor should consider a four week window of sales demand and a non-seasonal vendor should choose 8 to 10 weeks.

The final point to make about calculating weeks of supply, is to consult with your retail buyer on the period of demand they are using.  If you are using four weeks, and they are using six weeks, you will arrive at different order quantities.  By discussing the calculation, you may find that your method is more accurate or you may find that the retailer has good reasons for their method.  If you still feel your method is more accurate, then calculate weeks of supply using both methods and track the accuracy over time.  This will provide you with the factual data to either change your calculation method to align with the buyer’s, or demonstrate to them why your calculation is more accurate.

Retail Replenishment - How tuned in are you?

I spent about 9 hours yesterday analyzing sales, order and forecast data for Walmart, Home Depot and Lowe's vendors, and I am somewhat surprised by my observations.  It's pretty clear that there are some min/max rules in place, as I can see patterns to the order quantities based on the OH inventory and the order case pack quantities.  However, what surprises me is that I also see a large number of what I would guess are "manual overrides." That is UPC/stores which clearly need inventory and fall under the minimum OH of other stores, but which do not have an open order, and UPC/stores that are clearly overstocked (e.g. high WOS), and yet have an open order.  It makes sense that there would be automated replenishment rules in place and then some lead-way for the buyer/replenishment manager to make judgment calls, so that leads me to my question....

What do you know about your key retail customer's replenishment rules?

• Simple min/max ordering?
• Based on OTB dollars?
• WOS trigger?
• At what level is demand calculated?  e.g. Category/Region, Category/State, Sub-category/State
• Under what situations will the buyer do a manual override?

Store Level Merchandising Analysis Using EDI 852

The following is a step by step process to aid replenishment vendors in identifying stores on an item level basis, that are losing sales due to inventory stock outs or inventory that is present but unavailable for sale.  Such unavailable inventory may include lost or damaged items or items on the shelf but not available to the customer for any of a variety of reasons.  This process assumes that the vendor is receiving accurate and detailed EDI 852 Product Activity Data (or POS data via Retail Link or Partners Online, etc) on no less than a weekly basis from their retailing partners.  This article will focus on identifying and addressing underachieving stores. 

Step 1
The vendor will calculate average weekly sales velocity (Avg WS) at an item level across all stores.  This is best calculated using the most recent twenty-six weeks of sales.  Thus, for a given item, the calculation would be:

            Sum(last 26 wks. unit sales) = Avg WS
                               26

Step 2
Calculate the average item sales velocity (Avg WS) for each item for all stores for the last ten weeks of sales.  For each item, look at the last ten weeks of unit sales at the store level and separate the items by store into five categories.  For ease of identification, label these categories A-E.  The categories are as follows:

A.  Most recent two weeks of sales.

• Stores with sales in the last two weeks for any given item will fall into this category

B.  Most recent four weeks of sales.

• Stores with no sales in the last four weeks for any given item will fall into this category

C.  Most recent six weeks of sales.

• Stores with no sales in the last six weeks for any given item will fall into this category

D.  Most recent eight weeks of sales.

• Stores with no sales in the last eight  weeks for any given item will fall into this category

E.  Most recent ten weeks of sales.

• Stores with no sales in the last ten weeks for any given item will fall into this category

The total percentage of sales of any given item for a given category can be accurately calculated by dividing the number of stores per item in any category by total stores (TS). 

            Total Stores in a Category  = % each category is of the total
                         (TS)

This percentage calculation is a better, more accurate way to judge relative performance of each category than by comparing unit sales.

Identifying & Addressing Underperforming Stores
The remaining article focuses on underperforming stores, that is, stores that fall into categories D or E.  Now that you know how many stores are in categories D or E, go back to the list of items and the last 10 weeks of sales, and identify what store numbers are present in the bottom two categories and not in any of the other categories. These stores are stores with no sales in the past 8-10 weeks.  Pull the current inventory on hand for each store.

Out of Stock Stores
Stores with no sales and zero inventory on hand are most likely out of stock stores.  Vendors will want to identify the last week that a given store recorded a sale for a given item in categories D-E.  The vendor can then estimate lost sales by unit for that item/store combination by multiplying the number of weeks since the last sale by the average weekly sales (Avg WS) calculated in Step 1.

            (Avg WS) *[Sum(weeks w/o sales)] = Lost sales by unit due to stock-out (LU)

Lost sales by unit (LU) can also be multiplied by the price of the item to determine lost sales in terms of revenue (LR).

