Inventory Accuracy: Fundamental Strategies for Getting It Right

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1 Going Glocal Executive Summary 1 retail consulting and industry thought leadership Inventory Accuracy: Fundamental Strategies for Getting It Right

2 Inventory Accuracy: Fundamental Strategies for Getting It Right 2 In Parker Avery s recent Channel Integration in the Store 1 research study, 88% of respondents reported inventory accuracy as a primary challenge when trying to integrate stores into an overall channel strategy. This finding should come as no surprise to any seasoned store operator. Managing inventory to stay in stock for the customer and control shrink is a near all-consuming endeavor. Couple this with the pressures of managing labor and integrating new processes to accommodate channel integration (or omnichannel ) initiatives, and it makes one wonder how there is time left over for customer service. The typical process is to constantly react to issues as they arise for those retailers lucky enough to even have some sort of warning system that alerts them of problems. It is often assumed that companies who have implemented a certified receiving process driven off Advanced Shipping Notifications (ASNs), are using UPCs to scan all items sold at the Point of Sale (POS) to capture outbound inventory movements, and have solid processes in between to capture markdowns and obvious shrink episodes (the dreaded empty package ), that they would be able to keep inventory reasonably accurate. Root Causes of Retail Inventory Accuracy Issues! Alas, that is not the case. The retail store is an extremely volatile environment requiring constant vigilance to ensure it remains shoppable and accurate. While processes and planograms for a store may specify precise merchandise location(s), a store is rarely in a state where everything is in its place and the bigger and busier the store environment, the harder it is to keep together. Operators constantly need to adjust inventory Counting too much! Treating the store as one big bucket! Assuming receipts are accurate! Thinking more is better! 1

3 Inventory Accuracy: Fundamental Strategies for Getting It Right 3 counts based on what they are able to see all in the name of staying in-stock. When more product arrives, inventory levels increase and the labor required to deal with it is once again shifted away from direct interaction with customers. The question is: How to get out of this vicious cycle? What types of in-store processes are helping versus hurting? What about outside the store? Is inventory accuracy really just a store problem? Let s explore some of these root causes and some ways to ultimately combat them... Counting too much Retailers typically count too much...and usually at the wrong time. While it makes sense to react to an inventory issue such as a negative on-hand by initiating some sort of count on the item in question the fact is, there is a good chance the reason the item went negative is because the last time it was counted, not all quantities were found...and this wasn t realized until a customer found it, bought it and sent the perpetual count negative. And now, it s time to react by counting that item again. The other wonderful side-effect of this little activity is that by adjusting the inventory in question down, a process was most likely triggered to re-order the item (since the system now Cycle& Count!& thinks it is out-of-stock or at least low enough to warrant a reorder). This series of events further perpetuates the accuracy issue with this item. Parker Avery is not suggesting eliminating inventory counts. But operators must realize they run a risk every time counts are performed without ensuring a couple of prerequisites are in place: Know where the inventory is located. This usually requires a good zone or maintenance run within the department and in key areas like returns, staging areas for returns to vendor (RTVs) and of course the back room/overstock area.! QOH: -2!

4 Inventory Accuracy: Fundamental Strategies for Getting It Right 4 Pick a quiet time. Ideally, when the store is not open. If that s not a option, know when customer traffic is at its lowest and perform counting during that period of the day. Count it all at the same time. Ensure all items in every location on the inventory count list are counted within a specific time frame this means you really can t forget the first pre-requisite noted on this list. Undoubtedly, there should be a report operators can run on a periodic basis, which details all of the adjustments made to inventory (not including sales or receipts) over the course of some period of time (for example, 30 days). The thicker this report, the bigger the problem. Controlling the counting process is just one critical element to improved inventory accuracy. Let s consider another aspect... Treating the store as one big bucket It s easy to say, We re a small format store we don t need to differentiate inventory by location. That may be true on some level, but the fact is, even 1,000 square feet with a sales floor and a back room is ample space to lose inventory. Take a page from distribution partners, who more likely than not have a slot and a location for everything even when merchandise is in transit from one location to the next and it s all updated in real time. Many retailers lose this discipline when it comes to the final step in the inventory life cycle the store. Here are some thoughts on what can be done to make the inventory more granular and easier to manage within the store environment: Establish a location/slot management system. This is not just for the backroom/overstock area, but for the sales floor as well. The two areas are handled differently. The sales floor is more about capacity tied to the planogram location and if the item Leverage the planogram as a layer on the location management solution!

