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SCDigest: Are Retailers Shooting Themselves in Foot with Low Inventory Strategies?

March 16, 2009

By Dan Gilmore, Editor-in-Chief, SupplyChainDigest

Through a special arrangement, presented here for discussion is an excerpt of a current article from Supply Chain Digest.

The recession has caused almost everyone to cut back on inventories, due to both a concern about customer demand and also because right now "cash is king," and inventory uses up cash.

Nevertheless, I think many retailers may be taking it much too far, and costing themselves sales and profit as a result. Three recent personal anecdotes I hope make the point:

  • Two weeks ago I went in a large mass merchant to purchase some mini-DVD tapes for our video work. Virtually every peg was empty. The only ones with product available were terrible deals. An associate there said they hadn't received inventory in that area "for several weeks." I walked out without a purchase - as I assume many others have as well.
  • At a different mass merchant just this weekend, I needed to buy a gallon of anti-freeze for one of our cars. The shelves were simply decimated. In fact, I assume intentionally, they had taken some of the product that was still available (higher priced "extended life" anti-freeze) and moved it around to make it look like the shelf facings weren't totally empty. That of course resulted in that product being placed above shelf labels that were for different, lower priced SKUs. I went down the street to an auto parts specialty store that had plenty of inventory and bought a gallon for $11.00.
  • I was also at a major office products retailer this weekend. In addition to the usual no help for what I was looking for, as I was checking out I heard a woman at the service counter say this was the third time she had come to the store in the past few weeks looking for some item, and yet again it was out of stock.

Running "Lean" can be a good thing, and inventory management right now is a critical discipline. But from my view, many retailers have gone way beyond smart inventory decisions to ones that are detrimental not only to their own results but also to those of their suppliers.

Discussion Question: Are retailers excessively cutting inventories at the expense of sales and profits? Have you noticed an increasing rate of out-to-stock situations? How do you weigh the risks of out-of-stocks versus the markdown risk in overstocks in the current climate?

Discussion Questions:

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Instant Poll:

Are retailers being too aggressive in reducing inventories?

Comments:

We have gone overboard in cutting costs and inventories. Now it is becoming a self-fulfilling prophecy and retailers are only hurting their bottom line by not having enough product on the shelves. OOS are a lose/lose scenario and it will take several months for retailers to realize that they have overdone the inventory cost-cutting.

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Kai Clarke, CEO, American Retail Consultants

Retailers with empty shelves are putting themselves at risk of losing shoppers to other stores or outlets. They should approach the inventory management problem by keeping the assortment of items available with less depth of inventory for each item on the shelf. In other words, lose the casepack-and-a-half packout requirement and get better at managing the shelf and backroom or allowing fewer items on shelf for each brand and variety.

Now is also not the time to sacrifice slower-moving, but loyal or specialty item SKUs. Too many shoppers are lost for a retailer when the item on their list just disappears. If they want that particular list item, they will go somewhere else. Getting shoppers back is harder than keeping them.

A friend of mine is in a major mass merchandiser at least 3 times a week and buys everything he needs from that store before shopping anywhere else. He went looking for a minor bike part--the peg was empty--he normally browses and buys throughout the entire store. This time, he left with no purchase. They lost a lot more in sales than just one small bike part.

'CMB'

There's a great book called "Economics in One Lesson," which teaches that understanding economics requires thinking about the "unseen" (i.e., what didn't happen) as well as the "seen." The problem with anecdotes is that they are only the "seen." What is unseen is all the inventory, other than the specific items that would have been sold in the above anecdotes, that would have had to have been stocked in order to make these particular sales.

In this environment, I don't blame retailers a bit for slashing inventory. The lower sales they are experiencing are due to other causes! The problem will come later, as the market starts to come back. Like investors sitting in cash when the stock market returns, retailers without proper inventory will find themselves on the sideline as others gain share.

