Can the retail industry really afford stockouts?

In the event of waning consumer confidence, retail supply chain managers could be asked to reduce stock levels. And when that happens, the real cost of stock-outs could be glaringly exposed.

"In short, the cost of an empty shelf is more than a case of a day's lost sales," said Richard Evans, sales director at Slimstock, developer of the inventory management tool Slim4. "The key issues of image, customer loyalty, efficiency, merchandising and margin optimisation are clearly demonstrated for all to see."

He adds that while fears of a double-dip 'post-recession recession' are showing signs of receding, the next few months are likely to see the retail industry riding a rocky road again. "In the wake of the Government's moves to combat a looming cash crisis, consumers remain every inch as cautious about spending as they were at the height of the previous recession and that means that unless the retail sector gets its act together there's going to be a distinct sense of dj-vu hanging about the High Street for the next two years," he said.

At a meeting of Midlands supply chain managers in Coventry recently, he described the sector as being far more vulnerable to volatility and economic ups-and-downs than other sectors and the one with the most to lose from getting its inventory balance not quite right. Evans cited high levels of competition, regular staff rotation as much as 25% proliferation of new product lines, massive marketing budgets, regular promotions and massive volumes as key issues impacting on the sector's vulnerability.

"With heightened job-loss fears, tax increases and Government cutbacks, the issues facing the retail sector are considerably more complex than elsewhere," said Evans. "Not only that, but the amounts of cash held in inventory multiply the consequences of getting stock balance even a little askew. Add to that the fact that poor availability impacts more on the retail sector than on any other and it becomes clear why I say that for some retailers, the next eighteen months are going to prove as rocky as the past eighteen months."

He added that conversely, while the risks of supply chain managers getting it wrong are so much higher, the benefits of getting it right are correspondingly higher too a viewpoint he underlines by adding that the sector holds more scope than most for improvement in terms of business efficiency.

According to Evans, the chief difference between 2008-9 and 2011 is likely to be the acceptance that eliminating waste and duplication by re-examining entire supply chain strategies is the best route to surviving. "Now, as two years ago, eliminating waste, identifying improvements in efficiency, remaining value-focused, working towards a flexible supply chain and freeing-up working capital are undeniably the surest routes to maintaining competitive advantage. Looking back, the biggest legacy of the dark days of 2008-9 is that inventory management technology became recognised as the Great White Hope for the retail industry and the upshot is that those that embraced the new tools are now working 50% more efficiently than before."

The other difference, he says, is the growing sophistication of inventory management software tools. Based on the service level required and defined by logistic and purchasing parameters including actual stock and minimum and economic order quantities, in addition to lead times and other factors, forward levels of safety stock and the future development of stock levels can be forecast as a rule, to an exceptionally accurate degree.

He added that key people in the inventory management chain are now more likely to be fully aware of the consequences of their decisions, and that taking actions to free-up a serious part of their working capital results in increasing availability and the likelihood of survival. Evans cited the case of a retail company in the South that is now processing over 1,000,000 items every day using Slim4 a UK-developed program that's used in more than 400 organisations worldwide and promises to slash inventory levels by around 25% without loss of service levels.

"As I see it, the biggest single difference between the situation facing the retail industry mid-way through 2008 and the same time in 2011 will be that supply chains will once again have become leaner and much more streamlined with fewer links," said Evans. "And perhaps having undertaken the exercise twice in three years, those that took the necessary steps to eliminate waste will be in a better and stronger position than perhaps at any other time in their histories."

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