Reducing inventories and improving delivery readiness are not contradictory
By Götz-Andreas Kemmner and Stefan Hahn
The German retail sector has considerable potential for reducing inventory. High inventories cover up weak points in the processes that cause bottlenecks, out-of-stock situations and delivery delays.
On average, 13 percent of retail sales are tied up in inventories. This results in an inventory range of well over one month. However, the resulting potential for cost reduction is often not recognized and lies dormant in retailers’ warehouses.
One argument against lower stock levels in retail is that, despite modern logistics and ECR systems, out-of-stock situations (shelf gaps) still frequently occur in stores. However, studies show that their main causes are usually to be found in the last ten meters to the shelf. Consequently, they cannot be eliminated by optimizing the supply chain or by increasing stocks upstream in the supply chain.
Customers become unfaithful. According to studies, consumers very often change brands – less so the place of purchase if the desired product is not available on the shelf. European food retailers and manufacturers lose more than EUR 4 billion in sales every year as a result. In Germany, the “non-purchase rate” of 14% is above the European average of 9%.
Incorrect disposition mechanisms are responsible for 80 percent of overstocks
But why are many stores unable to deliver sufficiently? Studies show the following factors:
- Lack of staff for shelf stocking
- Poor warehouse organization
- Rare check of the stock situation on the shelf
- Lack of shelf labels – Insufficient assortment implementation
- Incorrect book inventories
- orders are triggered too late or not at all.
This means that almost three quarters of the identified shelf gaps occur within the store’s sphere of influence. 10 percent can be attributed to the ERP system with incorrect forecasts, excessive minimum order quantities or incorrect parameterization at article and supplier level. 4 percent of the shelf gaps investigated were caused by delivery errors on the part of the manufacturer. Incorrect disposition mechanisms at manufacturers and retailers are therefore only responsible for 14 percent of out-of-stock situations, but for a good 80 percent of overstocks.
No contradiction. These figures already show that high delivery readiness and low inventories are not contradictory. Rather, they are two facets of efficient inventory management. Increasing stocks in order to achieve delivery readiness is therefore rarely the necessary answer. In most cases it is even wrong.
According to analysts at Lehman Brothers, inventory management is the key to Wal-Mart’s success. At the beginning of 2006, the retail chain launched a stock reduction initiative. This should reduce stocks by 19 percent within one to two years. This corresponds to a sales value of USD 6 billion. With an out-of-stock rate of 1.5 percent, Wal-Mart intends to achieve an average annual inventory turnover of 10 across all product categories.
In order to improve delivery readiness and reduce inventories, the entire supply chain from the manufacturers to the shelves must be carefully balanced. These include, among others:
- Assortment optimization through reduction of articles and variants
- More accurate forecasting and disposition
- Synchronized data provision by suppliers using their own data from sales outlets and warehouses
- Improved information transfer in the supply chain (Collaborative Planning, Forecasting and Replenishment – CPFR)
- streamlined organization from logistics to the stores. This includes stabilizing the flow of goods through faster ordering and delivery rhythms and shortening replenishment times, optimizing the relationship between warehousing and cross-docking
- an efficient system of key figures for monitoring the supply chain.
By correctly parameterizing the control variables of the scheduling system, inventories can be reduced by up to 25 percent while maintaining delivery readiness. This was repeatedly revealed by the analyses of surplus stock carried out by management consultants Abels & Kemmner. In the competition between retailers, the ability to control and monitor stocks is therefore becoming more important.
