Secrets of Balance: Surplus and Lost sales

October 29, 2019 9 min
Secrets of Balance

Meggy McArthur, ABM Cloud Expert

More and more often, people began to cut on fast food, products containing a large number of substitutes and dyes, turning their attention to the segment of goods of the perishable goods category. Vegetables and fruits are steadily increasing their dominance on the dinner plate: steak places review the composition of the side dishes putting vegetables in the very center of the menu and consumers are keen to replace rice and pasta with mashed cauliflower they buy at grocery stores number of which is increasing every day.

Not only perishable segment

The global grocery retail market is characterized as dynamically developing. In 2016, sales amounted up to 8,7 trillion dollars, and by 2021 this figure is estimated to reach a value of 11 trillion dollars.

Despite the high demand for products, each of us regularly sees trolleys full of goods with expiring expiration dates when shopping in the stores, while media channels more often talk about the increasing quantity of food being thrown out in the world. For example, the Germans throw away about 20 million tons of food waste (which is 1% of the turnover, or more than 1,5 billion dollars). One of the reasons is fierce competition in the market that makes stores lower prices and put only externally flawless goods on the shelves; there is no room for a rumpled packet of milk or a slightly blackened banana.

The number of excess food stocks in developed countries caused such a phenomenon as food sharing to appear in the world. Food sharing is a socio-environmental project aimed at saving ‘eatable’ food. In some countries, there are already special restaurants/cafes opening based on food sharing. In England and Denmark were opened stores on a ‘pay-as-much-as-you-can’ basis where they sell food written off by other stores due to packaging defects or expiration dates.

Large volumes of the remaining food are primarily shared by shops and restaurants.

But why is it so? It is quite common that private individuals can have some “extra” food, but why and how does it happen in retail stores? Why isn’t it sold out? Is it profitable for the retail chain to distribute it, sell it at lower prices, or make extra shipments between its own stores?

No, not profitable. Those are necessary measures for the disposal of goods that were not sold on time or for the distribution of excess stocks. Surplus, spoiled, and expired goods are the result of inefficient inventory management. Retailers often use the perishable group as related products and offer them at lower prices that, in turn, affects the quality. Specialized stores put a higher margin and focus on quality, which in turn leads to a large number of expired goods.

How to effectively manage food products so that the buyer has something to buy and retail does not have to write off and move anything? Let's look at the main points.

1. Build a system of pulling, not pushing. Defend your interests, not the supplier’s

Under certain conditions, expired products can be returned to suppliers since very often, the reason for such conditions is the absurd process of placing an order. The quantity and list of goods are partially or fully determined not by the retail chain employees, but by the supplier. Otherwise, no return. Trying to avoid having expired goods "on hand", retailers agree to such terms and conditions.

As a result, retailer complains that the supplier supplies a large number of low-demand goods with longer shelf life and not enough better products with a short shelf life. That is when an interesting situation occurs: surpluses appear on the network for slow-moving goods, but they cannot be returned right away, because the goods are still good; at the same time there is not enough of those in demand, and the supplier simply does not deliver them so they will not be returned in case the goods are not sold before the expiration date.

Let us talk about products with a long shelf life of two weeks or more. Often there is a situation when suppliers provide a discount and demand in return that they indicate the goods, usually slow-moving, and the quantity certain should be presented on the shelves in.

If the network has a limited budget for orders, then it is forced to abandon some of the best goods. Thus, there is a discount with no needed goods.

2. Improve the internal processes

Talking about the relevance of the balances, most cases are pretty negative - they are not relevant. Especially when it comes to perishable goods. It means that inventory is carried out rarely or not qualitatively, and the acceptance, laying out of goods and their writing off is untimely. Unfortunately, the problem of the irrelevance of balances in grocery retail is massive: 90% of cases of perishable goods.

Unfortunately, often nothing is done to solve it.

