This story begins in the year 2010.
It was a regular day at a hypermarket at one of the largest retail chains in India in 2010 where I, a department manager at the time in the FMCG section, was going about managing store operations, getting ready for the evening rush of shoppers. Floor experiences told me that half-a-kilogram of butter was (and still is) one of the hottest selling products on the retail shelf and it typically required replenishment of the refrigerator twice a day, thrice on the big sale days. A walk-in consumer picked up a pack of butter, and as fate would have it, realized that it was past its expiry date. The consequence – A resounding earful on the shop floor from a very angry consumer who, rightfully so, had her trust and belief shaken not only with respect to the butter, but also every other product she had added to her cart. Oh! And all this in the midst of around 1000+ other consumers walking around the store. The ‘cover my face’ Emoji would have been apt.
As the operations manager, the one question that kept coming back to me was:
Why did we not see this coming?
Cut to a decade later.
As a supply chain analytics consultant, I was working with the Senior Director of Supply Chain Operations at a large consumer products company in the US, for whom On time In Full delivery of products all the way through to the consumer was critical on any Day in his Life, and every moving object along this path that isn’t doing what it is supposed to becomes a hurdle to overcome. He shared an incident: On one December evening, a plant manager at his company realized that they were short on two truckloads of Product 1 and one truckload of Product 2, impacting fill rates. Outbound managers at the plant started emailing and reaching out to other facilities to check if there was some way to cover for the shortfall. 23 hours and 6-7 emails later, they managed to plug the gap and get the trucks rolling. Incidentally, he only got to know about this exception 23 hours after the incident happened.
I heard from the Senior Director a familiar question: “Why did we not see this coming?”
Two supply chain incidents, two different geographies, ten years apart— same question.
Supply chain professionals we have spoken to attest to the fact that these incidents remain, the resulting inefficiencies remain, and most importantly, the above question remains as well.
Negative Consumer Experience
The irony is that the person who suffers the most due to these inefficiencies is the person for whom the business exists – the Consumer, who has to constantly put up with various kinds of irritants during a buying journey.
While each of them has a negative impact on consumer experience, poor product quality and out-of-stock tend to cause long-term damage to Customer experience and erode loyalty.
Empty Retail Shelves
Out of Stock Signage
Out of Stock on a Website’s Ecommerce Site
So what is the cause of this problem of product availability?
While other irritants have operational fixes, poor product quality delivered and out-of-stock point a deeper systemic issue with regards to Inventory management.
Let’s dive deeper into some of the most important reasons why organizations struggle with inventory management:
1. Demand Volatility & Fluctuations
In a magical, beautiful, and perfect world,
Dt = Ft and Error = Dt – Ft = 0.
i.e. Demand is exactly equal to the Forecasts.
But we live in a real world, and there is only one constant: Consumer demand is volatile, and changes with seasons, world events, an ongoing pandemic, and hundreds of other macro and micro economic factors.
As a consequence, consumer demand forecasting, while being one of the oldest math, is also one of the trickiest. The complexity only increases when you factor in changing consumer demographics, attitudes, preferences, behaviors, technological progress, omnichannel access to products, the need for instant gratification, and rising mobility. Consider the effect on the inventory side and you have a problem statement that needs serious attention.
Organizations across industries are catching up to the fact that aggregated one-size-fits-all forecasting does not work anymore.
The need for a demand forecasting approach that allows for planning at product and SKU level to achieve desired service levels defined for each product, while maintaining the lowest level of inventory possible, is necessary.
2. Inventory Visibility and Accuracy
In the scenario involving the Senior Director described above, the real problem in trying to resolve the issue and pre-empt future occurrences was –
- The team did not have an early warning that there was an inventory shortage
- The team did not have a clear view into where in the supply chain was there available inventory
You cannot manage what you cannot measure, and not having a clear measure of your inventory typically leads to one or many of the following incidents (which typically keep increasing over time unless you fix the root cause):
- Product cuts: These may occur at various nodes/echelons in the supply chain due to shortages leading to dropped service levels. Diving deeper into the issue during our conversations with product supply analysts and operations managers, we understood that they wanted to know about:
- Inventory that was In-yard or In-the-building and was still being cut
- Inventory that was not available at all (true OOS)
- Inventory that was well below safety stock and had a replenishment risk leading to future out-of-stock
- Inaccuracies: Mismatch between book inventory/system inventory and physical inventory lead to ongoing errors in forecasting, deviations from optimum levels of inventory to be maintained, and escalating costs.
