The beauty of being wrong

Wrong

Let’s be honest, no one likes to be wrong.  From early schooling and continuing through our careers we’ve been ingrained to do our best to be right.  It keeps us out of trouble, builds our self-esteem and helps us progress.

But what if our views on being wrong were, well, wrong?

There is growing research from a number of disciplines that in order to improve, grow, innovate and lead you need to be able to question your own thinking – allowing for different ideas and views to be heard and essentially being humble enough to admit that you might be wrong about what you think you know.

To illustrate this point of view, consider Julia Galef, co-founder of the Center for Applied Rationality, who asks a beautiful, metaphorical question, “Are you a soldier or a scout?

Soldiers defend and protect. Scouts, in contrast, seek and try to understand.  In her view and a number of others, this worldview shapes how you process information, develop ideas and guides your ability to change.

The mindset of a scout is anchored in curiosity. They love to learn, feel intrigued when something new contradicts their previous views and they are also extremely grounded: their self-worth as a person or team mate isn’t tied to how right or wrong they are about a specific topic.

Scouts have what many refer to as “intellectual humility” – a term that has been popularized in the past several years by a number of influential folks including Google’s Lazlo Block and University of Virginia Professor Edward Hess, who even penned a brilliant book entitled, “Humility is the new smart”.  According to Hess, in order to compete you need to assume the role of lifelong humble inquirer.

Intellectual humility is loosely defined as “a state of openness to new ideas, and a willingness to be receptive to new sources of evidence”.  At the heart of intellectual humility are questions.  Scouts ask lots of questions and are comfortable with all sorts of answers.

In short, scouts have a completely different view about being wrong.  They’re actually cool with it.  They embrace it.  And understand that being wrong is as important as being right – since they understand that being wrong helps you learn, change, iterate and, ultimately, make breakthroughs.

While you might feel a tad uncomfortable with this assertion, I would contend that virtually every major innovation, change or scientific breakthrough started out, at some point, being “wrong”.

While I’m not sure I’d consider myself a scout (though I do like the term and metaphor), I can surely confess I’ve been wrong a lot.  Maybe even more often than I’ve been right.

As just one example, a few years ago I was on a team working to achieve inventory accuracy in stores.  We’d followed a sensible approach that we’ve outlined in previous newsletters – frequently counting a control group of items to uncover and correct the root causes of the errors.

The team had surfaced and resolved some important discipline and housekeeping errors and consistently had the control group of products between 92-94% accurate.  Unfortunately, I helped to convince the team that we needed to get to virtually 100% accurate before we could roll it out to all stores.

Unfortunately, I was wrong.

A couple of years ago I was talking to a colleague who has more experience and, importantly, a different view.  He asked me why I thought that we needed to be 100% accurate and, during the discussion, politely reminded me that “perfection is the enemy of great”.  According to him, what we’d done could have been rolled out to all stores, instead of only rolling out minor procedural changes.

Here’s a great example of why I think being wrong is actually pretty instructive.  This learning helped me change my perspective on change and altered my thinking and approach.  Now “perfection” will never be the goal and good enough truly is – since good enough gets done (implemented) and done can be built on and improved.

Now, I’m not saying you should try to be wrong.  It’s just that being wrong has gotten a bad rap. Innovation and change require that you get good and comfortable with the notion of being wrong.  Wrong leads to right.

Of course, that’s my view and, well, I could be wrong.

On Shelf Symbiosis (Robots Optional)

 

The cows shorten the grass, and the chickens eat the fly larvae and sanitize the pastures. This is a symbiotic relation. – Joel Salatin

interlinked

Daily In Stock.

It’s the gold standard measure of customer service in retail. The inventory level for each item at each selling location is evaluated independently on a daily basis to determine whether or not you are “in stock” for that item at that store.

The criteria to determine whether or not you are “in stock” can vary (e.g. at least one unit on hand, enough to cover forecasted sales until the next shipment arrives, X% of minimum display stock covered, etc.), but the intent is the same. To develop a single, quantifiable metric that represents how well customers are being served (at least with regard to inventory availability).

One strength of this measure is that – unless you get crazy with conditions and filters – it’s relatively easy to calculate with available information. A simple version is as follows:

  • Collect nightly on hands for all item/locations where there is a customer expectation that the store should have stock at all times (e.g. currently active planogrammed items)
  • If there’s at least 1 unit of stock recorded, that item/location is “in stock” for that day. If not, that item/location is “out of stock” for that day.
  • Divide the number of “in stock” records by the number of item/locations in the population and that’s your quick and easy in stock percentage.

By calculating this measure daily, it becomes less necessary to worry about selling rates in the determination. If an item/location is in stock with 2 units today, but the selling rate is 5 units per day, it stands to reason that the same item/location will be out of stock tomorrow. What’s important is not so much the pure efficacy of the measure, rather that it’s evaluated daily and moving in the right direction.

Using this measure, people can picture the physical world the customer is seeing. If your in-stock is 94% at a particular store on a particular day, then that means that 6% of the shelf positions in the stores were empty, representing potential lost sales.

Here’s the problem, though: Customers don’t care about the percentage of the time that your digital stock records are >0 (or some other formula) – they want physical products on the shelf to buy.

That’s the major weakness of the in stock measure – in order to interpret it as a true customer service measure, the following (somewhat dubious) assumptions must be made:

  1. The number of units of an item that the system says is in the store is actually physically in the store. You can deduct 5 points from your in stock just by making this assumption alone.
  2. Even if assumption #1 is true, you then need to assume that the inventory within the 4 walls of the store is in a customer accessible location where they would expect to find it.

That’s where shelf scanning robots come in – quiet, unassuming sentinels traversing the aisles to find those empty shelves and alert staff to take action.

As cool and futuristic as that notion is, it must be noted that this is still a reactive approach, no matter how quickly the holes can be spotted.

The real question is: Why did the shelf become empty in the first place?

Let’s consider that in the context of our 2 assumptions:

  1. It could very well be that a shortage of stock is the result of shitty planning. But for the sake of argument, let’s say that you have the most sophisticated and responsive planning process and system in the world. If there is no physical stock anywhere in the store, but the planning system is being told that the store is holding 12 units, what exactly would you expect it to do? Likewise, if there is “extra” physical stock in the store that’s not accounted for in the on hand balance, the replenishment system will be sending more before it’s actually needed, which results in a different set of problems – more on that later.
  2. To the extent that physical stock exists in the 4 walls of the store (whether the system inventory is accurate or not) and it is not in a selling location, the general consensus is that this is a stock management issue within the store (hence the development of robots to more quickly and accurately find the holes).

