BrainTrust Query: What does it imply for manufacturers when retailers initiate programs to reduce their store-level inventory?

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Aug 10, 2006
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By Bill Bishop, President, Willard Bishop


Wal-Mart’s “Inventory Deload” and “Remix” initiatives are by far the most high-profile examples of what we expect will be the focus of a growing number of successful retailers, i.e., decreasing inventory investment.

For those not familiar, the two Wal-Mart programs address inventory efficiencies from different vantage points:


  • Deload is a broad-based effort to reduce inventory levels at both distribution center and store.


  • Project Remix focuses on the sales velocity of individual SKUs, with dual goals: a) rationalizing assortment, and; b) reducing distribution costs and improving service levels.

The initiatives have heightened awareness of the ongoing tension between manufacturers and retailers regarding the amount of inventory that a retailer keeps on hand for each
SKU.


  • Retailers typically use a measure like days of supply to control store-level inventory but are frustrated when case pack quantities require that they keep 30-to-40 days of supply when the store gets three-to-five deliveries a week.


  • Manufacturers are concerned about sales lost because of out-of-stocks, and while this is caused by a lot more than inadequate inventory on hand, they have a legitimate concern when planograms don’t provide for adequate inventory on the shelf.

This issue is particularly timely as online retailers begin to explore their advantage in selling slower-moving products that are part of “The Long Tail,” a concept developed
by Chris Anderson (see his book of the same name).


Discussion Question: What are the implications for manufacturers if/when retailers focus on reducing their investment in inventory, and what are some
outside-the-box responses?


Further, while these inventory reduction initiatives make sense from the retailer’s operational/financial perspective, how will they affect the shopping
experience? Specifically, what will the impact be on the:

– Perceived variety offered?

– Level of out-of-stocks experienced?

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19 Comments on "BrainTrust Query: What does it imply for manufacturers when retailers initiate programs to reduce their store-level inventory?"


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Bill Bittner
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Bill Bittner
14 years 6 months ago
The number one inventory consumer is “presentation stock.” The simple rules for presentation stock were enough space to hold a case plus the sell through for an order interval. To make this even easier, most retailers did not bother to work out the specific requirements but used a “rule of thumb” case pack plus one week’s supply. So how does the retailer go about reducing inventory holding costs? First and simplest, they can reduce varieties. Does that apricot flavor really have to be there? How much does it sell and is it used as a component in something bigger? Maybe it should be seasonal, or maybe it should not be there at all. Second, they can review shelf allocation rules and order points. Very simply, lower order points on Friday and Monday to truly reflect need. Keep midweek order points at a week’s supply so that those items get replenished when the warehouse demand is lower. Thirdly, review case packs with the manufacturer and try to get smaller versions. In many instances the retailer serves… Read more »
Al McClain
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Al McClain
14 years 6 months ago

While consumers apparently buy into the “less is more” idea of selection in physical stores, they are not oblivious to the plethora of choices offered online. Take a look at books and music as categories. Most savvy shoppers these days are buying these categories almost exclusively online if they have interests beyond the bestsellers, unless they just like the experience of physically walking around a store. Online and specialty stores are picking up the large crumbs in many categories that are falling off the efficiency truck.

bob caruao
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bob caruao
14 years 6 months ago

SKU reduction and inventory control are nothing new to those who produce products for a seasonal market. Wal-Mart Canada requires all their seasonal lawn and garden vendors to lift remaining products from the Wal-Mart shelves at the ‘end’ of the sales season. Do It Best has recently put out a memo to their buyers that slower moving SKUs must be removed by the vendor from their warehouse as a means of controlling their WOS inventory. Companies in the know have already begun the process of smaller case packs to increase their shelf turns and improve inventory control. This is the past, present and future. The best offense is to get on line with the merchants (Retail Link for Wal-Mart) and manage ‘real time’ inventories for them. This management may help solidify your position with the buyer and generate new business for your company.

