For fifteen years, information systems have taken a leading role in the management of flows: ERP communication and collaborative approaches between manufacturers and retailers (SSM and now GPFR) have become the industry standard. Even better, stocks are now controlled on the basis of actual consumption (VMI), completely relieving the sales areas of responsibility of supplies. Yet despite all these developments and associated investments, the Out Of Stock (OOS) rate recorded on shelf stock barely drop below 8%. Are we facing a structural OOS rate? Can we go further to improve the product availability? Traditional retailers are asking the question more than ever at a time when, to deal with increased competition from online distribution, the answers are to provide a wide range of products with immediate availability.
In 2011, a study by the ECR concluded that the average rate of actual product availability in large retailers was less than 90%. This figure surprised many France no exception. Studies conducted in the United States have come to similar conclusions, averaging 8% OOS on shelf (Corsten and Gruen 2003). Even more astonishing, this figure varies very little when you factor is investments for tools and technology. In 2008, a report commissioned by the Coca-Cola Company reported an OOS of 8 to 9% ... the same rate that had been recorded 12 years earlier.
Remobilizing Store Teams on Supply Chain Issues
We are very far from the service rate known in the industry, in the warehouses of the same retailers that show an average 99% of product availability. How do we explain and reduce this gap?
The first challenge is to align Supply Chain and Sales with this finding. Indeed, when we ask store managers about their product availability level, they typically announce figures that are far removed from the reality on the shelves. The OOS rate is usually underestimated, and even more the loss of associated revenue because store managers are assuming sales will almost systematically be captured by other products. A survey conducted by Danone showed that in nearly half of cases, the client preferred to do without the product or buy it via a competing brand. In defense of store managers, few Supply Chain reporting guidelines incorporate this concept of “On-Shelf Availability”. Indicators often only cover the platform availability and delivery lead time in store. But what about the actual customer service? If one agrees that the role of Supply Chain is to deliver the right product, at the right time, in the right place, the performance indicators should focus on the one place where the goods are really needed -- the shelf. Yet OSA ("On-Shelf Availability") is an indicator rarely included in the Supply Chain vocabulary for retail.
Failing to be measured by the Central Supply Chain, OOS products in stores are often relegated to (anecdotal) field surveys performed by the sales teams. This process, which has the merit to exist, however, has two major limitations:
It is not possible to calculate the real OOS rate of the store, for the following reasons:
- These relatively time-consuming surveys cannot be conducted on 100% of the store’s inventory.
- Made at a predefined frequency, it gives only a static view of OSS but does not allow you to understand the duration (or circumstances) between each review.
- Finally, usually performed in the morning, at off-peak time rush and often just after replenishment, they cannot be considered reliable. Client traffic usually follows a "camel hump" curve (see illustration below), with increased traffic in the late afternoon. Thus, OOS products in the afternoon potentially represent a higher loss of turnover figures for distributors than those identified (and corrected) during the morning.
The second major limitation we see is that these OOS surveys are undermanaged and underutilized.
During this operation, the store employee will strive to optimize the presentation of the shelves, and potentially to verify the presence of the product in the storage area. With our clients, we work with operational teams on the development of a simple diagnosis & resolution tool to help them utilize the information system to localize the goods. From there, we can easily understand and deal with the root cause of OOS products. This analyses often concludes that the central supply-chain is responsible for many of the failures.
Build a Field Action Plan
Empirically, it is found that 50 to 60% of OOS on-shelf depend directly on store operations, the remaining portion being connected to the upstream supply chain (suppliers / platform failures).
Among the errors attributable to the stores, listed are those which occur most frequently and which must be better managed:
- The theoretical stock is wrong, thereby preventing replenishment triggers
- The quantity on shelf is not properly aligned / set-up (facing and depth)
- And finally, a well-worn subject but that still represents a potential improvement for retailers, the product is in the storage area but it did not make it to the shelf.
This year we worked with a chain of hypermarkets where stores complained of a malfunction in their automatic ordering system. The conclusions of the on the ground analysis confirmed this rule (see below the summary of the causes of observed failures):
It's a fact: products often travel thousands of kilometers without any problem, to then get lost in the last meters in-store. The goods and information flows are under control until they enter the storage area – which is where store organization needs to take over.
- What Operational Solutions can be Undertook to Avoid these Problems in Stores?
Some retailers, with the support of manufacturers, develop tools to encompass the shelf in their global vision of supply flows. RFID is the most acclaimed. A survey conducted in October 2015 with professional retailers confirmed that 63% of interviewed companies were investigating RFID as a solution or already deploying it as a solution. However today, the solution is deployed in only 6% of organizations ... So from here to have an RFID chip on every product, what we do?
It would be unrealistic to base the improvement of customer service only on the technology. For example, electronic tags that incorporate logistical information (available stock, work in progress...) have not had a significant impact on product availability. While access to information is faster, it’s utilization is still necessary in order to know how to use it more effectively.
It is therefore necessary to work with operational teams to develop an efficient information processing system.
Two main areas need to be analyzed:
- Review the Process
- Strengthen the Managerial Control
Goods receiving, shelves replenishment and more generally operations planning in stores
The storage area often resembles a ‘black box’, which generates either overstock or out of stock products. It is essential to redesign how this area is organized into a transit area instead of a storage area. The reconfiguration of the storage area is often a prerequisite to optimize the replenishment process and the activity management. Whether the store has dedicated replenishment teams or mobilize their sales staff during off-peak hours, the challenge remains the same -- ensure that the information and goods efficiently circulate between the storage and the sales area.
Redefining the roles and improving management systems
These levers are well known and yet still neglected. The reliability of stock remains a major challenge and largely relies on the due diligence of the store personnel. End of promotions management, breakage and shrinkage monitoring, checkout practices, are all store operations that impact the reliability of stocks. Obviously the lack of resources is the first argument our clients mention to justify the lack of reliability of their stocks. We then study with them a logistics system differentiated by the type of product and customer. What type of customer visits a store during its opening: professionals or individuals? What do they ultimately buy? What are the priority issues in terms of margin? What differentiation is there from the competition? The objective is to define the priorities for sales activities in order to define the best possible allocation of logistics resources. These performance management practices in differentiated flows are widespread in the fields of supply chain, but they are often lacking when entering the perimeter of the sales floor.
Change Competencies in the Retail Sector
In terms of optimizing the supply chain, we can only welcome the development of technologies that allow a transversal and centralized management of supply flows. However, these tools should not limit the responsibilities of the section manager but instead, allow him to position himself on higher value added activities. The release time on order placement (what, how, when?) must be reallocated to stock calibration and the global flow management during the last meters of flow.
Any technological change, as it enters the supply chain of retail companies, must be accompanied by a change of roles & competencies. In the retail sector, the explosion of the offer (range width multiplied by an average of 2 of the last 15 years) and the pressure on costs create many challenges for an organization. The shelf is not only a place to showcase products for sales, but is also a storage space. The roles and competencies of sales teams must evolve accordingly and retailers must adapt their organization to this transformation.