The introduction of various forms of technology such as Point-of-sale (POS) cash register systems and barcode scanners seemed to promise dramatic improvements in retail operational processes and efficiencies by providing retailers with the ability to better manager and leverage their supply chain. This vision was driven by the potential success of retailers to automatically track the flow of goods and electronically manage inventory by transmitting precise replenishment orders. This vision has yet to be realized (Raman et al., 2001). The reason for the disappointing results is primarily related to inaccurate data perpetually generated and utilized by retail establishments.
In order to understand the failings of supply chain management in the retail industry, one must understand the concept of supply chain management as it relates to operations management. Supply chain management assists organizations with the efficient purchasing, management of and, in the case of retail operations, the profitable resale of goods. The Council of Supply Chain Management Professionals defines this process as, “The planning and management of all activities involved in sourcing and procurement, conversion and logistics.” Supply chain management is also a method for improving coordination and collaboration with behind-the-scenes partners such as suppliers, distributors, and other service providers that impact the overall operational processes (Linton, 2016).
In a study conducted with cooperation of 35 major retailers it was discovered that data used to drive the supply chains of these retailers was detrimentally inaccurate (Raman et al., 2001). For example, one company that was studied claimed to have an estimated accuracy of 99% in all data. However, physical audits actually showed inventory levels off as much as two-thirds of the stores’ stock-keeping units (SKUs). It was estimated that this level of inaccuracy reduced the company’s overall profits by 10% as a result of excessive inventory holding costs and lost sales resulting from out-of-stock items, or stockouts, as they are called in the retail business.
Another retailer discovered during this study that 16% of its in-stock SKUs were listed as stockouts when customers asked for them at the help desk. In fact, the items were available. The data was inaccurate because the items were misplaced in storage or in the wrong place on the sales floor. The result of “phantom stockouts” resulted in 25% lost profitability for this company due to lost sales!
The article asks the question, “Why are the data so inaccurate?” Their findings indicated 3 key causes contributing to inaccurate data that undermine the potential efficiency of the supply chain. These 3 causes are listed and described below:
Human nature: For example, the actions taken by clerks at the register impact the inventory data. Inaccurate scanning is often a culprit. Managers make this problem worse by checking clerks for speed but not for accuracy.
Retailers’ distribution centers: One example is cited where one of the retailers in the study audited every item on hand at the store and found that the
inventory system had the wrong quantities for 29% of the SKUs. The pickers in the distribution centers had inaccurately compiled the store’s mix on SKUs. Again, management practices in this example perpetuated the problem by discouraging store managers from getting credit from distribution centers for items shipped in error that were less than a certain amount. This process was instituted to minimize paperwork and audit expenses to the detriment of the data accuracy and sales profit.
Misuse of inventory audits: Most retailers conduct regular inventory audits within the stores. Unfortunately, most retailers inventory in-store merchandise for financial reasons only, to measure the “shrink” of goods that have been stolen. This process results in measuring inventory by dollar value rather than by item. The store is happy if the dollar values align with what is in the system, even if the mix of SKUs differs greatly.
The problem can be solved if executives take the time to understand how their policies and actions distort the data. Rewarding clerks for fast checkouts, reducing and streamlining paperwork, and monitoring inventory value are important. Unfortunately, these actions also undermine the accuracy of supply chain data (Raman et al., 2001).
I am proposing, after studying this article, that executives build a more comprehensive system of checks and balances into their business models with the express goal of improving accuracy of supply chain data. In order to maximize and leverage the benefit of the retail supply chain, executives must create innovative new purposes for the
use and application of supply chain data. This would mean stepping outside of the typical retail business model, holding managers and employees accountable for delivering on goals that contribute specifically to the success of the value chain as a whole, as well as continuing to deliver on profitability in the traditional manner, e.g., monitoring inventory, productive checkout speed, efficient overall operational processes, measuring value of inventory, etc.
- Raman, A., DeHoratius, N., Ton, Z. (2001). The Achilles’ Heel of Supply Chain Management. Retrieved May 17, 2016, from http://www.HBR.Org/OperationsManagement
- Linton, I. (2016). Primary Business Benefits of Supply Chain Management. Retrieved May 17, 2016. Hearst Newspapers, LLC (2016). [Electronic version].
- Linton, I. (2016). What are the Four Elements of Supply Chain Management? Retrieved May 17, 2016. Hearst Newspapers, LLC (2016).