Edward Herrera
Guest
Edward Herrera
14 years 6 months ago

Retailers will always strive for better information, forecasting, and productivity. Retailers that find the right blend of value, selection, and cost will succeed over the long term. Retailing is an equation of many variables that have different importance according to the vision. At the top of Wal-Mart’s list is cost and price. Other retailers can’t win that game so they elevate “selection and experience” at the top of their importance. The “Right” inventory is not equal for everyone. Retailers must find their balance and not fall in to the trap of less inventory is the end all.

jack flanagan
Guest
14 years 6 months ago
There is no inherent conflict between reducing inventory and reducing out of stocks. To quote Lean Thinking’s Jim Womack, it does require that you “rearrange your mental furniture” (to which I might add, “and change your business processes”). Reduced stocks can also result in fresher product, less spoilage or damage, closer store level attention to OOS and (no small benefit to consumers) less need for verrrrrrrrrrry slow moving products to be subsidized by faster movers which can result in lower prices if management will do the right thing and pass the savings on. There are also a number of empirical studies that have shown that thoughtfully reducing excessive item proliferation also results in consumers actually perceiving increased, not decreased, variety. By the way, the benefits in the preceding paragraph can also benefit the manufacturers as well, assuming they’re willing to make the change in thought processes and business processes. Too many retailers have, for years, practiced the FISH method of inventory management on hundreds, if not thousands, of items in their stores – First In,… Read more »
Bhupesh Shah
Guest
Bhupesh Shah
14 years 6 months ago
Wal-Mart offers a very good system for vendors to keep an eye on their inventory (Retail Link). Properly used, this system can ensure that those stores that need product get product. One of the benefits is that sales tend to go up since vendors are aware of how their SKUs are doing in the field…and they act accordingly. This is especially important on the seasonal side of the business. A challenge, however, is when there are long lead-times involved. Then, it becomes critical to ensure that there are no OOSs while also ensuring that there are not any OVERstocks at either the vendor’s warehouse or the customer’s warehouse. This is where having a good relationship with the buying staff and the production people helps. Watching sales levels daily allows room for micro decisions, like whether to offer a rollback, buy some advertising pages, explore alternative channels of distribution, etc. The issue with case pack quantities is not new. Canadian Tire was looking at this about 15 years ago. RONA constantly evaluates their warehouse orders against… Read more »
M. Jericho Banks PhD
Guest
M. Jericho Banks PhD
14 years 6 months ago

Fresh, live lobsters never sold well enough to justify their cost in supermarkets, but their display tanks were, hands down, the very best symbol for fresh seafood departments ever. Plus, this “zoo” kept the kids occupied. You rarely see the tanks anymore, and you rarely see complete, first-rate fresh seafood departments in supermarkets, either.

When did shoppers tell us that they wanted less selection, less choice, less variety? I must have been out of town that day. One of the primary tenets of the perception of selection is carrying slow-movers. Shoppers want to know that it’s available, even if they don’t buy it. That’s why limited-assortment stores never succeeded.

Smaller case packs just for slow-movers is the best choice. Don’t limit variety, just keep dusting off those same three jars of apricot preserves.

Bill Bishop
Guest
Bill Bishop
14 years 6 months ago

Direct Store Delivery (DSD) suppliers are also feeling the pressure to reduce their inventory in the backroom of stores. Many high volume stores are already getting one or more merchandising service calls a day from their top DSD suppliers and they are seeing an increase in weekend merchandising coverage. Less backroom inventory could require some suppliers to increase the number of deliveries and further drive up their cost-to-serve.

Given higher fuel costs and increasing pressure to reduce backroom inventory, how will DSD suppliers respond? Are we at the tipping point where we see new DSD business models emerge, like shared distribution?

Ben Ball
Guest
14 years 6 months ago

How about “No slotting costs for six packs”?