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Jonathan Marek, Senior Vice President, Applied Predictive Technologies

Retailers are keeping a sharper eye on inventories. Even at food retailers, some of the basic items are OOS by early afternoon during busier store times. Also, notice older products near or past expiry of sell by dates are being cleared at lower prices, or worse, not rotated out of the case.

In many conversations with food retailers about perishables, metrics for OOS were the most difficult to discuss. There was often little concern about empty cases on Friday afternoon as long as the overall store numbers met expectations. There are major penalties for over-inventory of fresh product, so retailers are quite aggressive about monitoring these situations at store level.

As mentioned, shoppers are not going to waste their time going to stores that are OOS for needed items. As shoppers have reduced the number of trips they make, destination stores will change if desired items are not on the shelf.

Anne Bieler, Sr. Associate, Packaging and Technology Integrated Solutions

I agree with the first post's emphasis on the need for better inventory management and replenishment technology, however, that is not enough. Retailers aren't just stretching their inventories thin--they are stretching their staff as well. Now more than ever, retailers must actively solicit the help of manufacturers in cooperatively managing inventories, promotions, and planning. The challenge is in making the data available to outside manufacturers in a useful form (i.e. not just a raw data dump) without placing additional burden on over-worked IT and business resources.

One route (taken by Tesco, Kroger, Wal-Mart, CVS, etc.) is to invest millions of dollars in building proprietary infrastructure to support this type of data sharing. And, in the long run, this approach can pay huge dividends. For most retailers, however, we believe that an off-the-shelf solution, delivered using the Software-as-a-Service (SaaS) model to keep IT burden low, can deliver huge value much more quickly.

Technology adoption in retail is notoriously slow, and it may take time to get retailers to change their thinking. The question is, can they afford not to?

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Ben Sprecher, Business Development, Google

Apparel retailers have struggled with inventory for years, but some situations are particularly baffling now. At a recent visit to an apparel retailer I found cute outfits on display; shoppers could choose from tops in size 4, pants in size 10, and shorts in size 12. Wha??

Apparel retailers who want to cut back on inventory might adopt the 12-season policies of the teen retailers, who don't attempt replenishment, but who have fresh stocks of trendy clothes readily available.

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Cathy Hotka, Principal, Cathy Hotka & Associates

I believe it is myopic to look at out-of-stocks simply as an inventory control issue. I do believe the consumer will be very sensitive to this at this time when, in the past, they simply forgave the retailer. Many factors could have converged to heighten Mr Gilmore's sensibilities--and that includes listening to a fellow consumer complain.

Retailers need to address these sensibilities and address them directly (make lemonade out of lemons). Communicate with the consumers if low inventory is a new practice, increase customer service, offer discounted rain-checks. The consumer knows these are lean times; practicing better marketing during the lean times will lead to better dividends in the long term.

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Carlos Arámbula, Managing Partner, MarcasUSA LLC

Ok, well, I will admit my blog from which this was taken was meant to just relate some anecdotal stories, but if anyone else has seen this level of totally empty shelves in many retailers if their lifetimes I would be interested in hearing it.

If personal experience doesn't count, you might try googling "retail inventory reductions" or something. I think that will indicate this is very real. When container volumes from China are down 15% (much, much more than actual demand is down) and much of that is retail imports, I would say that is a pretty good objective sign empty shelves are very real.

This is from a story on Campbell's Soup's earning call last month:

"Retailers made corporate-level decisions to reduce inventories of many products at the end of last year, including condensed soups, Campbell Chief Executive Officer Doug Conant said today on a conference call. The inventory cuts surprised him given the demand for soup in a weak economy, he said.

"It was a frustrating experience," Conant said.

There are literally dozens of other consumer goods manufacturers pointing to retail inventory downsizing, and many publicly traded retail chains saying they are cutting back on inventories. Of course they would reduce inventories consistent with lower demand; the thrust of these statements are clearly meant to say "more than the drop in demand."

