Monday, May 28, 2012

Automated Store Replenishment – Volume II

Theoretical Sources of Out-Of-Stocks


In my book, “Retail is Detail,” I quoted a conversation in which Dee Biggs, Director of Customer Logistics at Welch Foods was present. Mr. Biggs said, “The industry needs some type of third-party company that identifies out-of-stocks with the aid of the retailer, and then finds solutions to get the item back in stock … Currently, the stores don’t have enough people to do this effectively… There needs to be a new entity that focuses on helping to resolve these issues at the store. The key issue is RETAILERS DO NOT HAVE ACCURATE PERPETUAL INVENTORY SYSTEMS, so store ordering can be difficult and lead to ordering the wrong items.”

The keyword here is “Accurate”. Accuracy is far from being an absolute, and accuracy, with regards to units of inventory, is affected by the range of time-periods between counts, with its value increased with the frequency at which the samples are taken.

 The ‘value’ of accuracy, when viewed in a graph, with the peak of the curve representing the epitome of accuracy, is directly proportional to the frequency and the quality of the counts. At some point in the far, distant future, radio frequency identification (RFID) will make it possible for a computer to scan the entire store in one-second intervals and count the number of items with the highest degree of accuracy imaginable. However, until that time has come, the best we can do is try to lessen the time-period with the tools at hand in the best way we can.     

The Mathematical Approach

Experts tend to agree that a purely mathematical approach to inventory management is impractical. Many factors, such as Logistics and Operations Management cannot easily be included in algorithms. For example: On average, out-of-stock situations for all retailers have lessened from 1960s levels of 12.2% to more recent levels of between 7-10%. Why? No doubt, we are required to give technology much of the credit for the improvements in out-of-stocks. Prior to the early 70s, electric adding machines and paper Gannt charts were the analysis tools of the day, so it only stands to reason, as technology evolved, so did the decline in out-of-stock situations. Other factors such as changes in management techniques and new ideas, which could not have occurred in a more primitive environment, have had its effect on practically everything we do. 

The topic of Supply Chain Management (SCM) is receiving a great deal of press these days and addresses not only inventory levels, but also departments within organizations and relationships with customers and suppliers both inside and outside the enterprise. The idea that a product should magically appear on the shelf the instant a consumer reaches for it is pure folly. A supply chain does not work this way. There are now, and always will be hiccups and delays both up and down the line.

Everyone agrees an attractive, full shelf draws the attention of the consumer making a purchase more probable, but it plays havoc on the efficiency of the supply chain. The age-old argument that the advantages of overstock override the cost of carrying excess inventory will come to an end as the enormous value of having the right amount of stock proves otherwise. Sometimes ‘foolish’ management decisions are in the eyes of the beholder. However, problems such as this should and must be resolved. Can we have the best of both worlds? You bet! And as we move farther into this discussion I will show you how.

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