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[16 comments]

Are Big Box Stores Running Too Lean This Holiday Season?

December 18, 2013

We all know that supply chain optimization is a Holy Grail for retailers, with just-in-time delivery a goal few will quarrel with. And, Big Data and little data are supposed to eventually tell us what each shopper wants, when and where they want it, and what they might want if they only knew it existed.

For now, however, we haven't gotten to the point where we can tell exactly what shoppers are going to buy and when, so running too lean can cause out of stocks. And, according to a recent CapGemini study, 73 percent of shoppers will go elsewhere if an item is out of stock, and 29 percent would not purchase the item at all. Regarding e-commerce, 93 percent of shoppers are frustrated when a retailer delivers an order late.

An article this week in the StarTribune says that Target shoppers are frustrated with the chain's out of stocks, and that Target.com was out of stock on almost 60 percent of top holiday toys after Black Friday weekend. The piece also says Target historically keeps inventory leaner than its rivals, Amazon and Walmart. Coincidentally (or not), sales have barely grown in the first three quarters of 2013.

Analyst Gerald Storch attributes some out of stocks to Target's apparel background, because too much inventory is a killer in that business. According to the StarTribune, Target execs are also paid incentives based on sales profitability, which depends in part on keeping inventories lean. With Target's PFresh grocery format becoming core to the company, replenishing inventory infrequently can be a liability, as consumers buy those categories much more often than they do apparel and electronics.

Of course, earlier in the year, Walgreens and Walmart were criticized for their own failures regarding out of stocks. "The answer is simple — any retailer that continues to make margin by shaving labor hours is going to end up with stock outages," wrote RetailWire BrainTrust panelist Ryan Mathews at the time.

In 2012, a Walmart exec said the retailer could sell up to an additional $5 billion a year in merchandise with improved inventory management. But in March 2013, a spokesperson said that news reports of bad out of stock situations were isolated examples.

"Walmart's $5B out-of-stock problem is prime evidence of retail's paradox of scale," commented RetailWire BrainTrust contributor Jamie Tenser in March. "In brief: The bigger the chain, the greater the distance between headquarters and the shopper. Centralized replenishment systems are probably the culprit here. Not that the technology is unsophisticated. It's just that they build a time-lag into the reordering process that confounds accuracy. Add in-store implementation breakdowns to that and you wind up with a lot of stubborn holes."

Mr. Tenser advocated chains use computer assisted-ordering that takes into account in-store conditions to improve the situation.

Discussion Questions:

Are large retail chains inherently worse at preventing out of stocks than smaller stores? With ever improving technology, why is this still the case? Can retailers "break the supply chain rules" during the holidays to make sure more items are in stock?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Will shoppers be understanding when a desired item is out of stock during the holidays?

Comments:

Large retailers or small, what kills me is that with all the hype about big data, we still can't solve the basic issue of out-of-stocks. Yes, big data holds great promise, but imagine the benefit to retailers and consumers if we just solve this problem that has been around back when big data was small, once and for all.

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Zel Bianco, President, founder and CEO, Interactive Edge

There's brilliant insights in this piece. My favorite: "The bigger the chain, the greater the distance between headquarters and the shopper."

Whether we're talking about supply chains or anything else for that matter, the secret to success is 'the alignment of energy'. As we've seen over and over again, a team with all-stars but no alignment will often fail while one with less talent but superb alignment will usually win.

Finally a quick comment about Just-In-Time theory...at a dinner party the other day a friend noted his company (headquartered in Germany) was obsessed with JIT approach to supply chain management. "What that really means," he noted, "is we won't have inventory." Sometimes the more clever the theory, the greater the distance between manufacturer and the sales team.

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Ian Percy, President, The Ian Percy Corporation

Simply stating that large retail chains have a more difficult time preventing out-of-stocks than smaller stores would be unfair. Although the distance between the staff and the shelf may be narrower in a small retail setting, upstream efficiencies within the supply chain are no less complex ... and perhaps more challenging for smaller retailers.