While the use of a daily recalculating planning process is the best way to achieve high levels of in stock, more needs to be done to ensure that the in stock measure more closely resembles on shelf availability, which is what the customer actually sees.

Instituting a store inventory accuracy program to find and permanently fix the process failures that cause mismatches between the stock records and the physical goods to occur in the first place will make the in stock measure more reliable from a “what’s in the 4 walls” perspective.

Flowing product directly from the back door to the shelf location as a standard operating procedure gives confidence that any stock that is within the store is likely on the shelf (and, ideally, only on the shelf). This goes beyond just speeding up receiving and putaway (although that could be a part of it). It’s as much about lining up the space planning, replenishment planning and physical flow of goods such that product arrives at the store in quantities that can fit on the shelf upon arrival. This really isn’t super sophisticated stuff:

  1. From the space plan, how much capacity (in units) is allocated to the item at the store? How much of that capacity is “reserved” by the minimum display quantity?
  2. Is the number of units in a typical shipment less than the remaining shelf space after the minimum display quantity is subtracted from the shelf capacity?

If the answer to question 2 is “no”, then you’re basically guaranteeing that at least some of the inbound stock is going to go onto an overhead or stay in the back room. The shelf might be filled up shortly after the shipment arrives, but you can’t count on the replenishment system to send more when the shelf is low a few weeks later, because the backroom or overhead stock is still in the store, leading to potential holes.

Solving this problem requires thinking about the structural policies that allocate space and flow product into the store:

  • Is enough shelf space allocated to this item based on the demand rate?
  • Are shipping multiples/delivery frequency suitable to the demand rate and shelf allocation?

Finding this balance on as many items as possible serves to ensure – structurally – that any product in the store exists briefly on the receiving dock, then only resides in the selling location after that (similar to a DC flowthrough operation with no “putaway” into storage racking).

Like literally everything in retail, the number 100% doesn’t exist – it’s highly unlikely that you’ll be able to achieve this balance for all items in all locations at all times. But the more this becomes standard criteria for allocating space and setting replenishment policies, the more you narrow the gap between “in stock” and “on the shelf”.

So if the three ingredients to on shelf availability are 1) continuous daily replanning, 2) maintaining accurate inventory records and 3) organizing the supply chain and space plans to flow product directly to the shelf while avoiding overstock, then any work done in any of these areas in isolation will definitely help.

Taken together, however, they work symbiotically to provide exponential value in terms of customer service:

  • More accurate inventory balances means that the right product is flowing into the back of the store when it’s needed to fulfill demand, decreasing the potential for holes on the shelf due to stockout.
  • Stocking product only on the shelf without any overhead/backroom stock keeps it all in one place so that it doesn’t end up misplaced or miscounted, increasing inventory accuracy.
  • Improved inventory accuracy increases the likelihood that when a shipment arrives, the free shelf space that’s expected to be there is actually there when the physical stock arrives.

The (stated) intent of utilizing shelf scanning robots is to help humans more effectively keep the shelves stocked, not to make them obsolete.

I think it a nobler goal to design from end-to-end for the express purpose of maximizing on shelf availability as part of day in, day out execution.

And obsolete those robots.

Store Inventory Accuracy: Getting It Right

 

A man who has committed a mistake and doesn’t correct it, is committing another mistake. – Confucius (551BC – 479BC)

correct and incorrect

 

A couple months ago, I wrote a piece entitled What Everybody Gets Wrong About Store Inventory Accuracy. Here it is in a nutshell:

  • Retailers are pretty terrible at keeping their store inventory accurate
  • It’s costing them a lot in terms of sales, customer service and yes, shrink
  • The problem is pervasive and has not been properly addressed due to some combination of willful blindness, misunderstanding and fear

I think what mostly gives rise to the inaction is the assumption that the only way to keep inventory accurate is to expend vast amounts of time and energy on counting.

Teaching people how to bandage cuts, use eyewash stations or mend broken bones is not a workplace health and safety program. Yes, those things would certainly be part of the program, but the focus should be far more heavily weighted to prevention, not in dealing with the aftermath of mishaps that have already occurred.

In a similar vein, a store cycle counting program is NOT an inventory accuracy program!

A recent trend I’ve noticed among retailers is to mine vast quantities of sales and stock movement data to predict which items in which stores are most likely to have inventory record discrepancies at any given time. Those items and stores are targeted for more frequent counting so as to minimize the duration of the mismatch. Such programs are often described as being “proactive”, but how can that be so if the purpose of the program is still to correct errors in the stock ledger after they have already happened?

Going back to the workplace safety analogy, this is like “proactively” locating an eyewash station near the key cutting kiosk. That way, the key cutter can immediately wash his/her eyes after getting metal shavings in them. Perhaps safety glasses or a protective screen might be a better idea.

Again, what’s needed is prevention – intervening in the processes that cause the inaccurate records in the first place.

Think of the operational processes in a store that adjust the electronic stock ledger on a daily basis:

  • Receiving
  • POS Scanning
  • Returns
  • Adjustments for damage, waste, store use, etc.

Two or more of those processes touch every single item in every single store on a fairly frequent basis. To the extent that flaws exist in those processes that result in the wrong items and quantities being recorded in the stock ledger (or even the right items and quantities at the wrong time), then any given item in any given store at any given time can have an inaccurate inventory balance without anyone knowing about it or why until it is discovered long after the fact.

By the same token, fixing defects in a relatively small number of processes can significantly (and permanently) improve inventory accuracy across a wide swath of items.

So how do you find these process defects?

At the outset, it may not be as difficult as you think. In my experience, a 2 hour meeting with anyone who works in Loss Prevention will give you plenty of things to get started on. Whether it’s an onerous and manual receiving process that is prone to error, poor shelf management or lackadaisical behaviour at the checkout, identifying the problems is usually not the hard part – it’s actually making the changes necessary to begin to address them (which could involve system changes, retraining, measurement and monitoring or all of the above).

If your organization actually cares about keeping inventory records accurate (versus fixing them long after they have been allowed to degrade), then there’s nothing stopping you from working on those things immediately, before a single item is ever counted (see the Confucius quote at the top). If not, then I hate to say it but you’re doomed to having inaccurate inventory in perpetuity (or at least until someone at or near the top does start caring).

