Recent trends in consumer preferences demand healthier food options, greater quantity and variety of fresh produce, value-added products, and year-round availability. Households today are less likely to plan meals in advance; households are opting towards readymade foods and purchasing foods closer to mealtime. The fresh produce section and retail merchandising are expanding and innovating strategies in response to changing consumer demand, globalisation of the produce market, greater technological capacity, and changes in production logistics. Technological improvements that facilitated the standardisation of electronic labelling and electronic data ordering have led to common ordering guides and streamlining fresh produce operations, which in turn cuts costs and improves sales.
What is inventory shrink?
In response to the consumer signals, retailers design strategies to assemble, manage and improve supply chains to maximise profit. For example, up to one in seven truckloads of perishables delivered to a store will be thrown out. The truckload alone is an important loss to the retailer, and this does not include the costs of transportation and logistics, handling, merchandising, culling and waste management. Retail uses the term shrink to refer to the difference between received and sold inventory; this difference can be consequent to employee or customer theft, error at checkout, spoilage during transportation or in-store, or vendor fraud. Although technology has allowed for greater data tracking and keeping, there is a lack of informed management surrounding freshness and shrink which could “make or break” profitability in perishables.
The quality of a retailer’s store replenishment process has a direct impact on its top-line revenue and its bottom line profits.
Improved store replenishment translates into the following benefits:
Increased revenue from better on-shelf availability boosting sales up to 1%
Up to 30% lower markdown and spoilage costs as supply matches demand more accurately
Optimised inventory flows enabling up to 30% reduced cost of goods handling in the distribution centres and stores
Much more efficient capacity utilisation in transportation, storage and manual work phases throughout the supply chain
Yet, in 2018 a survey of North American grocery retailers found that 20% of the respondents had not even started implementing any kind of replenishment automation in their stores and only 30% of the companies had implemented forecast-based automated store replenishment extensively. Store replenishment is definitely an area where many food retailers’ operations are quite far from best practice.
Fresh Food Replenishment Warrants Granular Planning and Control
For fresh products, well-managed store replenishment is central to finding the optimal balance between the risk of lost sales margins caused by stock-outs and the risk of waste or markdowns eating already slim margins.
Even though traditional supermarkets have decades of experience dealing with fresh products, many still do not excel in this area. Their supply chains are reactive enough to support frequent deliveries, but their replenishment planning is not up to scratch.
According to the North American grocers surveyed, the annual value of spoilage was on average around 70 million and up to several hundred million annually for the largest companies offering a wide range of fresh products. The survey responses also demonstrated that grocery retailers with less advanced store replenishment practices are almost five times more likely to suffer from above-average spoilage levels than their competitors who are using forecast-driven store replenishment extensively.
Balancing Waste and Lost Sales
For so-called ‘ultra-fresh’ products, meaning short shelf life items that need to be sold that same day, a 100% on-shelf availability means that there will always be waste or markdowns unless the forecast is consistently flawless on the day, store and product level. This means that very granular control is needed to find the optimal balance between the risk of stock-outs and the risk of waste. Other fresh products face a similar challenge, just a bit less pronounced.
Demand for a product in a specific store typically varies between different weekdays. For some stores and products, this weekday variation in fresh replenishment can be very dramatic. This means that the same safety stock does not fit all weekdays when dealing with short shelf-life products.
When managing store replenishment of fresh products, it is very important that all calculations and optimisations are done automatically. It is an impossible task for any human to keep track of all factors influencing demand, such as weekday variation (e.g. seasons, weather, and promotions) as well as all factors influencing replenishment (e.g. delivery schedules, batch sizes and day-level probabilities of waste and stock-outs) for hundreds or thousands of items per day in a store, let alone hundreds of stores.
However, it is equally important that the forecasting and replenishment system does not turn into a black box. Actionable analytics allow supply planners to easily detect and remedy exceptions such as historical or projected waste or poor availability.
Examples of typical exceptions in fresh food replenishment are:
Too large a batch order causing waste in stores. Sometimes order batches, such as case packs, are so large in relation to a store’s demand that each delivery of the product will result in waste. To address this problem effectively, your supply planners need to be able to determine whether this is a problem in just a few or many stores, what the financial implications are, and whether the problem can be mitigated by directing replenishment to specific weekdays, such as ordering the products only for the weekend.