5 Inventory Accuracy: Fundamental Strategies for Getting It Right 5 is merchandised in multiple locations, each should have a separate associated capacity in order to optimize flow of overstock to the floor. Knowledge of fixture size is a key element location definition. Leverage the planogram as a layer on the location management solution. The back room is about precision the inventory in this location should only move when the system indicates a need, which also means that it is imperative to consistently scan products in and out of back room locations. Consider in-transit as separate inventory these items are in limbo because they are not secure in a specific storage location, and they are also not easily accessible for customers to purchase. Examples of in-transit inventory are in receiving (just coming off the truck), on re-stock carts (back room to sales floor), in returns and in RTV staging area(s). Implement technology to manage the flow of inventory within the store. Once the location management foundation and proper processes are established, this system will know where specific quantities are within the store, and can assist in creating directives to move that inventory. In addition, this technology can also provide greater direction to store associates when they are asked to perform counts. The more specific a retailer can be with where items should be (and are), the greater the chance of ensuring inventory stays accurate. While it is not realistic to implement the same degree of precision found in a distribution center, controlling inventory within the store can make a huge difference. It does require more discipline and dedication to process execution, but that can pay dividends in reducing overall inventory levels, increasing turns and driving greater profitability. Now let s look at one of the biggest areas of inventory grief... Assuming receipts are accurate It s about saving time and precious labor dollars. Checking in product is time consuming especially if that product is coming from the distribution center. Shouldn t it just be assumed that because those facilities are accurate (99.9% is not uncommon in a DC), the store receipts should also be accurate? This isn t always the case, not necessarily at the macro level, but at the micro level. For instance, what if there was a weight problem on a shipment and a pallet or two had to be offloaded? If that merchandise was already on the manifest, it will also likely be on the ASN and in the receipt the stores are blindly accepting as 100% accurate. It is likely the missing merchandise will get put on the next truck, but it is not in the store at the point in time

6 Inventory Accuracy: Fundamental Strategies for Getting It Right 6 the store systematically accepts responsibility for it. If the store staff were to go looking for it (because it came up on a count request), there would be nothing to count. Not a good scenario. Here are some approaches to employ to keep the receiving process streamlined and efficient, without sacrificing accuracy. Scan each container. This breaks a truckload of merchandise down into smaller pieces, much like the locations in the store. Yes, this sounds painful, but there are techniques to ease the burden such as installing an overhead scanner on a conveyor used to move cartons off the truck. Other benefits include: Identifying merchandise need If the product won t fit on the shelf, why bother even taking it to the sales floor? Find a back room location for it immediately. Stock rotation No inventory gets better with age (except perhaps for fine wine retailers), and some inventory is highly perishable, making it critical to follow a strict First In/First Out (FIFO) model. Leverage bar codes. In order to scan the container, a different type of bar code is required. In reality, most retailers already have this bar code on their boxes it s how their DCs know the difference between cartons with identical contents that need to go to multiple stores. This type of bar code acts as a license plate, versus a UPC-based bar code, and it s a powerful tool that can vastly improve the inventory management processes in retail stores. Set up an inspection sampling process for receipts. This is a random process where a small percentage of every receipt is pulled aside to do a more detailed count and quality check on the contents of the container. This is especially useful for shipments coming directly from outside vendors, but can be leveraged for internal shipments as well. The inspection levels should vary based on building a track record of quality and accuracy new vendors are sampled at higher rates until they have established a pattern of passing scores over a period of time. When failures occur, the system can order additional samples to determine if the issue is more widespread (up to the entire shipment). The best time to identify a problem with inventory is upon arrival into the store. Receiving errors typically account for a significant portion of shrinkage, which impacts accuracy as well. By not assuming all receipts are perfect, there is a far greater chance to significantly improve the inventory accuracy and in-stock positions. Lastly, let s explore an area where most merchant partners get nervous...