Tackling some low hanging fruit is one thing, but to attain and sustain high levels of accuracy – day in and day out – over the long term, rooting out and correcting process defects needs to become part of the organization’s cultural DNA. The end goal is one that can never be reached – better every day.

This entails moving to a three pronged approach for managing stock:

  • Counting with purpose and following up (Control Group Cycle Counting)
  • Keeping the car between the lines on the road (Inspection Counting)
  • Keeping track of progress (Measurement Counting)

Control Group Cycle Counting

The purpose of this counting approach is not to correct inventory balances that have become inaccurate. Rather, it’s to detect the process failures that cause discrepancies in the first place.

It works like this:

  1. Select a sample of items that is representative of the entire store, yet small enough to detail count in a reasonable amount of time (for the sake of argument, let’s say that’s 50 items in a store). This sample is the control group.
  2. Perform a highly detailed count of the control group items, making sure that every unit of stock has been located. Adjust the inventory balances to set the baseline for the first “perfect” count.
  3. One week later, count the exact same items in detail all over again. Over such a short duration, the expectation is that the stock ledger should exactly match the number of units counted. If there are any discrepancies, whatever caused the discrepancy must have occurred in the last 7 days.
  4. Research the transactions that have happened in the last week to find the source of the error. If the discrepancy was 12 units and a goods receipt for a case of 12 was recorded 3 days ago, did something happen in receiving? If the system record shows 6 units but there are 9 on the shelf, was the item scanned once with a quantity override, even though 4 different items may have actually been sold? The point is that you’re asking people about potential errors that have recently happened and will have a better chance of successfully isolating the source of the problem while it’s in everyone’s mind. Not every discrepancy will have an identifiable cause and not every discrepancy with an identifiable cause will have an easy remedy, but one must try.
  5. Determine the conditions that caused the problem to occur. Chances are, those same conditions could be causing problems on many other items outside the control group.
  6. Think about how the process could have been done differently so as to have avoided the problem to begin with and trial new procedure(s) for efficiency and effectiveness.
  7. Roll out new procedures chainwide.
  8. Repeat steps 3 to 7 forever (changing the control group every so often to make sure you continue to catch new process defects).

Eight simple steps – what could be easier, right?

Yes, this process is somewhat labour intensive.
Yes, this requires some intestinal fortitude.
Yes, this is not easy.

But…

How much time does your sales staff spend running around on scavenger hunts looking for product that “the system says is here”?

How much money and time do you waste on emergency orders and store-to-store transfers because you can’t pick an online order?

How long do you think your customers will be loyal if a competitor consistently has the product they want on the shelf or can ship it to their door in 24 hours?

Inspection Counting

In previous pieces written on this topic, I’ve referred to this as “Process Control Counting” – so coined by Roger Brooks and Larry Wilson in their book Inventory Record Accuracy – which they describe as being “controversial in theory, but effective in practice”.

We’ve found that moniker to be not very descriptive and can be confusing to people who are not well versed in inventory accuracy concepts (i.e. every retailer we’ve encountered in the last 25 years).

The Inspection Counting approach is designed to quickly identify items with obvious large discrepancies and correct them on the spot.

Here’s how it works:

  1. Start at the beginning of an aisle and inquiry the first item using a handheld scanner that can instantly display the inventory balance.
  2. Quickly scan the shelf and determine whether or not it appears the system balance is correct.
  3. If it appears to be correct, move on to the next item. If there appears to be a large discrepancy, do some simple investigation to see if it can be located – if not, then perform a count, adjust the balance and move on.

It may seem like this approach is not very scientific and subject to interpretation and judgment on the part of the person doing the inspection counting. That’s because it is. (That’s the “controversial” part).

But there are clear advantages:

  • It is fast – Every item in the store can be inspection counted every few weeks.
  • It is efficient – The items that are selected to be counted are items that are obviously way off (which are the ones that are most important to correct).
  • It is more proactive – “Hole scans” performed today are quite often major inventory errors that occurred days or weeks ago and were only discovered when the shelf was empty – bad news early is better than bad news late.

No matter how many process defects are found and properly addressed through Control Group Counting, there will always be theft and honest mistakes. Inspection Counting ensures that there is a stopgap to ensure that no inventory record goes unchecked for a long period of time, even when there are thousands of items to cycle through.

As part of an overall program underpinned by Control Group Counting and process defect elimination, the number of counts triggered by an inspection (and the associated time and effort) should decrease over time as fewer defects cause the discrepancies in the first place.

Measurement Counting

The purpose of this counting approach is to use sampling to estimate the accuracy of the population based on the accuracy of a representative group.

It works like this:

  1. Once a month, select a fresh sample of items that is representative of the entire store, yet small enough to detail count in a reasonable amount of time, similar to how a control group is selected. This sample is the measurement group.
  2. Perform a highly detailed count of the measurement group items, making sure that every unit of stock has been located.
  3. Post the results in the store and discuss it in executive meetings every month. Is accuracy trending upward or downward? Do certain stores need some additional temporary support? Have new root causes been identified that need to be addressed?

Whether retailers like it or not, inventory accuracy is a KPI that customers are measuring anecdotally and it’s colouring their viewpoint on their shopping experience. Probably a good idea to actually measure and report on it properly, right?

If you’re doing a good job detecting and eliminating process defects that cause inaccurate inventory and continuously making corrections to erroneous records, then this should be reflected in your measurement counts over time. Who knows? If you can demonstrate a high level of accuracy on a continuously changing representative sample, maybe you can convince the Finance and Loss Prevention folks to do away with annual physical counts altogether.

What Everybody Gets Wrong About Store Inventory Accuracy

 

Don’t build roadblocks out of assumptions. – Lorii Myers

red herring

Retailers are not properly managing the most important asset on their balance sheets – and it’s killing customer service.

I analyzed sample data from 3 retailers who do annual “wall to wall” physical counts. There were 898,526 count records in the sample across 92 stores. For each count record (active items only on the day of the count), the system on hand balance before the count was captured along with the physical quantity counted. The products in the sample include hardware, dry grocery, household consumables, sporting goods, basic apparel and all manner of specialty hardlines items. Each of the retailers report annual shrink percentages that are in line with industry averages.

