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)
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
- 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.