Ken Kubat
Guest
Ken Kubat
14 years 6 months ago
Hopefully, an immediate “implication” will be a corresponding increase in collaborative opportunities to replace inventory with information…i.e. information that provides more real-time visibility/understanding of what’s in the distribution “ecosystem,” where/when out-of-stocks and overstocks are likely to occur, and how those “under/over” situations can be mitigated. A key culprit in the flow of physical inventory, as well as information, is latency…when things sit still, bad things happen. OK, prayer and meditation may be exempt from this axiom, but generally speaking data (AND inventory) in motion wins! Reduction of inventory is a shared goal and a shared industry responsibility. The essential “technologies” for achieving the goal (real-time messaging, event-driven architectures, etc.) have been leveraged for decades by other industries, most notably financial services/exchanges and the aforementioned “online” world. My personal view is that the “online” world of retailing has no inherent advantage over “brick and mortar” retailing and traditional consumer product supply chain. Rather than viewing the online channel as a threat, it should be seen (and analyzed!) as a model…the “best practices” of other industries, including… Read more »
Ed Dennis
Guest
Ed Dennis
14 years 6 months ago
I was not aware that Wal-Mart and other major retailers had ANY inventory investment. It is common knowledge that successful retailers are able to operate entirely off supplier float. One thing I have seen more frequently at my Wal-Mart is increasing OUT OF STOCKS. OOSs cost Wal-Mart money because they miss an immediate sale and may miss a future sale. I fear that many retailers have not looked carefully at the inventory management results of the airlines industry. The airlines are so focused managing their inventory of seats that they have alienated most of the traveling public. It may be working to some extent but it looks like those airlines offering alternative systems (Southwest) see their business expanding while the inventory managers see their business failing. The key to the entire situation is to manage your business to satisfy your customer. If given the choice of decreasing retail inventory to the point of causing OOS or increasing inventory to decrease OOS, I think the second choice is the consistent winner.
Charlie Moro
Guest
Charlie Moro
14 years 6 months ago
I was with a key retailer this past week and we discussed the very issue of case packs. I was proud to say that more and more manufacturers have moved to “sixes” and his response was “why not threes?” Wal-Mart is only one of many retailers in all channels working on inventory reduction and congrats to them and others for driving the issue. Why should retailers hold millions in inventory when it makes no sense to the consumer? Companies can redeploy that cash into more stores and services and, from the shopping experience, give the consumer more choices since the allocations can be better adjusted to support the lower inventory levels. This can benefit both the faster selling items with more space and new items with single row allocations and secondary locations. Now, the retailers need to move away from slotting and other onerous fees to truly make reducing costs and actually selling new and different as well as staying in stock for all stops along the selling path. Reducing inventory is only one piece.
Kenneth A. Grady
Guest
Kenneth A. Grady
14 years 6 months ago
This is a great follow up to the earlier discussion about manufacturers working more closely with retailers. Imagine a world where inventory levels could be at very low levels because stock was replenished daily. The mix of products could be adjusted constantly depending on a variety of factors such as weather, taste preferences, fads and current events. In the manufacturing world this is called just-in-time, but in the retailing world it is called just-a-dream. Manufacturers need to work with retailers to tighten the supply chain so that both parties don’t have to live on the binge and purge method of sales. When I ran a factory, many of my suppliers came to the plant daily to replenish parts. By knowing what we used each day, whether orders were up or down, and what we anticipated our suppliers kept us in stock but not overstocked. Tightening the supply chain through incredibly close cooperation will reduce out of stocks. It also will allow inventory mix to fluctuate very frequently, enhancing the customer experience through providing the daily… Read more »
Mark Lilien
Guest
14 years 6 months ago

Retailer inventory reduction is complicated because the side effects can be costly. One major retailer reduced its case packs to the stores by 85% and then faced a field rebellion because the store-level restocking labor promptly rose sharply. In other words, when the case packs are larger, the number of store-level restock trips goes down.

Furthermore, weeks of supply needs to tempered by volatility. If the demand is very predictable, the weeks of supply can be minimal, but if the demand is volatile, preventing stockouts is more expensive.

For many products, case packaging expense is such a high proportion of the product cost that larger case packs are almost “free” from the manufacturer point of view. Fewer and fewer retailers and suppliers are willing to break case packs at the warehouse level, since that overhead increase isn’t trivial, either. Cost reduction, from a holistic point of view, isn’t easy.