To the second question, can retailers make sure items are in stock during the holiday? No. But, for brick-and-mortar operators, the pressure is clearly very real. However, multi-channel retailers may win. If an item is not physically available on shelf, why then couldn't next day delivery send it from a fulfillment center? This should satisfy frustrated shoppers and ease the out-of-stock conundrum.

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Dave Wendland, Vice President, Hamacher Resource Group

My belief is the majority, 95%+, of retailers don't manage replenishment and their supply chain as well as they need to. This is a complex function and often isn't well understood in the management ranks and technology investment hasn't typically been at the top of the priority list.

I think 2013 is a pivotal year showcasing that technology investment is critical to retail's future, thanks to Amazon and eBay, and those retailers that get on board have a better chance of using their supply chain as a competitive advantage.

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Bill Davis, Director, MB&G Consulting

The inventory issue is an age-old one, particularly for merchandise that is fast moving. Target, Walmart, and Walgreens can take some lessons from their big box cousin in home improvement. They would do well to "steal" a couple of ideas from Home Depot in the way that merchandise is moved from warehouse to store, stocking, and ultimately to the consumers' carts.

Granted that HD has many more slower moving lines, but they have written some supply chain rules that have application for the soft goods players.

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Roger Saunders, Managing Director, Prosper Business Development

Isn't this an omni-channel problem? Where are my customers going to purchase? On or offline? The answer, of course, is that you need to be where they are with the products they want.

If they're standing in front of you and you don't have it, arming associates with tools (tablets) to save the in-store sale by making the online sale to be delivered next day solves the problem.

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Marge Laney, President, Alert Technologies, Inc.

There is a delicate balance between having the item in stock at he moment the consumer wants to pick it from the shelf, versus achieving profitability on having just-in-time inventory (GMROII).

The reality across retail is that gross margins have been steadily declining in almost every product category. To make realize the same profitability on stock means retailers must turn their items faster.

The "easy" way to increase inventory turns is to carry less items on the shelf. But, the danger of lean stock is being out of stock if there is no rapid replenishment and predictive analytics in place.

This balancing act of in-stock vs. GMROII will be one of the most critical success factors for the store of the future. The winners will require 1) "Big Data" 2) Sophisticated logistics across all channels, and 3) the ability to execute "long tail" inventory items through omni-channel execution.

In the store of the future, the shelf must become virtual and "seamless" to the consumer. Amazon has already proven very successful in convincing consumers that 24 -48 hours is very acceptable tradeoff for a shelf with "unlimited choices ... and you can receive exactly what you want, where you want it.

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Chris Petersen, PhD, President, Integrated Marketing Solutions

Larger chains certainly have inherent challenges, as Mr. Tenser points out. However, one advantage is their ability to push inventory. You can see the impact now in the stores that wisely use very wide aisles to hold holiday merchandise on temporary displays. Stores that still try to hold the bump in the backroom struggle. Jumbo aisles are one of the best store design elements to come along in a long time.

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Dan Raftery, President, Raftery Resource Network Inc.

Supply chains can break down all the way to the source, as problems with manufacturers are the beginning of the domino effect that follows. Special items for the holiday season are gone from the wholesalers, and unless you pre-ordered, forget about getting certain items. All of us are trying to stay a little leaner, as sitting on excess inventory after the holiday is a markdown nightmare. How many Bone-in Prime ribs are going to sell after January? None, which is why the major meat wholesalers are cleaned out of this product.

It is a tough balancing act to maintain the right items, at the right price, just to make it through the big rush, and getting cleaned up without extra product laying around. I'm still trying to get it right after all these years.

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

I believe large retail chains will be inherently worse at preventing out-of-stock items due to their limited supply channels to replenish.

In a previous discussion about "webrooming" I made a joke about "stockrooming" where small retailers can shop various distributors to handle JIT replenishment - even from other retailers.

