OSA: Avoid lost sales due to out of stocks
OSA: Avoid lost sales due to out of stocks
Neogrid | Retail Insights
Learn how to identify problems related to product availability in retail and how to fix them with the On-Shelf-Availability concept.
You are walking down the snacks aisle in search of a particular brand of cookie and instead of your favourite cookie, you are greeted by a hole on the shelf, it’s out of stock. Unusual? Unfortunately not, it’s all too common given the retail grocery industries average Out-of-Stock rate consistently hovers around 8%. From the shopper’s perspective that means that ~ 1 in 13 of the items on their shopping list are not available for purchase. For certain highly substitutable products, it may be little more than a minor irritation, while for other products, it may be cause to abandon the whole basket and seek the products at another location. Regardless of where in the spectrum the consumer responds, customer satisfaction is impacted 100% of the time.
Out-of-Stocks are an issue which has plagued the industry for decades, with little progress despite massive advances in information technology and data availability. Why? We believe the fault is in the way the problem is framed and consequently addressed. More often than not, the issue is dealt with as a short-term emergency to be corrected, rather than a systemic issue which needs to be prevented through understanding and correction of the root cause. Moreover, attempts at short-term reactive intervention are often unsuccessful, ineffective and expensive.
In this piece, you will discuss how shifting the focus of On-Shelf- Availability (OSA) from triage to prevention, OSA rates can be increased along with shopper satisfaction and your bottom line.
"1 in 13 of the items on their shopping list are not available for purchase"
A breakthrough in product availability analysis
We are in the midst of an era where the relevance and survival of retail is being questioned. With online retailers offering an unprecedented assortment of products, next day or next hour delivery and an increasingly frictionless shopping experience, retail is in the fight of its life. While a few have, or are destined to lose the battle, others are successfully fighting back with a variety of tools focused on the shopping experience, shopper engagement, mass personalization and other customer centric strategies. These are all critical to the success of retail, but unless the product is available to the consumer where, when and how they want it, the experience will be negative, engagement will be lost and consumers will feel personally let down. We see On-Shelf-Availability as the one thing that can either derail all your efforts or be the final enabler of success.
Neogrid provides a leading retail intelligence solution focused on providing insight into retail execution and supply chain effectiveness, leveraging store level POS, inventory and other data streams widely available in today’s retail environment. We leverage this data to effectively address OSA issues for both retailers and manufacturers, providing visibility into their OSA levels, out-of- stock conditions and the root causes that led to these outages. Armed with these insights retailers can have an accurate reading of how well they are serving their shoppers and are armed with the information they need to diagnose the cause and take short-term corrective and long-term preventative action.
Identifying and solving problems with OSA
The proactive OSA model helps manufacturers and retailers identify and solve the main root causes they face, including:
- Phantom Inventory
- Inventory not Available on the shelf
- Out of Stock (OOS) in Store due to OOS in DC
- OOS in Store due to Order from Store to Supplier not Placed
- OOS In Store due to Order Placed On Time but still not delivered within Lead Time by Supplier
- OOS in Store due to Order not Placed from store to DC
- OOS in Store due to Order On Time but sill not delivered by DC
- OOS in Store due to OOS in DC ( Order not on time and still not delivered by supplier to DC )
- OOS in Store due to OOS in DC( Order on time and still not delivered by Supplier to DC)
Identifying the Root Causes of OOSs
To effectively address OOS’s it is critical that the problem is viewed from the perspective of the shopper. Many retailers and their vendors have a distorted view of their availability rate which is driven by what and where they are conducting the measurement. The graphic below shows typical availability rates at various stages in the supply chain and shows that upstream rates of availability are typical high and where a breakdown does occur it is at the last few critical feet of the supply chain. From a shoppers perspective, the only stage which is relevant is the shelf and it is critical that the focus of availability initiatives focuses on what’s relevant to the shopper rather than a more generic “in-stock” metric.
To proactively manage OOSs, it is essential to first identify and understand the root cause of the situation. Out-of- stocks can be caused by any number of issues, including phantom inventory, disruptions in the supply chain, underestimating demand for a product or in-store replenishment schedules. The primary goal of root cause analysis is to determine why and where the problems are occurring. In which store(s) did the OOS occur? Did an outage occur during a particular sales event (i.e. Labor Day Sale)? Was product available in the DC, was the replenishment process followed as designed, was the data feeding the system available, accurate and timely etc.?
To gain this insight, the first step is to conduct a detailed mapping of the business process and the data which is driving the system. One of the key data sources related to on-shelf- availability, is the retailers perpetual inventory system, as it is that which drives when a product should be ordered, in what quantity and at what interval. Unfortunately, perpetual inventory data is notoriously inaccurate with industry studies estimating that as much as 65% of the data points in a typical PI system having some level of error. The reasons behind these inaccuracies are numerous and range from shrink, receiving systems error, scanning practices, theft and more.
Maintaining an accurate PI system is less to do with technology and more of an execution discipline and maintenance issue. It’s about people and process not technology. Having said that, technology is critical to understanding when and where errors occur at a mass scale. It is impractical to have people counting inventory every day to “true-up” the numbers, so an exception based intelligent system that can recognize when there is an error in the PI data and alert users to correct it is the only practical solution. Given that “phantom inventories” are often the most frequent cause of OOS’s, having such a capability is critical to both identifying the right root cause and prescribing the right corrective and preventative actions.