A system inventory record is considered to be “accurate” if the system quantity is adjusted by less than +/- 5% after the physical count is taken. Here are the results:

So 54% of inventory records were accurate within a 5% tolerance on the day of the count. Not good, right?

It gets worse.

For 19% of the total records counted (that’s nearly 1 in every 5 item/locations), the adjustment changed the system quantity by 50% or more!

Wait, there’s more!

In addition, I calculated simple in-stock measures before and after the count as follows:

Reported In Stock: Percentage of records where the system on hand was >0 just before the count

Actual In Stock: Percentage of records where the counted quantity was >0 just after the count

Here are the results of that:

Let’s consider what that means for a moment. If you ran an in-stock report based on the system on hand just before those records were counted, you would think that you’re at 94%. Not world class, but certainly not bad. However, once the lie is exposed on that very same day, you realize that the true in-stock (the one your customer sees) is 5% lower than what you’ve been telling yourself.

Sure, this is a specific point in time and we don’t know how long it took the inventory accuracy to degrade up for each item/location, but how can you ever look at an in-stock report the same way again?

Further, when you look at it store by store, it’s clear that stores with higher levels of inventory accuracy experience a lesser drop in in-stock after the records are counted. Each of the blue dots on the scatterplot below represent one of the 92 stores in the sample:


A couple of outliers notwithstanding, it’s clear that the higher on hand accuracy is, the more truthful the in-stock measure is and vice-versa.

Now let’s do some simple math. A number of studies have consistently shown that an out-of-stock results in a lost sale for the retailer about 1/3 of the time. Assuming the 5% differential between reported and actual in-stock is structural, this means that having inaccurate inventory records could be costing retailers 1.67% of their topline sales. This is in addition to the cost of shrink.

So, a billion dollar retailer could be losing almost $17 million per year in sales just because of inaccurate on hands and nothing else.

Let’s be clear, this isn’t like forecast accuracy where you are trying to predict an unknown future. And it’s not like the myriad potential flow problems that can arise and prevent product from getting to the stores to meet customer demands. It is an erosion in sales caused by the inability to properly keep records of assets that are currently observable in the physical world.

So why hasn’t this problem been tackled?

Red Herring #1: Our Shrink Numbers Are Good

Whenever we perform this type of analysis for a retailer, it’s not uncommon for people to express incredulity that their store inventory balances are so inaccurate.

“That can’t possibly be. Our shrink numbers are below industry average.”

To that, I ask two related questions:

  1. Who gives a shit about industry averages?
  2. What about your customers?

In addition to the potential sales loss, inaccurate on hands can piss customers off in many other ways. For example, if it hasn’t happened already, it won’t be long until you’re forced by competition to publish your store on hand balances on your website. What if a customer makes a trip to the store or schedules a pickup order based on this information?

The point here is that shrink is a financial measure, on hand accuracy is a customer service measure. Don’t assume that “we have low shrink” means the same thing as “our inventory management practices are under control”.

Red Herring #2: It Must Have Been Theft

It’s true that shoplifting and employee theft is a problem that is unlikely to be completely solved. Maybe one day item level RFID tagging will become ubiquitous and make it difficult for product to leave the store without being detected. In the meantime, there’s a limit to what can be done to prevent theft without either severely inconveniencing customers or going bankrupt.

But are we absolutely sure that the majority of inventory shrinkage is caused by theft? Using the count records mentioned earlier, here is another slice showing how the adjustments were made:

From the second column of this table, you can see that for 29% of all the count transactions, the system inventory balances were decreased by at least 1 unit after the count.

Think about that next time you’re walking the aisles in a store. If you assume that theft is the primary cause for negative adjustments, then by extension you must also believe that one out of every 3 unique items you see on the shelves will be stolen by someone at least once in the course of a year – and it could be higher than that if an “accurate” record on the day of the count was negatively adjusted at other times throughout the year. I mean, maybe… seems a bit much, though, don’t you think?

Now let’s look at the first column (count adjustments that increase the inventory balance). If you assume that all of the inventory decreases were theft, then – using the same logic – you must also believe that for one out of every 5 unique items, someone is sneaking product into the store and leaving it on the shelves. I mean, come on.

Perhaps there’s more than theft going on here.

Red Herring #3: The Problem Is Just Too Big

Yes, it goes without saying that when you multiply out the number of products and locations in retail, you get a large number of individual inventory balances – it can easily get into the millions for a medium to large sized retailer. “There’s no way that we can keep that many inventory pools accurate on a daily basis” the argument goes.

But the flaw in this thinking stems from the (unfortunately quite popular) notion that the only way to keep inventory records accurate is through counting and correcting. The problem with this approach (besides being highly labour intensive, inefficient and prone to error) is that it corrects errors that have already happened and does not address whatever process deficiencies caused the error in the first place.

This is akin to a car manufacturer noticing that every vehicle rolling off the assembly line has a scratch on the left front fender. Instead of tracing back through the line to see where the scratch is occurring, they instead just add another station at the end with a full time employee whose job it is to buff the scratch out of each and every car.

The problem is not about the large number of inventory pools, it’s about the small number of processes that change the inventory balances. To the extent that inventory movements in the physical world are not being matched with proper system transactions, a small number of process defects have the potential to impact all inventory records.

When your store inventory records don’t match the physical stock on hand, it must necessarily be a result of one of the following processes:

  • Receiving: Is every carton being scanned into the store’s inventory? Do you “blind receive” shipments from DCs or suppliers that have not demonstrated high levels of picking accuracy for the sake of speed?
  • POS Scanning and Saleable Returns: Do cashiers scan each and every individual item off the belt or do they sometimes use the mult key for efficiency? If an item is missing a bar code and must be keyed under a dummy product number, is there a process to record those circumstances to correct the inventory later?
  • Damage and Waste: Whenever a product is found damaged or expired, is it scanned out of the on hand on a nightly basis?
  • Store Use, Transformations, Transfers: If a product taken from the shelf to use within the store (e.g. paper towels to clean up a mess) or used as a raw material for another product (e.g. flour taken from the pantry aisle to use in the bakery) are they stock adjusted out? Are store-to-store transfers or DC returns scanned out of the store’s inventory correctly before they leave?
  • Counting: Before a stock record is changed because of a count, are people making sure that they’ve located and counted all units of that product within the store or do they just “pencil whip” based on what they see in front of them and move on?
  • Theft: Are there more things that can be done within the store to minimize theft? Do you actively “transact” some of your theft when you find empty packaging in the aisle?