            (LU) * (price of given item) = LR

Inventory stock-out problems are typically due to one of two things: Inaccurate inventory replenishment reorder points or inventory availability issues on part of vendor.  If that item was out of stock due to high reorder quantity, then a vendor can contact the replenishment manager at the retailer responsible for the underperforming store(s) and suggest changing the inventory replenishment set point, using lost revenue (LR) as the rationale for the recommendation.  This exercise can be performed for all item/store combinations that had few or no unit sales for an 8-10 week period (categories D-E) and showed no inventory on hand.

Stores with Inventory on Hand, But No Sales
Some of the stores are going to reflect no unit sales in the past 8-10 weeks, but still have on hand inventory. This typically indicates inventory which is misplaced, lost, stolen or stock on the shelf, but out of view of the customer for whatever reason.  It may also include damaged inventory and inventory otherwise unavailable for sale.  In this case, the vendor would contact the retailer and investigate the problem.  The inventory replenishment system from the retailer will not release an order for new merchandise until the vendor visits the store directly or contacts the store manager to investigate the problem and demonstrate that the product is not available for sale.  It is useful, when contacting the store manager, to know the date of the last unit sold.  This date, and the average weekly unit sales (Avg WS) calculated in Step 1, will indicate to the store manager when a sale should have occurred.  That is, if, on average, a given item is sold every other week, and 8-10 weeks have passed at a given store without a sale despite recorded inventory on hand, this is indicative of a problem, since 4-5 units should have been sold during that timeframe. 

Business Rationale for Store Level Merchandising Analysis
Conducting a store level merchandising analysis can be a time consuming effort for a vendor.  Many vendors have trouble rationalizing the expense, especially vendors with very good in-stock rates.  But, even a vendor with an in-stock rate of 98.5%, still has 1.5% of stores out of stock.  In a typical 3,000 store chain, this could represent as many as 45 stores out of stock.  If those stores averaged just one unit sold per week, that translates to as many as 2,340 units of lost sales per year.  Since this represents only a single item, and out of stock stores typically are out of multiple items and average significantly more than one unit sold per week per item, this vendor is looking at hundreds of thousands, or potentially, millions of dollars of lost revenue (LR) per year, despite a very high in-stock rate of 98.5%.

Resources:   Whitepapers on SKU Sales Analysis, Store Analysis, Out of Stock Analysis and SKU Forecasting are available.  http://www.acceleratedanalytics.com/download-whitepapers/

Walmart Tightens Delivery Deadlines

Walmart’s new “must arrive by date” ratchets up supply chain pressure on vendors, shippers and carriers.

Like most shippers, Walmart Stores is looking for a delivery guarantee from its suppliers. Unlike most others, the world’s largest retailer now is demanding one. While many retailers were scrambling last week for any space they could find out of Asia, Walmart implemented its strongest delivery requirements yet on suppliers in the United States, imposing new deadlines for getting goods to distribution centers as well as tough penalties on those that miss the mark. As of last week, U.S. companies shipping goods to Wal-Mart distribution centers must begin to deliver within a four-day window leading up to a “must arrive by date,” or what the company calls its MABD. The requirement will initially apply to suppliers shipping prepaid and truckload freight to Walmart DCs.

What action’s can you take if you are a Walmart vendor? We have started conversations with vendors about how to integrate together various Retail Link data with the vendors purchase order and shipping data, to create exception based reports to show them when they are in danger. The key to not getting hammered by fines is going to be careful management, and with the high volume of orders and shipments many vendors have with Walmart, careful exception based reporting is key.

Retail sales improvement requires careful forecasting

The WSJ reported retail sales Rose 3.3%, showing signs consumers are returning to stores.  This is a great sign for the retail market as it seems a turnaround may be in the works.  Macy’s posted a 3.4% increase, Saks reported 7% and Costco 8%.  As demand begins to increase, vendors need to keep a careful eye on the supply chain.  Retail buyers have been operating on low open to buy for over a year, so inventory levels may be below where they will need to be to satisfy demand.  Vendors using EDI 852 data for forecasting need to make some careful adjustments to their forecasting model to not be caught by surprise.  Here’s why.  Forecast models use historical demand as the foundation for current year predictions, but last January was a terrible month for retail sales, so a simple look at comp year demand will give a misleading result.  To correct for this, vendors should be considering not only last year’s demand, but also the prior year’s demand and the current period trend.  By combining these three numbers, vendors will have a more accurate model and hopefully not get caught by surprise.  But even with a good forecast, we expect sales to be unpredictable for the foreseeable future, so vendors must carefully watch demand and inventory levels by analyzing the EDI 852 data weekly or even daily and making push order recommendations to their buyers.