3. Determine the level of service

The main approach that can be followed in the formation of stocks and orders of the perishable goods is the level of service. The target of this approach is to satisfy demand with a given probability. For example, if the level of service of the second type is 95%, it means that out of 100 buyers who came for a particular product, 95 will find it on a shelf and buy it.

The problem is that it is very common to play it safe and make ‘in advance’ orders. Though it is not the best solution, especially if we are talking about perishability. Here it is quite necessary to minimize the amount of waste since only one spoiled product can offset the profit from several sales.

4. Calculate СDW (Coefficients of the Days of the Week)

When calculating the quantity for the order, it is necessary to take into account the dependence of demand on the day of the week for each product in each store. On different days of the week, buyers’ activity is different - usually, on Monday, everyone still has products after the weekend, and there is no time for shopping, as everyone is busy with work. Toward the end of the week, this activity is growing, and on weekends it reaches its peak.

In addition, the level of demand in the store is still very much dependent on its location. For example, if the store is near the school, then the demand for food on weekdays will be much higher than on weekends. Therefore, it is extremely important to calculate the CDW and apply them when placing an order.

5. Take into account the Remaining Shelf Life of the goods (RSL)

When evaluating consumption, it is imperative to consider RSL - the minimum number of days of the remaining shelf life for a product in stock at the time of arrival of such a product from the supplier. This is a very important indicator of perishability. It often happens that the time needed for delivery is greater than the RSL of the goods. In such a situation, the predicted consumption must be calculated for the period from the delivery to the time when the expiration date for the product expires, and not until the next delivery, as usual. Also, this parameter is necessary to calculate the available balance at the time of the formation of the next order.

Unfortunately, most companies do not even have it, not to mention the use in the calculations.

6. Do not forget about the demand deviation

When calculating the target inventory level for the perishables, it is important to take into account not only the level of service and projected consumption but also the standard deviation of the distribution. The standard deviation, in this case, characterizes the degree of dispersion of demand from its average value. Demand is constantly fluctuating what needs to be considered when predicting the consumption.

If we are not talking about perishable products, then the approach to responding to deviations in demand should be different. In this case, it is necessary to refer to consumption in the recent past and correlate our target stock for the product, based on the current situation, not referring to the forecast. For example, using dynamic buffer management, as in the figure below. A buffer is a target inventory level that is established and maintained for each product at each storage point to cover demand for the period between deliveries. Based on data on the current situation, we can understand in which direction the buffer should change - increase or decrease. This approach allows you to reduce the risks of surplus and lost sales.

One more important aspect of achieving commercial goals and providing quality service for our customers is the constant availability of products in stores at the lowest possible percentage of charges. It is impossible to solve this problem only by standard methods of inventory management - manually forecasting locally and determining the size of the order based on the expert experience of the employee.

The product area means excellent products for customers, that is why there are a lot of difficulties retailers face, one of which is the calculation of the quantity to order. The number and scale of other problems directly depend on how accurately the company copes with this task: the level of surplus, lost sales, the number of charges, the number of lost potential customers. Manually collecting and effectively processing the above-mentioned data is almost impossible.

Therefore, on the way to effective inventory management, a transition from manual ordering to auto-order is needed. On the one hand, the calculation of the quantity for the order will be more accurate and faster, and on the other hand, the employee will free up time that he/she can use for analytics.

Summing up

  1. Cooperation with suppliers must be arranged in a way the replenishment occurs according to the needs of the network or store, and not of the supplier.
  2. Internal processes should be improved to make the actual balances in the accounting system equal to the physical balances in the store.
  3. The process of creating and sending orders should be automated so that it is possible to take into account and analyze all the necessary data on demand for all goods by storage locations.

In other words, a maintained balance between surplus and lost sales in the network is a key to competent inventory management.

Now we have the era of a healthy lifestyle. Fashion, the fact that nutrition and sports affect our beauty and health, propaganda - all these push people towards a healthy lifestyle. And if before attention was mostly drawn to physical exercises, now nutrition occupies a special niche in developing a healthy lifestyle.

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