So how can retailers finally make a permanent improvement to the accuracy of their store on hands?

  • They need to actually care about it (losing 1-2% of top line sales should be a strong motivator)
  • They need to measure store on hand accuracy as a KPI
  • They need an approach whereby process failures that cause on hand errors can be detected and addressed
  • They need an efficient approach for finding and correcting discrepancies as the process issues are being fixed

Stay tuned for more on that.

Jimmy Crack Corn

 

Science may have found a cure for most evils; but it has found no remedy for the worst of them all – the apathy of human beings. – Helen Keller (1880-1968)

apathy-i-dont-care

On hand accuracy.

It has been a problem ever since retailers started using barcode scanning to maintain stock records in their stores.

It’s certainly not the first time we’ve written on this topic, nor is it likely to be the last.

The real question is: Why is this such a pervasive problem?

I think I may have the answer: Nobody cares.

Okay, maybe that’s a little harsh. It’s probably more fair to say that there is a long list of things that retailers care about more than the accuracy of their on hands.

I’m not being judgmental, nor am I trying to invoke shame. I’m just making a dispassionate observation based on 25 years experience working in retail.

Whatever you think of the axiom “what gets measured gets managed” (NOT a quote from Peter Drucker), I would argue that it is largely true.

By that yardstick, I have yet to come across a single retailer who routinely measures the accuracy of their on hands as a KPI, even though – if you think about it – it wouldn’t be that difficult to do. Just send out a count list of a random sample of SKUs each month to every store and have them do a detailed count. Either the system record matches what’s physically there or it doesn’t.

Measuring forecast accuracy (the ability to predict an unknown future) seems to take up a lot more time and attention than inventory accuracy (the ability to keep a stock record in synch with a quantity that exists in the physical world right now), but the accuracy of on hand records has a much greater influence on the customer experience than forecast accuracy – by a very wide margin.

And on hand accuracy will only become more important as retailers expand customer delivery options to include click and collect and ship from store. Even “old school” shoppers (those who just want to go to the store to buy something and leave) will be expecting to check online to see how much a store has in stock before getting in their cars.

It’s quite clear that retailers should care about this more, so why don’t they?

Conflating Accuracy and Shrink

After a physical stock count, positive and negative on hand variances are costed and summed up. If the value of the system on hand drops by less than 2% of sales after the count adjustments are made, this is deemed to be a good result when compared to the industry as a whole. The conclusion is drawn that the management of inventory must therefore be under control and that on hand records must not be that far off. The problem with shrink is that the positive and negative errors can still be large in magnitude, but they cancel each other out, thereby hiding significant issues with on hand record accuracy (by item/location, which is what the customer cares about). Shrink is a measure for accountants, not customers.

Store Replenishment is Manual Anyhow

It’s still common practice for many retailers to use visual shelf reviews for store replenishment. Department managers walk through the aisles with RF scanning guns, scan the shelf tags for items they want to order and use an app on the gun to place replenishment orders. Most often, this process is used when perpetual inventory capabilities don’t exist at store level, but it’s not uncommon to see it also being used even if stores have system calculated on hand balances. Why? Because there isn’t enough trust in the accuracy of the on hands to use them for automated replenishment. Hmmm…

It’s Perceived to be an Overwhelming Problem

It’s certainly true that the number of item/store inventory pools that need to be kept accurate can get quite large. The predominant thinking in retail is that the only way to make inventory records more accurate is to count each item more frequently. Do the math on that and many retailers conclude that the labour costs to maintain accurate inventory records will drive them into bankruptcy.

The problem with this viewpoint is that frequent counting and correcting isn’t really maintaining accurate records – it’s continuously fixing inaccurate records. A different way to look at it is not by the sheer volume of item/location records to be managed, but rather by the number of potential process failure points that could affect any given item in any given location.

Think about an auto assembly line where every finished car that rolls off  has a 2 inch scratch on the right front fender. One option to address this problem is to set up an additional station at the end of the line to buff out the scratch on every single car that rolls through. This is analogous to the “count and correct” approach to managing inventory records – highly labour intensive and only addresses the problem after it has already occurred.

Another option would be to trace back through the process until you find the where the scratch is occurring and why. Maybe there’s a bolt sticking out from a pass-through point that’s causing the scratch. Cut off the end of the bolt, no more scratches. Addressing this one point of process failure permanently resolves the root cause of the defect for every car that passes through the process.

Going back to our store on hand accuracy example, a retailer may have thousands or millions of item/store combinations, but the number of processes (potential points of failure) that change on hand balances is limited:

  • DC picking
  • Store receiving
  • Stock writedowns for damage or waste
  • Counts
  • Sales and saleable returns

For retailers who have implemented store perpetual inventory, each of these processes that affect the movement of physical stock have a corresponding transaction that changes the on hand balance accordingly. How carefully are those transactions being recorded for accuracy (versus speed)?

Are DC shipments regularly audited for accuracy? Do stores “blind receive” shipments only from highly reliable sources? Are there nightly procedures to scan out damaged or unsaleable goods? Is the store well organized so that all units of a particular item can be easily found before a physical count is done? is every sale being properly scanned at the checkout?

Of course, the elephant (or maybe scapegoat?) in the room is theft. After all, there is no corresponding transaction for those stock movements. While there are certainly things that can be done to reduce theft, I consider it to be a self evident fact that it won’t be eliminated completely anytime soon.

But before you assume that every negative stock adjustment “must have been theft”, are you totally certain that all of the other processes are being transacted properly?

Does it seem reasonable to assume that for every single unique product whose on hand balance decreases after a physical count (typically 20-30% of all products in a store) all of those units were stolen since the last count?

And if we do assume that theft is the culprit in the vast majority of those cases, then what are we to assume about products whose on hand balances increase after being counted (typically 10-20% of all products in a store)? Are customers or employees sneaking items into the store, leaving them on the shelves and secretly leaving without being detected?

Setting theft aside, there’s still plenty that can be done by thoroughly examining and addressing the potential points of process failure that cause on hands to become inaccurate in the first place, while at the same time reducing the amount of time and money being spent on “counting and correcting”.

What’s Step 1 on this path?

You need to care.

Customer Service Collateral Damage

 

Good intentions can often lead to unintended consequences. – Tim Walberg

unintended-Consequences

Speed kills.

