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The $69 Billion Problem

Out-of-stocks have long been the bane of the retail industry. RFID has the potential to make sure products are where they need to be, but solving the problem involves more than just tagging goods in the supply chain.
By Jonathan Collins
Apr 01, 2005—Over the past decade, retailers and their suppliers have spent hundreds of millions of dollars to reduce the number of times consumers can’t find the products they want on store shelves. They’ve invested in supply chain execution software and an alphabet soup of initiatives—CPFR (collaborative planning, forecasting and replenishment), ECR (efficient consumer response) and JMI (joint-managed inventory).

Despite these monumental efforts, the retail industry average for out-of-stocks remains a stubborn 8 percent globally. “For the top 100 retailers, that’s a $69 billion problem,” says Gerry Jastremski, director of retail availability at The Gillette Co.

What’s worse, the out-of-stock rate soars as high as 20 percent during special promotions, according to “Retail Out-of-Stocks: A Worldwide Examination of Extent, Causes and Consumer Responses,” a 2002 study commissioned by the Grocery Manufacturers of America (GMA). So while consumer product goods manufacturers and retailers spend the bulk of their advertising dollars on these promotions, consumers face a one in five chance of not finding the product when they get to the store.

“When faced with out-of-stocks, consumers delay their purchase, they brand swap or go to another store,” says Jastremski. “Whatever way you look at it, that’s bad news for the manufacturer and the retailer who see lost sales and a loss of consumer loyalty.”

Radio frequency identification has the potential to significantly reduce out-of-stocks by addressing inefficiencies in supply chains and providing real-time information about the location of goods. But RFID alone won’t solve the problem. Retailers will need to share data with suppliers so they can do a better job of forecasting demand. Both retailers and suppliers will need to change business processes—and their mindsets. They might even need to change the physical structure of their supply chains.

CPFR and other initiatives designed to better match supply and demand have had little impact on out-of-stocks, because they don’t attack the inefficiencies that contribute to the problem. They don’t, for instance, prevent late, missed or diverted deliveries; inventory miscounts; and misplaced stock. And they don’t provide real-time data about which products are out of stock and where replenishments are in the supply chain.

Retailers are responsible for nearly 75 percent of all out-of-stock situations, according to the GMA study. It says 50 percent of the time the problem stems from poor planning and forecasting by the retailer, and 25 percent of the time the products are within the store but are either misplaced or not recorded in store inventory systems.

Tackling supply chain problems
GMA members are manufacturers, so the study may have an unintended bias. But that doesn’t let retailers off the hook. One problem is retailers base the orders they place with suppliers on historical point-of-sale (POS) data. So when there’s a sudden spike in sales of bottled water because of a heat wave, the stores inundate their regional distribution center (DC) with orders. When the DC runs low, it places orders for more bottled water with suppliers. Even if suppliers have large safety stocks and react quickly, there’s still a delay in getting goods to the stores. With RFID data, manufacturers would see a sudden increase in shipments from the retailer’s DC to the stores and could react immediately.
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