In January, retail inventories dropped 1.7% (which is huge, actually) versus flat demand.

I can find a lot more facts as needed, but this is a lot more than anecdotal.

Dan Gilmore, President and Editor in Chief, SupplyChainDigest

Obviously this is a very difficult time for retailers that need to control expenses without losing their customers. These times cry out for better inventory management and replenishment and far too many retailers haven't invested in either of these. So, they are left with a real problem and recent visits to local suburban Chicago area stores proves this. Even Wal-Mart seems to be having problems with their warehouse replenishment, but DSD is still very good. Target's problem is lack of customers and doesn't seem to have an inventory out-of-stock problem.

Art Williams, Retail Marketing Consultant/Analyst, Independent

I have not seen nor experienced significant inventory reductions at the food and grocery level, other than a shift and re-allocation in brand-switching categories including private label and organic. That is to be expected.

I have seen specialty retailers reduce inventory. For example, at my local RadioShack they have a full wall display of batteries with one package of each size on each hanger. Looked like a TV show stage set-up. Definitely, gave me the impression they we either hurting or reducing inventory to the bare minimum.

Definitely changed my impression and expectation of RadioShack. They always "had" what I needed. The one battery I did need this day was out of stock--the clerk said he had sold the last (only?) one in stock that morning.

Mike Romano, President, SmartReply Mobile, Social & Digital Marketing

Short answer: Yes! I would consider this as one more area in which Walmart has won against Target. Target's brand strategy revolves around a four-fold philosophy: 1. Exclusivity AND 2. All-store distribution, PLUS 3. Limited duration--The Go International fashion programs, for example, now run for 30 days vs. the original 90--OR 4. Limited SKUs--The much-ballyhooed Orla Kiely collection in home, alas, is a mere endcap, and check out how out-of-stocks have compromised the presentation in some stores: http://is.gd/nyW7.

Target went into 2009 with enviable inventory levels yet it came at the expense of margin AND of its big calling card: brand representation.

Walmart's strategy of limiting brands only by distribution (some brands are distributed to limited stores and they stay that way, including the retailer's urban apparel brands) yet investing in those brands for the long term and with faster, though not nail-biting program turns have given Walmart more flexibility with promotions while keeping its brand presentations intact.

Lean inventory is retail's biggest mixed blessing.

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Carol Spieckerman, President, newmarketbuilders

The boom years have bred complacency in managing a couple of key metrics for suppliers and retailers. Sales were good, gross margins were within target for years, while expansion of sites and formats continued. But...during that period, basic business process improvements that could have enhanced operations and profits during the boom and help survive the downturn were not being aggressively addressed.

While buying light bulbs at my Wal-Mart Supercenter this past weekend, (note: second stop since my first at Home Depot netted an OOS) I befriended a merchandiser scanning locations which had no inventory present. We talked about the upcoming March Madness, while he identified open shelf locations in the housewares area. Five aisles later, he had recorded over 40 OOS. Fortunately, the light bulb I needed was available.

Improvements in days-of-supply, reduction of OOS, increases in inventory turns for suppliers, and greater forecast accuracy to meet demand, are handicapped until retailers can maintain an accurate perpetual inventory. And now in the downturn economy, personnel reductions and forecasting methodologies using historical data from an up economy will exacerbate the problem of inventory management and replenishment from supplier to the RDC to the shelf.

Possibly--just possibly--this will be the year that suppliers take a serious look at what is available from service providers to take the sting out of what is now a bad economy.

Jim Browning, Managing Partner, Consumer Product Demand Chain

The problem is retailers often lack the technology to reduce inventory surgically, rather than with a hack saw. It's actually a classic problem that happens whenever a company tries to ratchet up its turn. To avoid empty shelves you MUST look at stock-to-sales ratios by SKU, rather than by category. Especially in a SKU-intensive business.

If blank DVDs are just part of the category called "computer accessories" and you've set your inventory target by category you're going to have a problem. Demand must be looked at at very granular levels.