Retailers with brick and mortar operations are always trying to keep the checkout lines moving and get customers out the door as quickly as possible. Many collect time stamps on their sales transactions in order to measure and reward their cashiers based on how quickly they can scan.

Similarly, being able to receive quickly at the back of the store is seen as critical to customer service – product only sells off the shelf, not from the receiving bay or the back of a truck.

This focus on speed has led to many in-store transactional “efficiencies”:

  • If a customer puts 12 cans of frozen concentrated juice on the belt, a cashier may scan the first one and use the multiplier key to add the other 11 to the bill all at once.
  • If a product doesn’t scan properly or is missing the UPC code, just ask the customer for the price and key the sale under a “miscellaneous” SKU or a similar item with the same price, rather than calling for a time consuming code check.
  • If a shipment arrives in the receiving bay, just scan the waybill instead of each individual case and get the product to the floor.

These time saving measures can certainly delight “the customer of this moment”, but there can also be consequences.

In the “mult key” example, the 12 cans scanned could be across 6 different flavours of juice. The customer may not care since they’re paying the same price, but the inventory records for 6 different SKUs have just been fouled up for the sake of saving a few seconds. To the extent that the system on hand balances are used to make automated replenishment decisions, this one action could be inconveniencing countless customers for several more days, weeks or even months before the lie is exposed.

The smile on a customer’s face because you saved her 5 seconds at the checkout or the cashier speed rankings board in the break room might be tangible signs of “great customer service”, but the not-so-easy-to-see costs of stockouts and lost sales that arise from this practice over time is extremely costly.

Similarly with skipping code checks or “pencil whipping” back door receipts. Is sacrificing accuracy for the sake of speed really good customer service policy?

A recent article published in Canadian Grocer magazine begins with the following sentence:

“A lack of open checkouts and crowded aisles may be annoying to grocery shoppers, but their biggest frustration is finding a desired product is out of stock, according to new research from Field Agent.”

According to the article, out of stocks are costing Canadian grocers $63 billion per year in sales. While better store level planning and replenishment can drive system reported in-stocks close to 100%, the benefits are muted if the replenishment system thinks the store has 5 units when they actually have none.

Not only does this affect the experience of a walk-in customer looking at an empty shelf, but it’s actually even more serious in an omnichannel world where the expectation is that retailers will publish store inventories on their public websites (gulp!). An empty shelf is one thing, but publishing an inaccurate on hand on your website is tantamount to lying right to your customers’ faces.

We’ve seen firsthand that it’s not uncommon for retailers to have a store on hand accuracy percentage in the low 60s (meaning that almost 40% of the time, the system on hand record differs from the counted quantity by more than 5% at item/location level). Furthermore, we’ve found that on the day of an inventory count, the actual in stock is several points lower than the reported in stock on average.

Suffice it to say that inaccurate on hand records are a big part of the out of stocks problem.

Nothing I’ve said above is particularly revolutionary or insightful. The real question is why has it been allowed to continue?

In my view, there are 3 key reasons:

  1. Most retailers conflate shrink with inventory accuracy and make the horribly, horribly mistaken assumption that if their financial shrink is below 1.5%, then their inventory management is under control. Shrink is a measure for accountants, not customers and the responsibility of store inventory management belongs in Store Operations, not Finance.
  2. Nobody measures the accuracy of their on hands. It’s fine to measure the speed of transactions and the efficiency of store labour, but if you’re taking shortcuts to achieve those efficiencies, you should also be measuring the consequence of those actions – especially when the consequence so profoundly impacts the customer experience.
  3. Retailers think that inaccurate store on hands is an intractable problem that’s impossible to economically solve. That was true for every identified problem in human history at one point. However, I do agree that if no action is taken to solve the problem because it is “impossible to solve”, then it will never be solved.

It’s true that overcoming inertia on this will not be easy.

Your customers’ expectations will continue to rise regardless.

Rise of the Machines?

 

It requires a very unusual mind to undertake the analysis of the obvious. – Alfred North Whitehead (1861-1947)

20180626210156-GettyImages-917581126

 

My doctor told me that I need to reduce the amount of salt, fat and sugar in my diet. So I immediately increased the frequency of oil changes for my car.

Confused?

I don’t blame you. That’s how I felt after I read a recent survey about the adoption of artificial intelligence (AI) in retail.

Note that I’m not criticizing the survey itself. It’s a summary of collected thoughts and opinions of retail C-level executives (pretty evenly split among hardlines/softlines/grocery on the format dimension and large/medium/small on the size dimension), so by definition it can’t be “wrong”. I just found some of the responses to be revealing – and bewildering.

On the “makes sense” side of the ledger, the retail executives surveyed intend to significantly expand customer delivery options for purchases made online over the next 24 months, specifically:

  • 79% plan to offer ship from store
  • 80% plan to offer pick up in store
  • 75% plan to offer delivery using third party services

This supports my (not particularly original) view that the physical store affords traditional brick and mortar retailers a competitive advantage over online retailers like Amazon, at least in the short to medium term.

However, the next part of the survey is where we start to see trouble (the title of this section is “Retailers Everywhere Aren’t Ready for the Anywhere Shelf”):

  • 55% of retailers surveyed don’t have a single view of inventory across channels
  • 78% of retailers surveyed don’t have a real-time view of inventory across channels

What’s worse is that there is no mention at all about inventory accuracy. I submit that the other 45% and 22% respectively may have inventory visibility capabilities, but are they certain that their store level inventory records are accurate? Do they actually measure store on hand accuracy (by item by location in units, which is what a customer sees) as a KPI?

The title of the next slide is “Customer Experience and Supply Chain Maturity Demands Edge Technologies”. Okay… Sure… I guess.

The slide after that concludes that retail C-suite executives believe that the top technologies “having the broadest business impact on productivity, operational efficiency and customer experience” are as follows:

  • #1 – Artificial Intelligence/Machine Learning
  • #2 – Connected Devices
  • #3 – Voice Recognition

Towards the end, it was revealed that “The C-suite is planning a 5X increase in artificial intelligence adoption over the next 2 years”. And that 50% of those executives see AI as an emerging technology that will have a significant impact on “sharpening inventory levels” (whatever that actually means).

So just to recap:

  • Over the next 2 years, retailers will be aggressively pursuing customer delivery options that place ever increasing importance on visibility and accuracy of store inventory.
  • A majority of retailers haven’t even met the visibility criteria and it’s highly unlikely that the ones who have are meeting the accuracy criteria (the second part is my assumption and I welcome being proved wrong on that).
  • Over the next 2 years, retailers intend to increase their investment in artificial intelligence technologies fivefold.

