Today, retail organisations are in a flurry to consolidate their existing operations, step into new markets, adopt new channels, and find innovative ways to enhance customer experience. Hyper-local retailing or the ‘store of the neighbourhood’ is one definitive trend for brick-and-mortar retail, as customers demand more personalised offers and promotions. Retailers are looking to react to their customers’ demands quicker than ever before, and they need to adapt their processes and technology, to do so.

Earlier this year, we saw numerous companies on the British high street going into administration, and recently it was revealed just how severely UK retailers have suffered from the elongated winter seen this year. In fact, official figures have shown that sales volumes declined by 0.7% in March, with home-ware retailers suffering dramatically due to unforeseen weather conditions.

This has emphasised the importance of retailers speeding up reaction time, making sure their stores are stocked with the most relevant products possible at all times. As a result, the inventory management function – ensuring that the right product is at the right location and when the customer wants it – is assuming greater importance.

Yet, most retailers find that despite leveraging the latest technology tools, inventory bottlenecks continue to persist. According to a GMA study, worldwide out-of-stock (OOS) levels for fast moving consumer goods average at 8% and result in losses of up to 4% of retail sales. During promotions and holidays, these losses are much higher. In the long term, OOS impacts not just revenues but also customer satisfaction and brand equity.

With increasing amounts of data, volatile customer demand and limited shelf space, retailers are being forced to make changes to their approach to ensure the most effective processes, supported by right systems, are in place.

So what can be done?

Businesses can gain by adopting a Key Performance Indicator (KPI)-driven process framework that aligns stock performance with the corporate objectives. Through analysis of transaction-level process data, this approach can assist both management and day-to-day execution of merchandising functions; such as replenishment, forecasting, assortment and space planning.

The first step is to identify the right KPIs and develop consistent mechanisms for measurements and target setting. The targets could be derived using industry benchmarks or through analysis of the firm’s historical data. While some KPI targets might be category specific – for instance the acceptable levels for OOS in a “destination” category are different from those in a “convenience” category – it is worthwhile to have overall corporate level targets as well.

Secondly, remember to focus on root causes. The dip in performance of a key measure is a symptom for underlying inefficiencies in the inventory management process. Multiple studies have been conducted to identify the possible root causes of over-stocks and stock outs. The list of root causes includes data accuracy, order cycle, planogram compliance and forecast-sales variance.

A framework that quantifies these root causes and ties them to the appropriate KPIs should be developed. This enables inventory analysts to prioritise efforts on a particular process issue that is causing the most severe impact on a KPI.

And finally, drive action plans at the lowest transaction level. Eventually, the analysis should be reflected through a view of the process that throws up actionable insights at transaction level; such as a specific SKU (stock keeping unit) that has high forecast errors or a specific supplier with poor delivery record. With these insights, targeted process interventions can be driven.

What benefits can you expect to see?

Ultimately, OOS level improvements can have a significant impact on revenue; in fact, a 5% reduction in stock-outs can boost revenues by about $20 million on a base of $10 billion. Moreover, improvement in stock availability for localised assortments results in satisfied customers and is likely to lead to additional business in the future.

With retailers needing to manage availability of hundreds of thousands of stock keeping units across numerous stores and multiple channels and customers getting more demanding than ever – inventory management will remain one of the top retail priorities.

With the right framework in place, retailers can identify areas of value leakage in the inventory management process, which can make a huge difference to their business. While it is impossible to attain zero stock outs without prohibitive inventory investments, there is a lot of opportunity for retailers here. Maintaining the right stock levels and adoption of the right technology to manage the same can be a challenge, but it also presents an exciting opportunity for retailers to improve profitability and customer satisfaction, driving growth in difficult times.