- Shrinkages, Stale stock, Expiry: Substantial volumes of product have to be donated or destroyed because they have gone out of fashion or are past their best bag dates.
Lack of visibility into your inventory across the supply chain can blindside you more often than you believe.
The need for product-level visibility into inventory levels across the entire value chain – On-hand, Committed, Available to Promise, Reserved, Picked, Packed, Shipped, In-yard, Under Quality Control and Safety check – is critical.
3. Process Issues
In the first scenario at the retail store, what do you think went wrong?
- Did the store staff not follow process/guidelines?
- Did the manager not run a thorough inventory audit?
- Was the manager not aware that there was stale inventory on the shelf?
The true problem was a lack of holistic data-driven supply chain management, which meant the team:
- Was not aware of expired stock ? Visibility issue
- Did not ensure FIFO compliance (or FEFO compliance) – Process compliance issue
- Did not have a way to audit and catch these issues in time – Process & technology issue
Not knowing which issue to first go and solve – that is an issue of not using data-driven supply chain management. Operations managers already have so many things going on that it is nearly impossible to try and manage everything – from stock outs, to outbound orders, to inventory in the yard waiting to be unloaded, to replenishment, to pick-pack-quality. Managers need data to be their buddy who can guide them to the right scenarios to manage on priority.
The need is that data must come and speak to managers at the right time in the right context through the right channel.
The Solution: Smarter Inventory Management
We at Course5 Intelligence believe that there are 4 key building blocks to Smarter Inventory Management:
1. Demand forecasting
Consider an ensemble method to forecasting demand that includes:
- Demand forecast using historical data – that combines traditional time-series demand forecasts
- Demand sensing to understand signals from the consumer, the market, and other market forces using AI-driven solutions
- Demand prediction using associative methods that build on key predictors of demand using machine learning
An ongoing self-learning mechanism to study and analyze these inputs and their accuracies could help bridge the gap on volatility
2. Inventory visibility
Invest in an inventory tracking tool. This is absolutely necessary. (The clearest indication that you need such a tool is if your entire inventory is currently being entered into and managed from an Excel sheet). Also, evaluate the potential for IoT-driven Inventory tracking for greater visibility.
3. Multi-echelon Inventory Optimization (MEIO)
Inventory optimization at each echelon in the supply chain tends to bring in immediate benefits, whether that is adjusting stock level based on demand or increasing order cycles to reduce holding costs. But it is critical to remember that there is always a trade-off to every decision you take in the supply chain. More critically, the effect of the trade-off on your decision may not be visible to you, but could be felt further upstream or downstream in the chain.
To achieve multi-echelon inventory optimization —
- Identify the path-to-market for each product/SKU by every channel.
- Analyze demand forecasts to define the capacity needs of each path-to-market.
- Run an ABC analysis to understand and define priorities.
- Define service levels for each of the customers at the end of each path-to-market.
- Work backwards to define fill rate levels, on-hand stocks, safety stocks, and reorder levels.
- Now build your optimization model to reach the lowest level of total supply chain costs across all the echelons that will include a trade-off between Inventory carrying costs and Order costs including transportation, administrative expenses, and others.
4. Management by exception – Exception Analytics
The use of Exception Analytics, with an AI-powered augmented analytics solution like Course5 Discovery , can go a long way in helping clear the clutter for your supply chain personas, allowing them to focus on the most pressing issues at hand, saving time as well as pre-empting and mitigating situations when they happen, or even better, before they can happen.
To a ten years younger me, to the Senior Director of Supply Chain Operations, and to every other Supply Chain professional out there, Smarter Inventory Management will enable you to “see it coming”, help you plan better to make your supply chain more predictable, empower you to intelligently manage inventory across your supply chain, and forewarn you when things aren’t about to go well, and truly help you build the Consumer-centric Supply Chain that the consumer deserves. That is the promised land where “Life is as good as it gets”.