OSA: What if Toyota Managed Retail Replenishment?

The Toyota Production System revolutionised quality management in car manufacturing, establishing Toyota cars as a market leader. Their system that sought to remove waste, such as inventory, was initially inspired by supermarket retailing. In this meeting, attended by over 70 retailers, we posed the question, what would Toyota do to improve retailers replenishment system?

A full recap of the discussion with Dr Paul Chapman is below, here though are three takeaways for retailers.

#1: They would drain the back room!

A recent study on where inventory could be found in the store revealed that just over 21% of the inventory could be found in the back room, which went up to nearly 39% on frozen food. The study also showed that around 12% of the inventory that was in the back room was NOT on the shop floor (NOSF) , this metric rose to 25% with frozen.

Anyone who has had the job of filling the frozen category in store will recognise these numbers and the difficult task of finding items missing on the shelf in the back room in a category where the inventory arrives from the DC in brown boxes, where the space in the back room for frozen is limited, dark and cold!

Exploring the data more deeply using R2 analysis, there was a very strong relationship identified between the quantity of inventory in the back room and the quantity that was not to be found on the shop floor.

Simply put, the more in the back room, the higher the shelf out of stock number. This is not a new finding, a COO from Best Buy made this same observation two decades ago, where his observation was that the items most often out of stock on the shelf, were items that arrived at the store in case quantities that could not all be placed on the shelf, meaning that the excess items needed to go to the back room [never to be found again!]

It follows that to fix shelf out of stocks, first, you need to discover the causes of over-stocks in the back room

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#2: They would prioritise "One Touch" Planogram Designs

Toyota have adopted the "just in time" system with a view to reducing inventory in the system. In their system, parts that are needed on the production line are available at the exact time they are required. See video.

The retail equivalent would be a system where the shelf would be replenished, with inventory from the Distribution Centre (DC) arriving at the store and then the shelf, at the exact time the last item on the shelf is sold.

It is clear that retail is significantly more complex than a car factory, for example, a big retail store will carry up to 30,000 stock keeping units (sku's) and unlike the car factory, there are non-paying customers, also known as thieves, who corrupt the accuracy of the inventory records upon which the expensive replenishment systems depend.

What we did hear though from a number of retailers was an increased emphasis on "one touch" planogram / modular designs that maximised the percentage of inventory shipped from the DC that could flow straight to the shelf with no excess quantity needing to go go the back room.

Retailers adopting these "one touch" and JIT planograms have recognised that to achieve them, there is a requirement to increase cross functional collaboration between functions such as store operations, category management and supply chain.

Cross functionally agreed choices need to be made on the speed of the supply chain, the minimum ship quantities and frequency of deliveries to the store. Choices also in the store on shelf capacity and the space that can be allocated to every sku, and acceptable levels of OSA per sku.

Where there are competing incentives and rewards per function, retailers will need to explore ways to remove those functional KPI's as barriers to collaboration.

There was no sense in the meeting such collaboration was or would be easy, however, what was clear was that to deliver more "one touch" JIT planograms, retailers will need to consider building new capabilities and skills behind a more collaborative approach to planogram design.

#3: They would increase the automation of Shelf Replenishment Routines

Research from ECR Retail Loss revealed that sixty percent of all the inventory records in a typical store are wrong, that means that the system thinks there are either more or less items per record than was found at the time of the physical count.

There are multiple reasons that explain why those records might be mismatched, including master file errors, pick mistakes at the DC, items shipped to the wrong store, or items being stolen or damaged but the system records not updated.

Retailers believe that counting errors are also a big contributor. For example, an associate may find a gap on the shelf, see that the system says that there are (say) twelve of these items in the store, the associate then tries but fails to find those twelve and zeroes the inventory on that item to zero to trigger replenishment. But what if those twelve were actually in the store, for example, the items were on a secondary location, and the associate did not find them? In that case, when the audit takes place, the auditor will find twelve more than the system is stating.

The feedback from many retailers interviewed in our research is that the more you ask store associates to inspect, count and adjust inventories, inventory record accuracy worsens. So how could retailers increase the automation of the shelf replenishment process?

Examples of such technology possibilities include the use of shelf images from drones, robots or fixed cameras could replace the manual gap scanning processes. Then there is the possibility of using data science and smart algorithms to predict, identify and then "auto correct" phantom inventory. And then in the back room, computer vision can help store associates more easily find the items that can flow from the back room and onto the shelf.

In our working group, many of the retailers are experimenting with these technology approaches, in a meeting planned for November 19th, retailers are going to share their learnings. Retailers, CPGS and academics can register for this meeting by clicking here.

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If you are a retailer, CPG or academic, please send me an email at colin@ecrloss.com if you would like to see the recording of the full meeting. In the meantime, in the video below, Dr Paul Chapman, recaps his key takeaways from the meeting.

May 26, 2024