7 Inventory Accuracy: Fundamental Strategies for Getting It Right 7 Thinking more is better The typical answer to overcoming an accuracy issue is to increase safety stock levels until the store is drowning in inventory. Out-of-stocks are among most operators biggest challenges. Retail nirvana is being in stock with 100% of the assortment each and every day. The problem is if the store is so packed with unnecessary overstock, it is difficult and labor-intensive to find the items that would legitimately fill the hole on the shelf. This problem has sweeping impacts across several process areas and critical metrics. Overstock impacts labor, because it requires more handling, i.e., every case and item gets touched more frequently. It impacts shrink, because the more inventory on hand, the more counts may be required. It impacts turns, because the more inventory carried, the slower it moves especially with 20% of Overstocks Impact! most assortments generating 80% of sales. Addressing this one issue overstock is likely the most critically important tenant of this point of view. And it is one of the scariest, as it requires a leap of faith that the entire operation will act with more discipline and precision than ever before. The good news? Eliminating overstocks actually enables the store to operate in a much more efficient manner because resources are ultimately freed up. Here are some concepts to consider when looking to reduce inventory and improve instock positions. Labor! more handling needed! Shrink! more counts required! Turns! slower inventory moves! Establish a baseline of inventory levels. Review turns across item velocities to establish new goals. Then move those expectations into the hands of the store operators. Evaluate the stores first. Find the stores with the highest shrink, lowest in-stock, poorest turn performance and most inventory manipulation (adjustments). Put them on a program to immediately: Stop making on hand adjustments. Stop ordering any additional product (let replenishment do its job). p s p s p s p s p s

8 Inventory Accuracy: Fundamental Strategies for Getting It Right 8 Bleed down the inventory, while systematically cleaning up the store, restoring planogram integrity and improving overstock/back room organization. Find significant overstock and transfer the inventory out either back to the DC, to other stores or even back to the vendor if possible. Execute a physical inventory (PI) after 4-6 weeks of these activities. The PI does not have to be booked financially, as long as it establishes a sweeping new baseline to perpetual inventory. Not all stores will require this drastic of an approach, so do not be concerned that these measures are required universally. Collaborate with merchants and supply chain partners. Several initiatives should be addressed, including: Pack size Evaluate and adjust pack sizes so the stores can still handle full cases, but not be faced with 12 weeks of supply in each box. Shipping frequency Reduce inventory so shipments are smaller yes, this means more frequent shipments to replenish and maintain in-stock levels, but handling smaller amounts at a time is less error prone and easier to manage. Store-ready Optimize shipments to enable more efficient stocking by sorting categories into single shipping containers, allowing the restocking process to occur with fewer errors and less labor. Establish and implement the other process improvements outlined previously. Count less. Implement an in-store inventory management solution, including location management. Implement greater controls over receiving and integrate that with the inventory management solution. Reducing inventory is critical to improving overall accuracy, but it cannot be accomplished without a significant amount of effort: revamping traditional means of managing inventory and collaboration between various parts of the retail organization.

9 Inventory Accuracy: Fundamental Strategies for Getting It Right 9 Final Word We did not address one of the most compelling technologies in the inventory management space today: Radio Frequency ID (RFID), also known as Electronic Product Code (EPC). While this technology holds a significant key in the ability of a retailer to maintain greater inventory accuracy with less effort, we believe there are enough challenges to its implementation to warrant addressing it separately. In the mean time, traditional retailers who have significant investments in their brick and mortar presence, also have substantial investments in inventory. To successfully compete in additional channels, inventory must be closely managed and utilized to its fullest, and that requires instilling standard processes and executing these with more accuracy and precision than ever before. Greater accuracy enables more optimal instock positions, which provides retailers the ability to maximize sales in the traditional store channel, while providing better capabilities to support other channels.

10 Inventory Accuracy: Fundamental Strategies for Getting It Right 10 The Parker Avery Group The Parker Avery Group is a boutique strategy and management consulting firm that is a trusted advisor to leading retail brands. We combine practical industry experience with proven consulting methodology to deliver measurable results. We specialize in merchandising, supply chain and the omnichannel business model, integrating customer insights and the digital retail experience with strategy and operational improvements. Parker Avery helps clients develop enhanced business strategies, design improved processes and execute global business models. Learn more about us at: for more details contact: Robert Kaufman CEO robert.kaufman@parkeravery.com Rob Oglesby Associate Partner rob.oglesby@parkeravery.com