Academy
Inventory management specifics for grocery retail
Academy

Inventory management specifics for grocery retail

11 min read
Helen Schepanyk
Helen SchepanykProduct director
grocery store

For more than 15 years, the Leafio team has been a reliable partner for retailers in various directions from 17 countries around the world. We are convinced that a systematic approach to building processes at each level of the supply chain is an important component of any business. In this context, it is difficult to imagine a more complex and ambitious task than building a balanced inventory management system in such type of retail store as a supermarket. 

So, to begin with, let’s consider what features in inventory management are inherent in different types of supermarkets

Convenience store - a small supermarket near the house type implies stores with a small area, that are located in nearby residential areas or at petrol stations. The assortment of such stores is represented by basic food and beverages, as well as household essentials. During creating and managing the stock of the such type of supermarket, it is necessary to take into account its limited area, which is often fraught with the absence or small size warehouse. Here it is extremely important to set up an inventory management system in the "empty warehouse" format when order accuracy and well-organized logistics allow you to maintain an optimal level of inventory in the store without maintaining stock residues. In this case, the importance of the correct selection of the assortment also increases. That is limited here, and for the small area, managing margin per shelf meter becomes critical to the profitability of such an outlet. 

A supermarket is the most common and frequently visited store type for a customer these days, so it is important to ensure both the availability of the necessary goods and their assortment for him. Another side of goods availability for the client is the occurrence of surpluses, in which huge funds are frozen. In addition, for the retailer, this also means the simultaneous management of goods stocks in various categories that has their own specifics, for example, expiration dates, frequency of deliveries, turnover, seasonality, shrinkage, etc. It's like juggling several objects at the same time, dissecting on a unicycle. It goes without saying, that there are significant differences in the management of stocks of fresh dairy products, expensive high-end whiskey and Christmas decorations during the New Year's season. 

In the case of hypermarkets, due to the huge number of departments, categories, suppliers, individual SKUs, frequency and variety of orders, automation and optimization of inventory management is a sine qua non of profitability. Otherwise, you will have to "inflate" the staff to a gigantic size, and the payroll within. In addition, the task of covering all the needs of the client in one place leads to the emergence of the so-called old-stock goods or "stones", which can also freeze a significant part of the assets. That is why it is vital for hypermarkets to monitor indicators and not to ignore analytics. Modern data collection and analysis systems help to highlight and effectively manage “dead stocks” and outdated assortment.

What are the specific challenges retailers face in the supermarket vertical, and most importantly, how can they be addressed with the help of technology and artificial intelligence?

1. The presence of fresh and ultra-fresh categories, requires a special approach in inventory management

Fresh products tend to have a high risk of markdowns and write-offs, so it is very important to accurately forecast demand and synchronize it with replenishment. For fresh products, the planning process must be detailed enough to take into account even the smallest changes in demand and the supply chain must be flexible enough to adapt quickly to these changes as well.

For so-called ultra products, i.e. products with a short shelf life that should be sold on the same day, 100% on-shelf availability means that there will always be write-offs or discounts, unless the forecast is constantly perfect on a particular day, for a particular store. This means that very detailed control is needed to find the optimal balance between the risk of running out of stock and the risk of write-offs. Other fresh foods face a similar problem, only slightly less pronounced.

Fresh products

Technology allows the retailer to automate many processes. And for an adequate and effective response to this challenge, it is necessary to take into account many factors that are critical for this category, which, are considered by the Leafio Inventory Optimization when working on the fresh category, for example:

Thus, by using the above tips and innovating, managing the fresh category ceases to be a pain for the retailer. Technologies can significantly reduce losses from write-offs and at the same time ensure maximum availability of goods in such a specific category of goods as fresh and ultra-fresh. In this case, all that remains for the retailer to do is to build an effective logistics system. To do this, it is important to simultaneously master both the cost-effective supply chains that operate at reduced prices and the flexible supply chains required for fresh produce.

“It was important for us that for the fresh category, the Leafio Inventory Optimization system uses a separate algorithm that allows you to make purchases on time, as well as minimize write-off risks. Target stock levels are determined at each storage point, for each SKU, the system never orders more or less, while always monitoring the dynamics of demand and clearly forms the order,” says the management of the "BeeMarket" supermarket chain

2. Pronounced seasonality along with unpredictable factors of demand fluctuations

The process of forecasting and timely increase or decrease of the order is based on the fact that certain categories of goods and individual SKUs may have different buyer demands during the year. For example, this statement is true both for the purchases of ice cream or beer in the summer season and for the increased demand for strong alcohol or sweets on the eve of the winter holidays. This means that the inventory management system must be ready in advance not to miss the season and lose money, and after the season exit without sales and write-offs. 

Along with this, we should not forget about the unpredictable factors affecting consumer demand. These, for example, include:

Seasonality

So, abnormal heat, for example, will increase sales of ice cream and drinks, football matches will affect the consumption of beer and snacks, and a new competitor may force to review the assortment, quantity of needed goods or promotional offers availability. 

Seasonality, together with unpredictability, suggests that it is impossible to give everything completely to the system. Ideal when store replenishment is automated and replenishment planning is under the control of a knowledgeable team. Thus, your specialists will be able to balance purchases simply by fine-tuning the system parameters.

"In our case, the auto-ordering of the goods that is optimized for the current demand dynamics gave a noticeable change in indicators:

  • the average level of stocks decreased by 12% while increasing turnover by 18%; 
  • excess inventory decreased by 39%; 
  • the level of lost sales decreased by 37%", - notes Teimuraz Giorgobiani, the chief commercial officer of AgroHub, which also uses Leafio Inventory Optimization

    3. Frequent sales due to expiration dates or promotional sales re-forecasts where demand has not met the expectations

    In general, promotion planning and sales management often turn into a problem for a retailer. In addition to the fact that it is necessary to allocate a separate area for the promotion, when the trading space is already worth its weight in gold, it is also important to set up the collection and analysis of data on the progress of the promotion in real-time. 