The entire value in localizing assortments and computerizing the calculations of desired inventory levels is to get to a better number by SKUs. Do that, and OOSs will go back down. Do it at a higher level, and you will be subject to the law of averages--one foot in a bucket of ice, one foot in a bucket of boiling water, but on average, you're "just right."

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Paula Rosenblum, Managing Partner, RSR Research

Before we are too hard on retailers for "condoning" out-of-stock conditions, we should realize that in this environment, there are still serious credit availability issues impacting retailers of all sizes. Many suppliers, quite understandably for their own survival, are being much more careful with respect to the timing and conditions under which they ship merchandise to retailers (and the purchase of raw materials from their own suppliers). Suppliers right now are not as trusting that they will be paid as they once were. JIT stocking works only if both ends of the transaction can be relied on.

As an aside, in reference to an earlier comment, we went to Target for some household and pet staples over the weekend. This is one of those areas where there is a Walmart right across the street from Target. After snaking through Walnart's large parking lot and finding few spaces, Target looked to be a better/quicker option. Indeed it was. Parking was plentiful, the environment was calm, and the shelves were fully stocked with lots of specials. Several employees offered to help us find things. Although there were only three checkouts open, that was enough and there was no wait at all to unload the cart. Except for the sort of creepy emptiness of the store, our shopping experience was about perfect--and so unusual in this day and age that I actually noticed it! It made me wonder if Target may soon start to benefit from their relative normalcy over the Walmart circus by attracting back some customers for whom time and sanity are more important than saving a few cents. They should get the word out!!!

'Liatt'

I have also experienced the same OOS (Out of Stock) situation at several retail locations. Just-in-time inventory only works when it meets the customer's expectations.

We do a lot of work in the convenience store industry and learned a long time ago that customers have low to zero tolerance for OOS for their desired items in key categories such as bottled pop or soda, cigarettes, and beer. In fact, the majority of people will switch stores rather than brands.

The impact of this OOS trend will vary considerably based the item, alternatives available at the location, and the customer's tolerance levels. However, I expect that the competitors who manage to be in stock will win the customer's loyalty.

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Steve Montgomery, President, b2b Solutions, LLC

Financing additional inventory is not the solution. In times of economic downturn, the last strategy any CEO wants to adopt is that which involves greater expenditure. The best, and perhaps only alternative is improving a retailer's ability to better utilize existing inventories through a more dynamic store replenishment process. Those retailers able to sense fluctuations in store-level demand and react in a timely fashion will have the best opportunity at maintaining, if not growing, top-line revenue in today's uncertain marketplace.

Todd Mallett, Account Executive, RedPrairie

Conclusion-jumping and tales of falling skies. Of course, the opening statement in this article from SCDigest ("The recession has caused almost everyone to cut back on inventories") is strictly an assumption based on anecdotal information and mother-in-law research. We don't know this as fact until real research is conducted, and would be foolish to base decisions on such an assumption. This is not proof.

And, if it's really true that even a few retailers are presently cutting back on inventory, how would we know that the recession is the single causative factor, or even a factor at all? Retailers cut back on inventory in good times and bad, and for a wide variety of reasons. For instance, what about the role of suppliers in reducing inventories? Are their own inventories low because they've closed plants or laid off workers? Are they being shorted on raw materials? Is there a seasonal aspect?

Some retailers are actually increasing inventory. Bed Bath & Beyond, for instance, has built inventory in areas where Linens 'N Things closed stores. Similarly, Best Buy has up-stocked where Circuit City stores have shut down. We must be cautious with terms such as "recession has caused" and "almost everyone."

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M. Jericho Banks PhD, President, CEO, Forensic Marketing LLC

Inventory management is definitely a smart way to go, as long as the inventory management solution is not painted with too broad of a brush. What I am finding in my consulting practice with retailers is that too many of the approaches retailers take are the "sledge hammer" approach rather than the scalpel.