Dan Raftery
Guest
14 years 6 months ago

Inventory management is what this business has always been about. The biggest conflict between retailers and manufacturers centers first on product distribution and second on shelf space/location. Fortunately, analytical tools have matured and those retailers who invested in all the resources needed to use the tools can intelligently make both decisions. Unfortunately, the industry struggles with inertia caused by the need to make this quarter’s numbers using old habits. Companies who can break those bonds to the past can remain relevant. Sure it costs money to change case packs, but how much does it cost to wrestle the excess inventory through the forward and reverse supply chains? And why are multiples of 12 the magic numbers in CPG?

Joost van der Laan
Guest
Joost van der Laan
14 years 6 months ago

Retailers and suppliers have conflicting interests on case-pack quantities. Retailers want small case-pack quantities because they prefer low shelf stocks. Suppliers want large case-pack quantities for lower packaging costs and more shelf space.

These trade-offs are described in my online article about effects of case-pack quantity on costs, shelf inventory and profitability in the total supply chain. Check: Case-pack quantity must align with sales velocity of retailers

Case-pack quantity of a product has many effects on supply chain and retail marketing mix:

• Box prices suppliers

• Handling costs suppliers and retailers

• Store order quantity and delivery quantity

• Store shelf inventory costs

• Store shelf profitability

• Store assortment and opportunity costs

• Weight (kg) per case

These effects are analyzed for slow-movers and fast-movers, and for small products and large products.

Art Sebastian
Guest
Art Sebastian
14 years 6 months ago
I know reducing store level inventory is a major priority for retailers – I’ve had to go through this many times during my 10+ years in retail. “Inventory Reduction” typically takes place towards the end of the year and becomes a top priority. I think going through the rigorous process of developing Pareto curves and analyzing days of supply, etc. is healthy for the retailers as it will essentially improve in-stock conditions, store backroom inventory, warehouse aged inventory, etc. The affects of the manufacturer can go two ways based on the manufacturers role in the category. If the manufacturer is the #1 player in the category, then they can reap the benefits of the retailer discontinuing all of the 3rd, 4th, etc. tier players. If they are the bottom half of the players, they can find themselves either “paying to stay” or loosing their recent slotting and co-op investments. The shoppers and buyers can be affected in two ways as well – either good or bad. The good is improved shelf presentation, less out of… Read more »
Dan Gilmore
Guest
Dan Gilmore
14 years 6 months ago
A large number of consumer goods companies and even transportation providers have recently cited inventory reduction programs by retailers, especially Wal-Mart, as contributing to lower than expected financial results. The impacts will vary over the short and long term. In the short term, as we’ve already seen, orders for Consumer Goods companies will decrease. Post that “reset,” overall volumes for most should return to normal – but with a question of whether order patterns will change, moving to smaller, more frequent shipments, and therefore higher logistics costs. As always, that’s where the trade off is (same as for case pack quantities), and it is interesting that this is happening in an environment of rapidly rising fuel and transportation costs. The evidence at least at Wal-Mart is that the program will also involve paring overall SKU counts. Most at risk of course are second tier brands in a category. It appears likely some of these brands and more niche SKUs in a category are likely to go, impacting consumer choice, though the in-stock positions of the… Read more »
Richard Kochersperger
Guest
14 years 6 months ago
First Implication: The manufacturer CEOs had to go to Wall Street and announce that they will not make their sales numbers for the quarter. It was not a pleasant experience — negative results for most of them. Then the manufacturer have to figure out a way to sell more with less inventory investment and reduce out of stocks. Most of them have no idea how to handle this challenge. Second Implication: The retailer is forcing the inventory management process back onto the manufacturer which means added costs in the form of layers of management or technology investments. Many manufacturers will have to reevaluate their inventory locations and strategy to respond to the Fast/Slow program that Wal-Mart and others are implementing. Third Implication: Slow movers will be handled differently…through consolidation centers, shared LTL shipments, or internet portals such as Amazon, Net Grocer, etc. Fourth Implication: “Retail-ready” products will be required. The food supply chain must take fingerprints off the boxes and move to a flow through system: from field to fork.
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