The Sexy Topics of Metrics and Replenishment
Ok, now that I have your attention, I have to admit metrics and replenishment are sexy topics only to a select few replenishment nerds such as myself. However, they are important and even if you’re not a nerd I encourage you to take a few minutes and read on. I’ll focus on metrics and how they contribute to the F&R (forecasting & replenishment) process. As basic as the concept of having replenishment metrics seems many companies either do not have them, do not have a good set of metrics, or have metrics that are underutilized. This blog contains some thoughts regarding the importance of four metrics to replenished orders: In Stock Percentage, Out of Stock (OOS) Percentage, Negative On Hands, and High Sellers with No Sales.
In Stock Percentage
Yes, it is theoretically possible to be in stock 99% of the time, but at what cost? Will the store have enough room to house the product and how much money should be tied up in store inventory? What is the trade-off between the cost of being in stock and the cost of having a customer disappointed because their desired item is not on the shelf?
These questions have implications on finance, operations, marketing, and even the size of the supply chain needed to house and deliver the necessary product. While it is easy to state that no OOS are acceptable, it can be extremely costly to maintain a high in stock percentage. Should the same percentage be applied to all products? What about spoilage on perishable items? It could be challenging to gather together finance, operations and marketing in one room and work on a solution to these questions. Ultimately, the answer could be comprised of a complex mixture of percentage ranges, categories, or geographic locations. However, once this measure is determined, supplying this guideline to your replenishment team can also provide a long lasting, proactive and powerful guideline by which to measure orders for the long-term benefit of the organization at large.
When looking at in stock percentages the focus should be on the overall in stock picture of what the sales floor should look like, including cost of inventory. Once tolerance ranges have been identified, the replenishment team is responsible for maintaining inventory levels in the correct ranges.
Out of Stock (OOS) Percentage
One of the most common replenishment metrics, this is the flip side of the in stock percentage, but the focus is on the exception rather than the rule. If an item is OOS, a logical reaction is to approach the replenishment team and ask why the item was OOS. However, is it the best use of time and resources to investigate potentially random product occurrences that come to the forefront of attention?
A business can reactively pursue these instances; potentially resulting in finger pointing, costly overstock conditions and possibly even high spoilage. Another approach is to establish what is an acceptable tolerance and how often it occurs. I believe it is important to have a conversation about in stock percentages separate from out of stock percentages due to a different focus. Were multiple products in one location affected due to an unexpected busload of people? Was a sale item OOS in half of the available locations? In the best possible scenario, all business interests decide ahead of time what is the optimum OOS tolerance range that takes into account the least-worst combination of the risk of being OOS and the risk of having overstocked conditions.
Looking further into OOS conditions, it is important to determine why an item was OOS. Was it because the forecast was not high enough? Perhaps this is a volatile selling item (think ice cream on an unexpected 95-degree day). Digging further into a scenario, is it because on hands are inaccurate? In this scenario there may be a case or two on hand, but the system thinks there is an OOS or even a negative on hand quantity. Volatile selling items and sale items are addressed by the replenishment department and covered by the OOS tolerance range, however negative on hand conditions come from an entirely different scenario, which is the next topic for discussion.
As any system replenishes based on available inputs, ensuring on hand quantities are accurate is critical to good orders. When looking at OOS instances, the focus needs to be on performing an analysis of OOS items, then developing action plans. Once tolerance ranges have been identified, operations is responsible for maintaining accurate inventory and the replenishment team is responsible for maintaining inventory levels in the correct ranges.
Negative On Hands
As mentioned earlier, negative on hands occur when the location has more in stock than the system knows about. One reason this metric is important is because it is a very straightforward indicator of on-hand accuracy. The immediate response in an isolated instance is to perform a quick cycle count. If the problem is widespread, a reasonable assumption is that on hand inventory in general is over or understated, causing inaccurate ordering as well as financial records.
When looking at negative on hands, the focus is on improving inventory accuracy for the purpose of generating better replenishment Orders.
High/Medium Sellers with No (or Low) Sales
You might be wondering why a high or medium seller has no sales. The obvious conclusion is that the item must be out of stock. But what if the system is not reporting an OOS? One potential cause might be that the system thinks the item is in stock, however in reality the item is not on the shelves and is unavailable for purchase. This can be corrected by a cycle count. Another cause can be that the item is in the stock room, however the shelves are empty. Both of these scenarios can be identified by a single metric and result in simple actions to resolve the problem.
If high and medium sellers have inaccurate inventory, most likely low sellers do as well. By focusing on accurate inventory of high and medium sellers, inventory accuracy of low selling items will improve by default. With high/medium sellers with no (or low) sales, the focus is on improving inventory accuracy and ensuring product is on the retail floor available for sale to customers. The goal for this metric is maintaining a long term, low volume of high/medium sellers with no sales.
While there are many metrics that can be tracked and measured, the main observation is that having metrics can have a positive impact on not only F&R orders but the organization at large. It takes team work across departments to achieve results; everyone works for the same company and ought to have the best interests of the company in mind. One visible impact of metrics is optimized orders and in stock conditions. However, there are other impacts of utilizing metrics, such as contributing to more clearly defined organizational roles and responsibilities. For example, if stores are responsible for and focused on inventory accuracy, the replenishment team can be more focused on maintaining the agreed upon in stock positions.. Ultimately, metrics provide individuals and departments the ability to measure themselves, thereby reducing reactive finger pointing and creating less disruption across the organization, while improving performance.