    A systematic and automated approach to inventory management, taking into account all possible factors, allows you to make orders as accurate as possible. This, in turn, minimizes the need for sales. For example, in the Leafio Inventory Optimization, it is possible to exclude atypical sales from the calculation in order not to overstate subsequent orders. And if there is still a need to launch a promotional activity, then the system module for sales promotion will take care of all the “concerns” for planning, collecting and analyzing data, as well as predicting the course of the promotion.

    “Many managers have a belief that it is better to order more than less. This eliminates the problem of lost sales, but generates excess inventory, - says one of the leaders of "BeeMarket". Leafio Inventory Optimization sees inventory sales more clearly, doesn’t react to one-off spikes, and warns that inventory not to exceed our requirement.”

    4. The goods waste and the necessity to work with goods with different expiration dates to minimize that

    Despite the fact that all contracts with suppliers usually indicate the minimum allowable delivery and sale of goods, this information is not always taken into account when stocking. Especially if these terms can vary from delivery to delivery and for different products of the same category. That is why we propose the model that allows you to include variables such as expiration date, acceptable percentage of spoilage and lost sales in the calculations. This, in turn, minimizes costs by calculating the optimal safety stock level and choosing a value that provides the lowest overall cost.

    Expiration dates

    5. Shrinkage of goods as a result of theft, damage, fraud or errors of suppliers, theft or errors of store employees 

    Shrinkage is the loss of inventory due to the above factors. It goes without saying that this negative phenomenon in the retail industry has significant costs for the retailer and is unlikely to be completely eradicated, given the specifics of the business and the human factor. According to a survey conducted by the food industry association FMI, on average a supermarket loses up to 3% of sales due to shrinkage. Most of the losses are due to inventory misreporting on receipt, misreporting on sale, or misplacement. The good news is that with the help of modern systems for inventory management and planogram optimization, it is possible to significantly reduce the impact of these negative factors on the business. 

    “Due to centralization, the number of human errors and incorrect orders has been reduced significantly, as stores do not always have highly qualified staff and a higher rate of staff rotation.

    Managers received a very powerful Leafio Inventory Optimization analytical module, which allows them to find the reason why there is overstock or understock, identify problematic suppliers, and find delayed orders within a few minutes. This resulted in figures:

    • 10% More sales;
    • 15% Improved turnover;
    • 11% Less stock;
    • 98% SKU service level”

          Novus, the supermarket chain

          6. Omnichannel as a Challenge and Test of Operational Efficiency

          The rapid development of omnichannel sales and going online has made operational efficiency especially challenging for food retailers. There is a constant balance to be struck between the cost of shipping low-value products, which often require expiration and temperature control, and meeting growing consumer demand for online orders. But at the same time, as many struggles to make online shopping profitable, few food retailers can afford not to go online at all. At the same time, as experience has shown, buyers appreciate inexpensive goods under their own trademarks and a well-chosen assortment, even at the expense of a rich choice. And here, by the way, ABC analysis tools will come in handy, allowing you to make the right accents when choosing and filling the assortment.

          Omnichanell

          7. Similar products and provision of similar products

          In the absence of a particular product on the shelf, the buyer is easily able to switch to another product that is similar in price and property. This is especially helpful in the case of perishable products, which are rarely overstocked. But here an important question arises before the retailer: how to choose an analog and not provoke cannibalization of demand? Our answer is simple: using the same ABC analysis tool and "smart" algorithms of the inventory management system that can predict demand and form the optimal order size for each substitute product. And we again ensure the maximum availability of goods for the buyer with minimal surpluses and, as a result, costs for the seller.

          “By migrating to centralized ordering with Leafio Inventory Optimization, inventory surplus decreased and product availability increased by 25%. We understood that with the help of this system we would have a constant sufficient stock of products to meet the needs of sales,” says Andrey Orlov, director of "Lotok" chain of stores.

          8. Retail competition with the catering industry - culinary and ready-made products, cafes and restaurants at the supermarket

          The growing employment of urban residents in recent decades, as well as quarantine restrictions in recent years, have significantly affected the fact that the cost of delivering ready-made food and takeaway food has taken a firm place in consumers' wallets.  In turn, this spurred retailers to acquire their own kitchens, where a wide range of dishes is prepared on the stream, which can easily compete with cafes and even restaurants. However, if poorly executed, these initiatives also open up new opportunities for wasting money on expensive food waste.

          The difficulty lies in the fact that the final dish always consists of several ingredients with different expiration dates, preparation and sale. This greatly complicates demand forecasting. There is only one way out: building accurate demand forecasts for final products based on the demand for individual ingredients. Replenishment calculations must be performed for each ingredient, taking into account the time of its preparation and stocks on hand. If we recall juggling on a unicycle, then in this case it takes place on a rope with a ring of fire in front. 

          This is no longer a problem if you have a procurement optimization system that does all this work for you. You just have to calculate the profit from the sale of finished products.


          In this article, we have covered only the main of the many features and challenges that retailers face when doing business in the supermarket vertical. At the same time, it is obvious that they, like many other challenges, can be easily overcome with the help of modern technologies in the field of inventory management. This is also confirmed by the experience of more than 160 companies around the world who have already successfully implemented Leafio Inventory Optimization products.


          Helen Schepanyk
          Helen SchepanykProduct director

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