I’m reminded of the scene in Die Hard 2 (careful before you click – the language is not suitable for a work environment or if small children are nearby) where terrorists take over Dulles International Airport during a zero visibility snowstorm and crash a passenger jet simply by transmitting a false altitude reading to the cockpit of the plane.

Even in 1990, passenger aircraft were quite technologically advanced and loaded with systems that could meet the definition of “artificial intelligence“. What happens when one piece of critical data fed into the system is wrong? Catastrophe.

I need some help understanding the thought process here. How exactly will AI solve the inventory visibility/accuracy problem? Are we talking about every retailer having shelf scanning robots running around in every store 2 years from now? What does “sharpen inventory levels” mean and how is AI expected to achieve that (very nebulous sounding) goal?

I’m seriously asking.

Concealing Your Shame

 There is no shame in not knowing; the shame lies in not finding out. – Russian Proverb

Customer expectations of brick & mortar retailers are changing.

Most retailers are failing miserably at meeting those expectations with regard to providing information about stock availability at their stores online.

I’m not talking about whether or not they have sufficient stock to meet customer demand – it’s even more basic than that. When a customer is looking to visit your store can you even properly tell him/her what your stock status actually is?

Recently, I decided to anecdotally put one particular store to the test on this. I chose this store for the following reasons:

  1. They actually publish their store on hand balances online for all the world to see in real time.
  2. They offer a “buy online, pick up in store” option.
  3. I visit the store fairly frequently and it’s about 1 kilometre from my house.

On the day of my “study”, I only had 2 items I needed. Before leaving, I called up the pages for those items on my iPhone and went to the store. When I got there, I refreshed the pages to retrieve the most up-to-date stock information and compared that number to what I actually found on the shelf. After that, I wandered around the aisles and picked a few other items at random and did the same thing.

Now before I share the results, there are some rather significant caveats that I need to mention:

  1. The inventory is updated in real time, but obviously it’s based on POS transactions. When I did the “physical count” on the shelf, it’s certainly possible that some other customer had picked the item off the shelf but had not yet paid for it.
  2. The study was performed on a busy Saturday afternoon about 4 weeks before Christmas. Not exactly ideal timing for ensuring that the store was stocked neatly or that there wasn’t a lot of product floating around in customer baskets as per point 1 above.
  3. I know that this store has a very large back room and doesn’t keep separate on hand balances for shelf stock and backroom stock. In cases where my count is short, it’s certainly possible that the product was in the back room or displayed elsewhere in the store.
  4. When I got a count discrepancy, I did not ask the staff for help in locating the “missing” items. As I mentioned, we are only weeks away from Christmas and I wasn’t about to waste people’s time finding items that I had no intention of purchasing.

The first item on my list was a carbon dioxide cylinder for our SodaStream. Note that I’ve attempted to crop out any information that would reveal who the retailer is (logos, shelf tags, product identifiers, etc.). This won’t stop some of you from recognizing them, but I can’t do much about that.

Okay, back to the SodaStream cylinder. When I reached the shelf and refreshed the page on my phone, here’s what I got:

Wow, 337 units in stock! (As an aside, this retailer almost always shows the aisle number in the store where the product can be found, which is stellar – not sure why it’s not shown in this case, but it’s a product I buy often, so I knew exactly where to go).

Now here’s the shelf:

You can’t see them all in this image, but the actual count was 18 units, far short of 337. Obviously this is either a massive inventory record error or there’s a pallet of them on a secondary display or in the back room. So long as they sell fewer than 18 per day, buyers of this item will be happy.

RESULT: INCONCLUSIVE

The second item on my list was a large, bark deterring dog collar for my mother-in-law’s dog (it uses vibration or noise to deter barking, not electric shocks, so don’t judge me!). As you’ll see below, my phone told me to go to aisle 56 to find 1 unit:

Unfortunately when I got to the aisle, there was none to be found. I spent a few minutes searching all of the overheads, pegs and bins in this aisle and one aisle over in each direction and couldn’t find it.

RESULT: FAIL

While in aisle 56, I picked another random item (mulberry scented dog shampoo) and looked it up on my phone:

And here is the shelf:

6 units – right on the nose.

RESULT: SUCCESS

Now, how about this Bissell Little Green pet stain remover?

This item is on promotion for $25.00 off and I found an end aisle display with 12 units:

…and one more unit in the home in aisle 60:

So that’s 13 on the shelf vs 32 units reported on hand. But because this item is promoted, there is almost certainly more in the back room to replenish the shelves.

RESULT: INCONCLUSIVE

On to aisle 17 to check out the Stanley chalk line reels.

Hoping to find 5…

…and 5 it is.

RESULT: SUCCESS

You get the picture (no pun intended). I also documented a few other items in the same way, but I’ll spare you the photographic evidence:

  • Richard Self Adhesive Drywall Tape: 3 online, 4 on the shelf (RESULT: PRETTY CLOSE)
  • T.S.P. Heavy Duty Cleaner (400g): 10 online, 4 on the shelf (RESULT: FAIL)
  • Soft Glide Cabinet Hinge: 12 online, none to be found anywhere (RESULT: EPIC FAIL)
  • OOK Picture Hanging Kit: 14 online, 13 on the peg (RESULT: PRETTY CLOSE)

In summary:

  • There were 3 failures out of 9 (I’m counting “Pretty Close” and “Inconclusive” in the success column for fairness)
  • 2 of those 3 failures could have resulted in a lost sale on that day (i.e. the reported on hand was > 0, but there was no stock to be found on the sales floor).
  • With regard to the bark deterrent collar (one of the items I actually wanted to buy), there’s more to the story:
    • When I got home, I ordered the item for in store pickup and the on hand immediately dropped to zero
    • Later that day, I received an email notification and a phone call informing me that the item wouldn’t be available for pickup until the next day
    • From this, I’m surmising that they couldn’t find it in the store and had one delivered from a nearby store overnight
    • The next day, I picked up the item at my home store – lost sale averted

So what was the point of all this and why did I choose “Concealing Your Shame” as the title? Am I trying to shame this retailer for what (anecdotally and with all of my previous caveats applied) looks like imperfect performance?

Au contraire!

Store on hand accuracy is not easy to achieve and this retailer is to be highly commended for their confidence and willingness to be as transparent to customers as possible.

