In order to keep up in today’s competitive environment more and more grocers are beginning to resemble specialty markets in an attempt to lure customers with higher quality foods, expanding variety, including increasing amounts of perishable food including dairy, produce, and fresh meat that come from local vendors and farms. These areas often require new practices that increase the complexity of the supply chain that grocers already manage.
It’s clear that grocery has become more complex for retailers in the last decade. Not only have buying patterns shifted since the beginning of the recession, but customer preferences and eating habits have too. The huge demographic shifts that occurred extremely rapidly have greatly impacted the way grocery retailer’s look at buying and managing their inventories. Companies that had some success in understanding these changes were fortunate enough to have had the capabilities of seeing pertinent information in their data. Many others struggled.
Other contributions to the complexity of grocery include the multitude of suppliers and vendors that retailers are dealing with along with the growing volume of product that moves through the supply chain. Additionally, the speed at which a product moves through the supply chain has become increasingly complicated. For a typical producer, supplier and vendor of a grocer’s product, replenishment happens in very quick cycles, but varies widely for the different types of products.
To make matters worse, there is a huge difference in how to handle ambient (non-perishable) product compared to perishable product. There are many different logistical concerns from the time product leaves the supplier to how you get it through your internal supply chain and then to the store shelf within a retail location. With perishables, you can incur waste with tray sizes that are too large for some stores, but because you need to meet a certain service level, you might have to send the trays regardless.
Ambient product, on the other hand, has to accommodate to specific shelf display requirements particularly special fixtures during promotional periods. Non-perishable inventory may need to be brought in earlier ahead of a promotion. Overall, each delay or error in the process can lead to waste, shrink or a missed selling opportunity. It all comes down to getting the right product to the right store at the right time.
With that said, some retailers have neglected business strategies through all these changes in terms of waste vs. profitability specifically in a sense that certain product is critical for customer satisfaction. Therefore, having a higher availability, even if it means more waste and less profit, is critical. Establishing and maintaining strategies can help ease decision-making with perishable and non-perishable product.
Challenges in managing inventory with grocery
There are many inventory challenges brought forth from grocery’s new supply chain complexities.
One such challenge is the data dependency in tracking inventory successfully through the supply chain. For example, a grocer may receive an item from three different suppliers making it difficult to track their inventory. To overcome this challenge, some retailers benefit from having all of their suppliers manage to their specifications. Essentially, those suppliers would be contracted to put the same SKU number on that item.
For branded product, part of the challenge is that the manufacturer may actually have a number of different UPCs across regions for what is the exact same product. This can be driven by either change in the product over time or how the product is managed regionally particularly when production or preparation of those items is subcontracted. This is where you get into a lot of data complexity; if you don’t have a good handle on the data that represent a moving item through your supply chain, you’re going to have a hard time keeping track of it.
Multi-level distribution systems add to the challenges of tracking inventory successfully because a product can follow many different paths through the supply chain. Products often follow a lineal path from supplier to national distribution centers (NDC), NDC to regional distribution center (RDC), RDC to store. However, some retailers also have supplier direct to store or NDC direct to store and other combinations of movement that complicate inventory tracking, including lateral transfer of inventory between stores or between distribution centers.
Many grocery retailers work with antiquated systems that do not allow them to process item level receiving at store back door. At some point, these retailers will lose sight of that inventory because of the system’s limitations. In order to deal with these challenges, many retailers are in the middle of significant ERP programs where the primary goal of these programs is to get a better grip on managing inventory.
Technology to simplify the complexity
Ineffective inventory management can add to the complexities grocery retailers are combating. A simple solution lies within technology. Next generation supply chain solutions are key to managing the right amount of product at the right time. In turn, helping grocers to move forward in resolving inventory complications.
The ability to generate draft order plans that forecast demand should be an essential component of inventory management technologies, especially when it spans across the entire supply chain. This ability enables retailers to share order plans with suppliers who can then take the information and do a much better job of planning what they are going to be asked to produce and deliver in the future. Better yet, this helps suppliers with the purchasing of their own input materials that go into distributing product. Forecasting and demand planning also determines the right amount of product on the right days, which aids in quick replenishment cycles. A quick replenishment cycle increases product freshness and the usable life to a customer not to mention helping suppliers and vendors along the way.
It can prove difficult to get the right product to the right store when dealing with a multifaceted multi-level supply chain. With that said, it is crucial to have a tool that has a good distinct view of what product is moving through the supply chain, not only what has been delivered to the supply chain by the supplier or what is sitting in the store, but having the ability to pass the demand of a product appropriately through any distribution level to get that product to the store regardless if its from a national vendor or a local farm. A new technology solution that factor into the order planning and allocation processes what product is moving to the store, from the supplier and where it is going to hit would eliminate such issues.
3 things grocers can do to maximize profits
- Incorporate product strategies: It is important to have good product strategies in place especially for those perishable items with rigid pack or tray sizes. Depending upon your pack size, this can be a brute force decision creating two entirely different choices and sometimes missing the boat and incurring a little too much waste or perhaps losing sales. Defining product strategy goals is a proven tactic to maximize profit.
- Collaborate with suppliers: Managing ordering and replenishment properly is difficult with complex supply networks. By building a connection with your suppliers not only are you generating trust, but also you’re increasing your profit by reducing time and overlap within the supply chain. This holds true for both perishable and non-perishable products.
- Invest in new technology: Antiquated systems are not successful at overcoming data complexities or changes in buying patterns nor are they successful at getting the right amount of product to the proper store at the correct time. Solutions that are strategic, profit-aware and automated should be utilized.
Just like consumers have transformed, so has the grocery industry to keep up on the challenges produced from customer’s new wants and needs. What once were miniscule constraints now are made of multiple levels and large volumes. In order for retailers to flourish and be advantageous in overcoming these changes, next generation supply chain opportunities need to be adopted. Retailers need to employ tools that provide order planning and forecasting, track inventory successfully, and handle ambient and perishable product properly to avoid being left in the dust.
There are a variety of demand signals that need to be monitored on a local level, these signals include: the time of day activity occurs, local events, sports schedules, weather, seasonality, social trends and local buying habits. To add to this already complex problem, this must be done at a SKU/store level, in real-time to optimize profit from perishables. Grocers are one of the only retailers who have a legitimate need to plan inventory by the hour in order to avoid situations of ‘scarcity and abundance’.
Because the majority of non-perishables are shelf stable with long code dates, the time-phased element to the demand, delivery, and sale is related to carrying cost, customer service levels and the cost of money invested. The majority of allocation/distribution projects tend to focus on determining how much inventory to push to a given store. Theoretically these items can remain in the store until someone buys them or until they are marked down as part of a clearance initiative.
Grocers and food retailers now need a new approach to forecasting, SKU rationalization, assortment planning and order planning. Retailers who can meet the specific needs of their customers at a local level will become much more successful.
To place inventory in the most efficient and profitable way, merchants can define product objectives, like minimum credible display and service levels, which should be used to decide each inventory placement decision. This enables retailers to make sure every product is in their assortment for a reason.
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