A recent study conducted by RILA and Aberdeen Group reveals that an astounding 70 percent of retailers rate themselves “average” or “below average” on their inventory management processes. Moreover, only a third of retailers are using traceability tools for inventory tracking. Visibility into product movement (on-hand and in-transit active, in-active, discount, clearance, and discontinued merchandise) is imperative for creating cohesive replenishment, merchandising, and sales forecast plans and overall execution of sales and operations plans (S&OP).
The lack of inventory accuracy, visibility, and tracking capabilities is one of the main causes for under-performance within inventory operations. Some of the inventory-related business and IT complexities that retailers are currently facing include:
Between May and June 2010, Aberdeen and RILA surveyed 100 retail enterprises to determine the current state of inventory operations. Our data indicates that the foremost inventory-related pressure (selected by 41 percent of responding retailers as their top pressure) is "lost sales opportunities emanating from out-of-stock inventory” in stores and channels (Figure 1). During a revival phase in the retail industry, the out-of-stock pressure is a deeply troubling sign when one considers that the next two pressures are related to "high inventory holding costs" and "excessive inventory in channels and warehouses."
The contradiction related to out-of-stock and excessive inventory pressures indicate that retailers are not managing automated replenishment, cycle counts, and inventory accuracy requirements effectively. They also lack adequate visibility toward the flow of high-turn merchandise, which has lead to higher than normal out-of-stock and low service levels on high-turn merchandise. Moreover, higher than normal inventory levels and inventory carrying costs is reflective of too much buffer or safety stock in slow-moving product categories. Last within the top five pressures is demand volatility and inability to track on-hand and in-transit inventory. These pressures further complicate an already delicate inventory and working capital situation for retailers leading to a lower propensity to sell merchandise at the right place and right time, and lower customer satisfaction due to out-of-stocks.
Best-in-Class Strategies: Consumer-Driven Industry
According to the data, as a response to the business pressures related to topline sales and customer satisfaction losses associated with out-of-stocks, Best-in-Class retailers are focusing on raising the bar in three strategic areas. Firstly, 40% Best-in-Class are implementing a comprehensive inventory optimization strategy that takes into account shelf or item-level inventory flow that is related to customer purchase behavior. Retailers such as Macy's, Lowe's, and Family Dollar are applying more localized and customer-driven inventory models that strive towards inventory accuracy and visibility down to the store shelf-level.
For retailers, this is a departure from the traditional retail inventory planning that involved high-level category forecasts based on historical sales. The shelf-level focus is a precision-based localized inventory strategy that is more customer demand analytics-driven compared to previous models that relied on sales data. This strategy enables inventory demand and supply alignment. According to our analysis, retailers are taking more of an integrated view of shelf-level product movement in stores that is created by combining analytics related to unit and department-level point-of-sale (POS) sales data of individual stores or narrow store clusters, insights from category-level secondary data, and shipment data that relates with individual SKUs.
The make-up of inventory solutions in retail needs to be looked at from two lenses. First, there are systems that are primary to shelf-level inventory planning and execution. Inventory forecasting, order management systems, consumer-driven replenishment, and reporting tools are the primary systems/tools that are directly related to the core inventory functions such as forecasting, planning, demand-driven replenishment, inventory data analysis and reporting.
Second, associated collaborative approaches for shelf-level inventory optimization include vendor managed inventory (VMI) and collaborative planning forecasting replenishment system (CPFR), and closed-loop radio-frequency identification (RFID)-based approaches. All these approaches are focused on inventory accuracy, visibility, and better supply chain integration. CPFR and VMI have been adopted in the last decade or so by a third of retailers and continue to see increased adoption amongst retailers since perpetual inventory costs had to be distributed and curtailed within a multi-tier and multi-location retail supply chain environment. RFID has started to gain traction in spurts amongst apparel and other retail segments primarily due to the recent ROI success of several top tier retail brands.