No, the shame is reserved for those retailers who have on hand balances readily available in their systems but choose not to share it. I guess the thinking is that you can’t fail if you don’t try.

I say it again: customer expectations are changing.

If you’re afraid to share your on hand balances with your customers, I have 2 questions:

  1. Why? (you already know why)
  2. What are you doing about it?

Last Mile Delivery: Really Folks?

 

One way to boost our will power and focus is to manage our distractions instead of letting them manage us. – Daniel Goleman

shiny_object

Okay, first a confession out of the gate. The title, quote and image above might lead you to believe that I’m judging last mile delivery (and the broader omni-channel retailing discussion that goes along with it) as a ‘shiny object’ distraction.

I know that’s not entirely true. But I believe it is at least partially true.

To be sure, retail is changing and it’s changing rapidly. Customers want more choices in terms of how they make purchases and how they get those purchases to their homes – and they aren’t super keen on paying a lot more for these choices.

Retailers who put their heads in the sand and don’t actively address these challenges will (and in some cases already do) find themselves in serious peril.

Where is last mile delivery headed? It’s still evolving – but getting into those details is not the point of this discussion. I’m going to stay in my lane. At the risk of oversimplifying things, a sale is a sale and the supply chain planning challenge is to have the product available where the sale will be fulfilled.

The beef I have is that all of the discussion about last mile delivery seems to be making the blanket assumption that retailers have everything aced right up to the last mile.

As if to prove my point, I received an unsolicited email today (God only knows how many supply chain related online publications have my email address at this point) asking for my participation in a survey with the title: “Can we solve the last mile?” The opening two sentences read as follows:

“The last mile is bearing the brunt of the eCommerce boom. Yet, it represents a great source of angst and expense for retailers and last mile providers alike.”

After that is a ‘sneak preview’ of survey topics that focus solely on last mile problems – the implication (likely unintended) is that the challenges in the last mile are completely independent of all the activities that precede them.

Retail out-of-stocks have been a major problem since they started measuring it (8% on average and double that during promotions). The most prevalent cause cited by all of the major studies is inventory management and replenishment practices at store level. Not surprisingly, the lack of attention on solving for these causes means that they haven’t yet magically vanished. Perhaps someday, if we keep wishing really hard…

It’s pretty clear that ‘non Amazon retailers’ will need to make use of their bricks and mortar store network to enable whatever last mile delivery options they intend to pursue. How will they be successful in that regard with such abysmal out-of-stock performance and no idea what the accuracy of their electronic on hand records are (if they even have them at all)?

The day is coming when customers will expect to see store on hand balances on your web page before they submit a ‘click and collect’ order – what happens when the website says you have 3 in stock, but there isn’t any to be found when the customer goes in to collect?

Finally, we can’t lose sight of the fact that the ‘omni’ in ‘omnichannel’ is a latin prefix meaning ‘all’ or ‘every’. One of those ‘every’ channels is customers walking into a store, getting a cart, selecting products and paying for them at the checkout – kickin’ it old school to the tune of 91.5% of total retail sales.

Yes, e-commerce is growing like crazy, but it’s going to be awhile yet before online selling is truly dominant in retail as a whole.

And if (when) that day comes?

Again, I’m not suggesting that working out the last mile won’t be critically important. I’m just saying that retailers still have some work to do in getting basics right (like being in stock and knowing how much is on hand) in order to make it all work.

We Can All Agree

 

We rarely think people have good sense unless they agree with us. – Francois de la Rochefoucauld (1613-1680)

agree-givemesomeenglish

My family has a history of heart problems.

Although my blood pressure and cholesterol are both fine, I’m 47 years old, carrying 15-20 extra pounds and I don’t get enough exercise, which compounds that risk.

Family History + Being Middle Aged + Being Overweight + Not Enough Cardio = Increased Risk of Heart Problems

It’s hardly a mystery. Everybody knows this. I agree.

I can do nothing about my family history or my age, but I’ve been about the same weight for the last several years and have not meaningfully or sustainably increased the amount of daily exercise I get on a daily basis.

Ask any smoker if they are aware of all of the various health risks from smoking. They too will agree that smoking is bad. But they still do it.

Clearly, there isn’t a binary choice (i.e. agree or disagree), rather different ‘levels’ of agreement:

  • I agree with what you’re saying.
  • I agree that something needs to change.
  • I agree to change my behaviour.

In business in general (and supply chain in particular), significant improvement in results can only be achieved with process-driven changes to people’s behaviour.

We can all agree that the quality of a retailer’s customer service is directly tied to the accuracy of their store-item level inventory records – especially in an omnichannel world where a customer can demand product from a website and expect to pick it up in their neighbourhood store a couple hours later. It’s not a stretch to further agree that processes, procedures and measurement systems need to be in place to improve and maintain store level on hand accuracy.

And yet many retailers (40% of grocery stores according to a recent study) don’t even use a system on hand balance and those that do are not attacking their accuracy problems.

We can all agree that retail supply chains should be consumer driven to be efficient and profitable. And yet most retailers are using the same ‘old school’ processes for promotions, new product introductions and seasonal sales – ‘buy a ton, push it out to the stores and pray that it sells’.

While ‘agreement in principle’ is certainly necessary, it is clearly far from sufficient. So what is the secret ingredient?

I’ve seen it many times throughout my career in retail. I visit one store and the aisles are uncluttered, the shelves are faced out beautifully and the back room is organized and tidy. Then I visit another store with the same retailer and it looks like it was recently hit by a cyclone – even though both stores have the same systems, processes and training manuals.

The difference is that you have to care.

Don’t get me wrong. I’m not saying that the store manager with the messy store has no passion. I’m just saying that he doesn’t have passion for retailing.

It’s the same reason I’m a supply chain consultant and not a fitness instructor (at least for now). I agree in principle that I need to exercise and lose weight, but I care deeply about order, organization and process discipline in the retail supply chain.

So where does this passion come from and how can it be cultivated and spread throughout an organization?

God, I really wish I knew. I believe that everyone is born with passion, but not everybody is in a job they’re passionate about.

That said, I know that passion can be infectious enough that a very small group of uber-passionate people can change organizations – not necessarily by making everyone as passionate as they are, but by generating just enough force to overcome the organizational inertia.

And once the boulder starts rolling down the hillside, we can all agree that it’s very difficult to stop.