Growing demand for local products leads to out-of-stocks
Randy Fields, Chairman and CEO, Park City Group
Through a special arrangement, presented here for discussion is a summary of a current article from the bi-monthly e-zine, CPGmatters.
Inventories have ballooned nearly three-fold over the last two decades as localization has been embraced to protect market share and profitability. Yet, localization just might hasten the death of certain banners unless steps are taken to control the additional expense and lost sales that will almost certainly result from expanding SKU counts, increasing direct store deliveries (DSD) and a higher number of out-of-stock items in stores.
With shelf space largely unchanged, the number of units on hand for each SKU — which represents the safety stock for that SKU — will need to be reduced, inevitably increasing out-of-stocks.
With local suppliers typically using DSD rather than warehouse delivery for these new SKUs, retailers face forecasting challenges, inventory complexity and additional expenses for check-ins at the store.
However, a few steps can enable retailers to continue localizing store inventories and avoid out-of-stocks, lost sales and operating expenses that can flow from SKU proliferation. These include:
- Improving visibility for the DSD Supplier: When DSD suppliers gain visibility of sales and inventory trends at the SKU/store level, they can modify orders and deliveries to reduce out-of-stocks. This can be done dynamically each day, even at the route level.
- Automating ordering: Many suppliers aren’t equipped to forecast accurately, even if they have access to the critical data they need. Thus, the next step is to automate their ordering processes with tools designed to optimize forecast accuracy.
- Converting suppliers to scan-based trading: Scan-based Trading (SBT), a process whereby suppliers maintain ownership of inventory until items are scanned at the retailer’s point of sale, is more attractive than ever. When suppliers convert to SBT, retailers get immediate balance sheet relief from their inventory carrying costs. Just as importantly, suppliers now have all the incentive they need to manage inventories for maximum return and sales performance.
The key for trading partners is to coordinate their supply and demand chains more than ever before.
DISCUSSION QUESTIONS: What suggestions would you have for avoiding the negatives of SKU proliferation that tend to occur with increased localization? Do you have specific tips for managing inventories and expenses when sourcing from local and smaller suppliers?