For a grocery chain, success lies in balancing shelf life management and localised inventory. Greg Wilson explains the local variables that impact demand forecasts

Grocers participate in a highly competitive marketplace with complex timing issues, volatile product lifecycles, and competing price wars. On grocersí very slim margins, an inventory mistake in one category can totally wipe out the profit earned from another category. Likewise, an error in one store can erase the profit earned by a neighboring store. As a result, the quality of each inventory decision becomes that much more important, leaving no room for errors in building an inventory strategy. Good inventory planning and fulfillment practices should emphasise the need to improve replenishment and allocation by limiting stor generalisations and should be based on a strategy that
localises demand.



Scarcity and abundance
The concept of scarcity and abundance is based upon the fact that there will always be an inventory imbalance in retail operations. No matter how accurate forecasts are, how experienced a planning team is, or how much time is spent with spreadsheets, there will always be scarcity (under-stocking) or abundance (over-stocking). In situations of scarcity, grocers face issues like low customer service levels, higher commodity procurement costs and missed revenue opportunities. In situations of abundance, the perishable inventory will expire and erode margins by adding to a retailerís shrink. Nonperishable items can tie up cash, thus hurting liquidity ratios and access to capital. Balancing these two extremes of the inventory spectrum is a compelling reason for grocers to create strategies for allocation, forecasting, and assortment/range planning that take local shopper behaviors into account.

Local demand signals
There are a variety of demand signals that need to be monitored on a local level. These include: the time of day an 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 optimise profit from perishables. Grocers are the only retailers who have a legitimate need to plan inventory by the hour in order to avoid situations of scarcity and abundance.

Departments like dairy, meat, produce, seafood, bakery, deli, etc. often have a lifecycle that is measured in days (or even hours). The key to optimising profit with this merchandise is timing. Integrating time-phased planning for fresh products requires a strategy and an execution that aligns store-specific assortments with localised signals of demand. In order for stores to execute on their strategy, they must have the ability to plan in advance for known demand signals and to execute quickly for signals that change on a dayto- day basis.

Local demand insight for perishables: When grocers have local demand insight, they can optimise their recipes and manage their yield in order to align their fresh produce to that localised need. They can manage orders based on transit costs and locality of suppliers, as well as understand local factors that drive the demand of specific product types. Grocers will notice immediate increases in margin with their fresh and perishable goods because they will be minimising waste while achieving their availability goals.

Local demand insight for non-perishables: 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. Non perishables are typically divided into two groups, fast moving consumer goods (FMCG) and slow moving consumer goods (SMCG). FMCG are typically intended to be completely consumed by the customer (like paper towels, charcoal, pet food, etc.). SMCG are intended to be replaced someday, but on a far less predictable buying curve (like flatware, dishes, light bulbs, decorations, home dÈcor items, etc.).

What is most important for FMCGs is the replenishment strategy. FMCGs are typically replenished based upon a combination of assortment, demand and time. Having local demand insight on how to pack and move those goods most efficiently during the replenishment cycle will help grocers reduce costs. Grocers usually do not mind carrying some additional inventory for FMCG because demand is usually high and sell-through is complete soon after delivery.

Since SMCGs typically remain in the store for a long time, demand for these is less important. However, these goods can cost a tremendous amount of money in inventory carrying costs and often end up eroding the overall margins of the store through markdowns and inventory reduction initiatives. The strategy for SMCGs relies on having an efficient initial allocation that takes into consideration local transit vs. national transit as well as size and pack optimisation.

Assortment and SKU rationalisation
Assortment and SKU rationalisation ensures that every product serves a purpose at each store. Grocery chains need to align their inventory with regional and cultural product preferences. Grocers will find that in some stores,natural products sell more rapidly, while in others cultural products perform best and in some, discount items move quickest. To understand this level of SKU/store analysis in real-time with 46,000+ SKUs and over 500 stores would be impossible with spreadsheets. Grocers need the right technology to ensure they are able to get their order right.


Off the shelf metrics to drive grocery success
In order to adapt to those differing habits, grocers need to have the ability to turn transaction data into an action plan for the store and customer. Grocers must first consider what detail of transaction data is necessary and then compare the factors of demand to the conditions of the transaction.

In an industry where one mistake can wipe out hundreds of good decisions, shopper behavior and local buying habits are the most important metrics for grocers to utilise in their inventory decisions. The quicker a grocer can understand and react to this information, the quicker he will increase sales and service levels while reducing inventory waste.



Five tips for developing a real-time response plan for customer behavior:

􀂔 Each product should have a role with specific objectives that can be measured and executed to. A product may be in your assortment to drive traffic, to generate profitability, to present an image or to opportunistically acquire impulse sales. Each of these roles come with unique objectives that can result in different inventory requirements.

􀂔 While forecast accuracy is important, it is not the only way to improve inventory placement. If you are adjusting forecasts to achieve different inventory results, youíre already reacting to this fact. Shift focus to finding the best way to utilise inventory to achieve goals while understanding forecast accuracy and variability are realities.

􀂔 Get a deeper understanding of the impact of waste on your inventory decisions and act on it. Depending on margin, it may be more profitable to accept additional waste on some products, while other products would be better served accepting an occasional lost sale.

􀂔 There is no substitute for understanding product behavior at local levels. There are many ways to improve this understanding but consider those which have the most impact including:

􀂔 If youíre working to static, periodically generated seasonality profiles, you have a great opportunity for improvement.

􀂔 Did you stock out? When? What did that mean in missed opportunities for sales? Can you replenish again today? The more detail you have in answering these questions the more efficient you can make your inventoryóespecially for short life, short lead time merchandise.

􀂔 Does this location have a weekend traffic boost? Does that product respond to the pattern? Understanding these interactions invariably leads to better performance.

􀂔 Does this product react differently on cold days or wet days? What does that mean to demand? And how should that affect how stores are supplied? If I can ship it tomorrow and I know itís going to be hot, whatís the right decision? We all know these realities exist, but have you been able to execute to the reality?

􀂔 Product behavior constantly changes with the changing consumer. The item that fulfilled its role last year or last quarter may not be doing so now. You need to be alerted to situations where this change is happening, and have a mechanism to understand and react to the way that impacts your offerings to customers.

New answers for grocery The market is asking new questions of grocersó questions about customer preference; questions about the right amount of stock; questions about waste; questions about local products; questions about availability. The market is moving at an incredibly rapid pace that requires grocers to have advanced awareness of every store in their chain. That awareness comes from a mix of store strategy and technology.

The author is Director of Field Strategy, Quantum Retail