"It's essential to first identify and understand the root cause of the situation"
While PI system inaccuracy is often the biggest root cause, Store execution issues account for the majority of OOS with ~75% of OOS traced back to in-store execution failures. Within store execution, two factors stand out as key drivers: lack of shelf merchandizing (the product was available in the backroom, but the shelf was not replenished) and Replenishment systems and their settings.
Replenishment systems and the associated demand sensing used for forecasting, are often impacted by historical OOS which are not identified or fed into the system. The reality of many retailer and manufacturers systems is that they are not Demand Driven but rather they are Sales Driven. Some may believe this is nothing more than semantics with the terms sales and demand being interchangeable. However, this is far from true. Demand is what consumers want to purchase in an unconstrained supply situation where as sales represent that part of demand that the consumer is able fulfill. In the context of replenishment, if sales are constrained by OOS and the only signal driving the system is sales, you are in danger of creating a self-fulfilling prophecy of constrained or unfulfilled demand. The impact of these challenges on sales performance can be crucial when it comes to survival in the retail market. Problems are interconnected—where one ends another has already begun. However, the resolution is available to those interested in investing in a supply chain management solution that will support this proactive OSA model.
Finding the right source of out-of-stocks
Where to start
There three main components to implementation of an effective OSA solution, these are:
Data inputs to drive an effective OSA solution are generally readily available to retailers. They consist primarily of daily store/ item level POS sales and pricing along with inventory visibility both in-store and further upstream in the supply chain. In addition, data on the status of orders, lead times and order trigger points provide the insights needed to determine the root causes of OOS’s.
Finally, a process to resolve both the current issue and prevent future occurrences is critical in driving value and results. The process will vary from one retailer to the next dependent on the various roles and responsibilities. A key component of the process is a clear understanding of what needs to be fixed i.e. the root cause, who is able to fix that particular issue and the information they need to do so.
An analytics layer which can identify when an item is OOS and drill down into the root cause is the critical element of an effective solution. The system needs to determine an accurate expectation of unconstrained demand at the store, item, day level under regular turn and promotional conditions and compare that to actual performance. The system than needs to determine where variations between expected and actual demand are significant and likely caused by an OOS condition. Where an OOS condition is suspected further analysis of the inventory, orders, lead times, in-transits etc. are conducted to determine the root cause of the condition.
In addition to developing a process to address specific occurrences an overall prioritization process is key to success. Our suggested order of activities is depicted here.
Are you able to identify the root causes of lost sales?
A practical approach to addressing OOS’s and creating value
Using the these approaches, Neogrid has developed a smart retail insights system based on the proactive OSA model: Neogrid Retail Insights.
Retail Insights: OSA at work
Retail Insights (RI) monitors and analyses data to avoid out-of- stocks or excess inventories by getting accurate information about products’ performance at points of sales (POS). RI allows companies to, consolidate, process and report vital sales and inventory information to better plan sales actions, increase inventory turns, encourage production, manage promotions and detect opportunities for growth — all with collaboration between brand owners and retailers. The detailed and granular understanding of the demand dynamics and drivers impacting a brand are part of a holistic approach to both manage OSA and optimize demand.
RI also shows performance of the product on the shelf in the following aspects:
- Availability rate
- Stores with higher losses
- Sales at each establishment
- Items representing higher losses
- More competitive products
- Shelves to be supplied first
- Main reasons for out-of- stocks
- Monetizing impacts
RI puts OSA intelligence at the foundation of the data, providing answers to product manufacturers. In reports with a user-friendly interface, it is possible to recognize items that had good performance, differentiated from those that need attention or immediate improvements in shelf supply.
Balancing skewed inventory
In an effort to avoid out-of-stocks, increasing the overall levels of inventory would seem to be a logical step to take. However, a generalized approach of increasing overall inventories is rarely effective or efficient. Given that OOS’s tend to be very localized and specific to an item in a store at a point in time, a blanket strategy of increasing inventories may cause more issues than it solves. For supply chain management, the ideal situation is not having product excess or shortage, and for inventory to be always balanced. But how do manufacturers and retailers know the right number of products that must hit the shelves so you can keep inventory levels balanced?
As previously mentioned, through On-Shelf Availability monitoring it is possible to determine the causes of product shortages, as well as solutions for excess inventory. Through a granular view of demand, inventories and selling conditions at the point of sale, retailers and their vendors can easily determine which products in which stores have an imbalance of inventory and take corrective actions.
Out-of-stocks provide a massive opportunity for most retailers and often there is no easier way of generating same store sales growth than making sure the consumers you have fought so hard for, are able to buy everything they intended to. While a 100% OSA rate is probably unrealistic there are many examples where implementation of an effective OSA solution has helped retailers increase OSA rates and associated sales by 1% to 3% . By implementing proactive OSA practices, manufactures can prevent tomorrow’s loss through a scalable, repeatable, collaborative and cost-effective process while ensuring demand is fully captured and shoppers experience a more satisfying and effective shopping experience.
How Neogrid can change the way to look at OSA
With customers in over 30 countries and offices in Latin America, North America, Europe and Asia, and an exclusive and complete platform, Neogrid solutions synchronize the supply chain, delivering results such as reducing out-of-stocks and at the same time, reducing inventory levels.
In 2014, for the third consecutive year, Neogrid was awarded for its innovation in the retail landscape by the American magazine Supply Demand Chain Executive (SDCE Award). In the same year, it was also recognized in the United States in the category "Excellence in supply chain" by Pros to Know Award.