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David Biernbaum, Senior Marketing and Business Development Consultant, David Biernbaum Associates LLC

Inventory management involves two special skills--storage and distribution. They are interwoven in a consumer goods supply chain, from the raw materials supplier to the store shelf. A third skill--merchandising--is needed to create a successful interface with the consumer. Everything else is behind the scenes and provides the ability to offer the interface in the first place.

Many comments posted above reflect on the efforts by retailers and manufacturers to reduce their behind-the-scenes operating costs. Even though consumers know this is going on, I think most have no clue as to what that really means. Even small bubbles in the pipeline can look like big stock-out problems on some shelf somewhere.

And to make matters worse--while inventory belt-tightening has been going on for the high-volume consumables, a few aisles over in the toy and the apparel sections, huge gaps were just created in the aftermath of the Consumer Products Safety Improvement Act, which took effect February 10. Hundreds of millions of dollars of merchandise is heading toward landfills and incinerators and more is being turned back at the docks.

These are really big bubbles. Wait until you want to go the local beach with your kids, to save a few bucks but still take a vacation this summer. Think you'll find a beach ball or water wings?

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Dan Raftery, President, Raftery Resource Network Inc.

I think I have to agree with Doc on this one. Three experiences mean 'almost everyone'? and cited as proof?

Inventory reductions and increases in fact do have more than just a few multiple causes. The factors causing inventory instances at any given store can be numerous. Midwest supermarkets experienced incredible out-of-stocks in January and February--a fact. Were intentional inventory reductions due to what appeared to be a worsening recession? Hardly. It was due to multiple supplier issues and mostly due to weather and poor holiday inventory planning.

It's really easy to blame most anything on the 'crisis' or the 'recession' if you don't consider facts. There is no 'real' research here to actually prove or disprove any intent or economic connection.

Retailers, in particular supermarkets, can best manage inventory and reduce out-of-stocks through forecasting systems that are better than ever before. Fact. These, however, do take significant time to implement and deploy. Significant time = years. The gains, however, are substantial in shelf position and back room levels. Out-of-stock reduction utilizing these systems is substantial. They prove that inventory reductions can be successfully managed while having no negative impact on sales or negative impact on consumer perception.

The question has been answered through detailed study that the consumer doesn't care whether or not you have 84 cans of green beans or 18 on the shelf. They only want the one can and want you to have it when they come in. Further, by best practices and utilization of these systems, inventory turns increase and thorough rotation can be mandated all the time.

'Scanner'

The issue of OOS is wide spread within the retail industry in Canada , where I oversee a large Consumer Electronics Operation. One can look at a fairly large list of factors....

FEAR being the overriding one. Many retailers are being guided not by sound long-term business plans, but by the daily barrage of negative economic news they receive daily.

As a well established retailer with a strong market presence, we are walking the tightrope of showing a fair selection--which is in stock, and clearing those items which are either very slow movers or coming to the end of their life cycle. The end result must be a retail environment which still does everything possible to Wow the client and offers them every opportunity to get excited enough to make a purchase. This type of strategy is much more easily executed within either a single store or a smaller regional chain. Often the issues with larger chains is not the lack of inventory, but the location of the inventory.

'RICH16'

I see retailers managing there dollars at the expense of managing there inventories. Empty pegs means poor replenishment tools? I do not think so. We live in a day and age of good inventory tracking tools so empty pegs mean troubled companies.

I see this out-of-stock situation as a symptom of the big-box retailers failing.

'MikeBoze'

You must know who you are as a retailer, and what your strengths are before any serious OOS occur. Our meat inventory has increased about 100% in the last year, but I've cut out over 500 SKUs in grocery that don't move.

Stay strong on the better movers and weed out the items that the big stores crush the competition on, and it will help keep inventories at a reasonable level.

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Tony Orlando, Owner, Tony O's Supermarket & Catering

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