Too much allocated shelf space causing waste in the stores. Sometimes visual minimums, designed to keep displays attractively stocked, drive excess stock and waste of fresh products. Supply planners must be able to identify whether the problem is isolated to a few low-demand stores or whether there is a more widespread problem with the planograms in use.
Systematically poor availability or high waste on specific weekdays. Systematic patterns of poor performance on certain weekdays, such as higher than average waste on Mondays, is not uncommon. To address this problem, your supply planners need to understand the root cause of this problem. There can, for example, be process issues, such as store personnel checking sell-by dates and recording waste on specific weekdays, which need to be accounted for in replenishment planning.
Automation radically reduces the time spent on routine tasks in-store replenishment planning. At the same time, it multiplies the impact of your most knowledgeable process experts. If store replenishment has not been automated, your best supply chain analysts have limited leverage. They can review successes and failures in the rearview mirror and try to turn a few of their findings into action in the stores with help of the field training team.
When store replenishment is automated and replenishment planning centralised to a knowledgeable team, your planning experts can make a visible difference in hundreds of stores, almost immediately, simply by fine-tuning replenishment settings.
Adding Science to the Art of Managing Fruits and Vegetables
Fruits and vegetables are often last in line when store ordering is automated. Obviously, produce faces the same challenges caused by short shelf life and variable demand as other fresh product categories.
In addition, the varying supply and quality of fruits and vegetables demand additional flexibility from the planning system in use.
The regions from which fruits and vegetables are sourced constantly change as crops are harvested in different parts of the world at different times. Even growers in the same region may have timed their crops slightly differently. Furthermore, as there is always some uncertainty in the availability of good quality product, food retailers usually try to ensure that they always have several vendors for the same product.
From a consumer perspective, a lemon is a lemon, but the supply chain may need to deal with tens of different product codes for lemon, each associated with a different vendor.
Effective management of fruits and vegetables requires the planning system to be able to seamlessly switch between planning levels as needed:
Demand forecasting needs to be conducted on the product level, for example, “domestic organic tomato,” using historical sales data for all domestic organic tomatoes regardless of supplier.
The replenishment quantity also has to be determined based on the available inventory of domestic organic tomatoes as well as their forecasted demand.
The replenishment order, however, should be generated for the current vendor of domestic organic tomatoes. This is where the planning system needs to move from working on the product level to the Stock Keeping Unit (SKU) level, i.e. from “domestic organic tomato” to “domestic organic tomato supplied by Greendale Fresh Produce”
Often, the replenishment order needs to be split between two or three vendors to ensure availability in case of vendor product shortage as well as to keep several vendors in business. In that case, the planning system also needs to take care of allocating the order need to several vendors — for example, 65% to GreenGrowers Co and 35% to OrganicFarmers Co.
The forecasting and replenishment process for fruits and vegetables is highly laborious to manage manually but can be effectively automated.
The key prerequisite is clear guidelines for which products are to be included in the stores’ assortments and which vendors are to be used for sourcing at any given time. As in any automation process, high-quality master data is essential.
Real-time Data for Buying Fresh Products
For perishable products, a very high inventory turnover both in stores and in the supplying distribution centres is a must. This means that the supply chain is very vulnerable to quality issues, delivery problems or unexpected peaks in demand. In situations where store requirements exceed available inventory, quick reactions are of the essence.
In many cases, suppliers of short shelf life perishables make several daily deliveries to the same distribution centres. This is partly to guarantee freshness and partly to level out volumes.
Several daily supplier deliveries make it possible for a retailer to accommodate actual demand by placing the orders as close to the different ordering deadlines as possible, making use of the latest demand and inventory data.
However, to be able to identify demand surges, the planning system needs to be tightly coupled with the underlying transaction systems and have access to real-time data. Of course, the planning system also needs to be able to process the data quickly enough to turn the latest data into orders as accurately as possible.
Similar quick reactions and within-the-day calculations based on real-time data are valuable when fruits and vegetables, which are prone to supply and quality issues, are received in the morning.
Because the actual available inventory may differ from what is planned, it makes sense to re-allocate stock based on the latest forecast and stock data from the stores rather than fulfilling store orders in an arbitrary order.