Reducing Retail Stock Outs

Stock outs are a serious problem.  Research has shown stock outs average 8%, but can be as high as 40% on promoted items.  So, retailers and vendors are losing up to 40% of their potential sales on some items.  The financial impact is often exasperated by an overly large order to compensate for the back-order of demand and, the retailer hopes, add some safety stock.  This of course just compounds the problem by increasing inventory costs and reducing GMROI.  Maybe worst of all, research shows when consumers are faced with an out of stock situation they will continue purchasing the items on their list but go elsewhere to buy that lost item.  If the out of stock happens a second time, they are likely to change retailers.  If it happens one more time, they are likely to change brands all together.

Here are some steps that can be taken to reduce stock outs:

1. Use a data analysis tool to proactively monitor POS data on fast moving items.
2. Use a data analysis tool to calculate min/max on the longest time series of data possible, and be sure to account for geographic variances.
3. Coordinate your promotions internally, and among your supply chain.
4. Assume new product introductions will create an inventory problem and plan accordingly.
5. Leverage the experience of your vendors by empowering them to analyze sales and inventory data.

Next Article: Increasing Sales By Managing Out of Stock Inventory

Price Elasticity

Show of hands, how many of you know how to calculate price elasticity?  Well, if you are like me, you know the general concept but the math is a bit rusty.  So here is a quick and dirty refresher.

Price elasticity is a measure of how demand for a product is influenced by price changes.  This measure can help determine whether to change the price of products by calculating what effect price changes have on the quantities customers purchase.  Price elasticity can help to answer questions like:

If I increase my unit price by 20%, how much unit sales volume will I lose?

If I lower my unit price by 10%, how much unit sales volume will I gain?

To calculate the price elasticity (PE)

PE = [(Q2-Q1) / ((Q1+Q2) / 2 )] / [(P2-P1) / ((P1+P2) / 2]

Where Q1 = initial quantity; Q2 = final quantity; P1 = initial price; P2 = final price

Understanding the calculation results

If the PE > 1 the product is relatively elastic.  An increase in price would result in a decrease in revenue, and a decrease in price would result in an increase in revenue.

If the PE < 1 the product is relatively inelastic.  An increase in price would result in an increase in revenue, and a decrease in price would result in a decrease in revenue.

Making Data Come Alive

A picture truly is worth a thousand words...especially when you are analyzing data.  Which would you rather have? A spreadsheet with a thousand SKU's showing sales and gross margins or a picture that instantly tells the story?  If you have spent hours analyzing data in Excel, you probably have a strong preference.  When we work with business users, they are amazed at the way our Accelerated Analytics software can show them a picture of what is happening in their business.  We are always amazed they don't already have this technology.  The next time you have to conduct a complex analysis, consider how a picture like this would make your life a hundred times easier.

 

The Perfect Order

The perfect order is a very useful measuring stick for the retailer and manufacturer to measure performance.  According to AMR Research, "the perfect order is the ability to produce orders that are complete, accurate, and on time."  Research estimates a 3% improvement in perfect order performance will increase profits by 1%. 

Elements of the perfect order

• On time
• Complete
• Damage free
• Accurate documentation

Calculating the perfect order

Many organizations multiply together the scores for each element to calculate a composite score.  Therefore, if pick accuracy is 99.2%, on time delivery is 97.2%, shipped without damage is 98.7%, and 99.8% are invoiced correctly, the perfect order measure would be 94.9%. 

The perfect order provides a single value key performance indicator (KPI) which can be easily measured.  It's like a stop light - red, yellow, or green.  You immediately know how your organization is performing.  Managers should be careful, however, to review each individual element to have a complete and accurate view of performance.

The ability to sense and react to demand is a key driver of perfect order performance.  Which is why more and more vendors are asking for POS and inventory data from their retail customers, so they can better understand demand with as little latency as possible.

Which came first, the chicken or the egg?

Many times, when I talk to retailers about sharing data with vendors, I hear some version of "Well they are not asking for it," or "only if they can show me how they will use it."

It reminds me of the classic quandary...Which came first, the chicken or the egg?

Or in this context... which comes first... the retailer offering to share data, or the vendor requesting data?

Innovative leaders in any industry are always optimists.  They are the ones that don't wonder if a vendor will use the data or how, they wonder how big of an improvement in sales can happen by even one good decision.  They wonder if they can get another couple percentage points closer to the perfect order by sharing data.  What would happen if vendors were empowered to be category captains and proactively helped to manage in-stock performance?  What if they really analyzed POS data in the way your internal team does?  They don't know the answers.  But they are optimistic about the opportunity.  They do some research, learn others have had success, determine the risk is low, and take a step forward.

Notice I said leaders are optimists, not fools.  I own a business.  I understand the realities of limited resources and prioritizing a portfolio of possible projects.  But given the abundance of research on the benefits of sharing data with vendors, this project falls solidly in that coveted upper right quadrant.  If you don't belive me, google ECR, DDSN, or CPFR and read the case studies.

So how does one insipre a VP of Merchandising, or Supply Chain, or Purchasing to take that first step?  How do you position the WIFM?

Benefits of Collaboration

The benefits of optimizing the retail supply chain using better demand planning and collaboration with suppliers are well documented. Studies of retailers by the Harvard Business, Grocery Manufacturers Association, National Retail Federation (NRF), and AMR Research show results of 15% less inventory, 17% better perfect order performance and 35% shorter cash-to-cash cycles.  

Documented benefits include: 

•  Relationships with trading partners: 57% improved 
•  Stock outages: 38% reduced 
•  Sales: 38% increased 
•  Inventory: 29% decreased 
•  Forecast accuracy: 38% Improved 
•  Internal communications: 24% improved 
•  Asset utilization: 14% better

Compelled to blog

Hello.  Nearly three years ago I started a technology service organization called Accelerated Analytics (www.acceleratedanalytics.com) with a simple mission....help organizations better use the data they have in their computer systems to drive business success.  To accomplish this objective, I designed and am currently seeking a patent on a software application, for retailers to send point of sale and inventory data to their vendors.  This data sharing process has been growing in popularity in the last ten years as organizations like VICS, AMR Research, Harvard Business Review, and many others have been educating retailers and vendors on the benefits of close collaboration.  As I have traveled and met with various retail executives, I have been disappointed by how little collaboration is actually occurring.

So, I have felt compelled to setup my own little area in the blogosphere to educate, excite, and hopefully encourage retailers and their vendors to take advantage of this tremendous opportunity.  Stay tuned... I plan to chronicle the successes of as many organizations as I can.  I hope many of you will contribute, so together we can all drive more collaborative success.