But in reality, my team and I realized "stockrooming" was a competitive advantage for smaller retailers to have better in-stock availability than the larger chains in 2014. Guess I just gave up a retail technology secret for 2014.

Ed Dunn, Founder, (Stealth Operation)

What technology would allow big box retailers to address their out-of-stock (OOS) problem? Jamie Tenser's quote emphasizes monitoring "in-store conditions," and he is exactly right.

Traditional methods for addressing the OOS problem have failed. PI systems are notoriously inaccurate and fail to address many shelf issues (e.g., the item is in the backroom but not on the shelf, the item is damaged or hidden, the price tag is wrong). Walking the aisles, looking for holes, is manually intensive and very prone to human error. RFDI is expensive and insufficiently precise.

By creating store-and-condition specific, short-term sales models, one can forecast and monitor the sales rates of items. Such forecasts take into account price, promotions, cross-price, holidays and seasonality, time-of-day, and total store traffic (a good surrogate for "hidden" conditions, such as current weather or near-by road construction). If an item fails to sell in a time interval that is far too long given its current store- and time-specific forecast, store or distributor personnel are sent a real-time alert to suspect an OOS problem and to check the shelf.

Combine this forecasting technology with a customer-centric orientation - have a particularly sensitive alert trigger on our best customers' most important items - and you have an effective, low-labor and low-infrastructure intensive solution that will address far more effectively OOS problems than can any of the traditionally tried-and-failed approaches mentioned above.

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Dr. Paul Helman, Chief Science Officer, KSS Retail

Regardless of store size, inventory control has long been a bit of a Holy Grail in retailing. What is confounding is that despite the flourishing technology, particularly that involving data analysis, demand isn't being met. This issue begs the larger question: How do we make sure that consumers are buying from us in the places where they want to buy? Omnichannel strategies, using consumer-purchasing data as a guide, can ensure that all inventory is available to every customer, no matter how she shops. Done well, merchants can get the most out of their national inventories.

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Bryan Pearson, President and CEO, LoyaltyOne

In my experience, management often manages towards their bonus. It's basic WIIFM at work. If it is true that Target's management's bonus is based, or has as an overly large component of their bonus based on sales profitability, then they are definitely going to consciously or unconsciously consider that when making decisions. As least it is speculated that that is what is driving some of their current out-of-stock issues.

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Steve Montgomery, President, b2b Solutions, LLC

I believe the issue of big store out-of-stocks is even a BIGGER problem than most retail pundits declare it to be. Target is notorious for not only keeping inventories dangerously low, but also having inherently inadequate shelf space allocated to items that have a tendency to sell out, sometimes easily within the course of an average business day. Walmart, while better in this area, has also not cracked the code on "just-in-time" replenishment, especially in grocery.

Ironically, both retailers make a point of asking shoppers at the checkout, "did you find everything you were looking for today?"... but apparently do not have a system in place to take negative feedback and turn it into a remedial process to ameliorate the out-of-stock problem. Consequently, not only are they not fixing the problem, they are going out of their way to remind shoppers they have a problem when they check out.

Out-of-stocks are not just annoying, they are transaction size killers and over time will cause shopper defection. In those categories that lend themselves to Amazon and other online sources, bricks and mortar out-of-stocks will be a catalyst for online retailers to grab market share.

The real "crime" of out-of-stocks, (unlike competitive issues, the economy, and many other retail maladies), is that they are largely CONTROLLABLE by the retailer. I can only surmise that because the "opportunity cost" of missing sales due to out-of-stocks does not show up anywhere in the retailer's P&L, retailers remain largely passive in their approach to correct the problem.

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Mark Heckman, Principal, Mark Heckman Consulting

It is interesting that most predictions were for a successful holiday selling season and out-of-stocks still seem to be a problem.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

Purchasing, planning, allocation, and merchandising these are the root causes for out-of-stocks in any size company. There are vendor causes as well, but the big losses come from internal issues.

'gjarnoldjr'

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