How to Optimize Grocery Inventory Management: Insights and Strategies

For more than 15 years, the LEAFIO team has been a reliable partner for retailers in various industries 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 a retail store like a grocery store chain or supermarkets. 

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

Convenience store - a small neighborhood supermarket. This type of store is typically small and is located near residential areas or gas stations. They usually sell basic food and beverages, as well as household essentials. When creating and managing the stock for this type of supermarket, it is necessary to take into account its limited area, which typically does not have a warehouse. Here it is extremely important to set up a grocery inventory management system in an "empty warehouse" format when order accuracy and well-organized logistics allow you to maintain an optimal level of inventory in the store without having to house excess stock. In this case, a correct selection of the assortment is critical, which is limited for such a small area. Managing a margin per shelf meter becomes critical to the profitability of the store. 

Customers most commonly visit supermarkets, so it is important to ensure both the availability of the necessary goods and their assortment for them. However, surpluses often occur with goods availability, which can freeze funds. In addition, for the retailer, this also means the simultaneous management of goods stocks in various categories that have their own specifics, for example, expiration dates, frequency of deliveries, turnover, seasonality, shrinkage, etc. It can be a huge juggling act. There are obviously significant differences between the management of stocks of fresh dairy products, expensive high-end whiskey and Christmas decorations during the holiday season. 

Related: Convenience Store Merchandising: Layout & Tips

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 grocery inventory management is essential to profitability. Otherwise, you will have to hire more staff and support a higher payroll. In addition, the task of covering all the needs of customers in one place can result in old or “dead stock,” which can also freeze a significant amount of funds. That is why it is vital for hypermarkets to monitor indicators and pay close attention to analytics. Modern data collection and analysis systems help to highlight and effectively manage “dead stock” and outdated assortment.

What are the specific challenges retailers face in grocery inventory management, 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 to grocery inventory management

Fresh products tend to have a high risk of markdowns and write-offs, so it is very important to forecast demand and synchronize it with replenishment accurately. 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 accurate 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.

Technology allows the retailer to automate many processes. To effectively respond 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:

• Taking into account the remaining shelf life of a product after it has been put on the store shelf avoids the expiration date, customer dissatisfaction and unnecessary write-off costs.
• Use batch accounting to make the order calculation as accurate as possible. If there are several batches of a product in the store simultaneously, the buyer will always try to find the freshest product on the shelf.
• Take into account the demand fluctuations by days of the week. For some stores and products, the difference in the amount of product needed on weekdays and weekends can be quite dramatic. This means that the same stock is not suitable for all days of the week when dealing with products with a short shelf life. In order to strike the right balance between the risk of loss and risk of shortage, inventory must move up and down in line with expected sales volumes.
• Follow the goods delivery time slots, i.e. the range of available delivery times during the day to make the forecast even more accurate.
• Calculate the optimal level of availability for each product. This balances the inventory and prevents both excessive write-offs and lost sales. 
• It is also important to consider all the basic factors: demand forecast and variability, lead time, packaging multiplicity, supplier restrictions, the size of safety stocks and the necessary calculation.

By using the above tips and innovating, managing the fresh category can be less of a pain for the retailer. Technologies can significantly reduce losses from write-offs and ensure maximum availability of goods in specific categories like fresh and ultra-fresh. In this case, all the retailer has 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 Bee Market supermarket chain

2. Pronounced seasonality along with unpredictable factors of demand fluctuations

The process of forecasting and the timely increase or decrease of an 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 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 during the winter holidays. This means that the grocery inventory management system must be ready in advance to prepare for the season and to avoid write-offs and sales at the end of the season.

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

• sudden changes in weather conditions during the season, 
• major sporting or cultural events,
• opening of new public facilities nearby, 
• opening of competitor stores nearby, etc.

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

Seasonality and unpredictability implies that it is impossible to input every variability completely into the system. But it is essential that store replenishment is automated and that 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 turnover increased by 18%; 
• excess inventory decreased by 39%; 
• the level of lost sales decreased by 37%" – Teimuraz Giorgobiani, Chief Commercial Officer of AgroHub, which 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. Aside from the fact that it is necessary to allocate a separate area for the promotion, when the sales 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 in supermarkets, considering 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 to not 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 believe 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 Bee Market. "Leafio Inventory Optimization sees inventory sales more clearly, doesn’t react to one-off spikes, and warns that inventory should not exceed our requirement.”

Related: How Toy Store Boosted Revenue with Demand Forecasting Software

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

Despite the fact that all contracts with suppliers usually indicate the minimum allowable deliveries 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 a model that allows you to include variables, such as expiration date, acceptable percentage of spoilage and lost sales in your calculations. This will minimize costs by calculating the optimal safety stock level and choosing a value with the lowest overall cost.

5. Shrinkage of goods as a result of theft, damage, fraud or errors of suppliers or 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 receipts, misreporting on sales, or misplacements. The good news is that with the help of modern systems for grocery inventory management and planogram optimization, it is possible to significantly reduce the impact of these negative factors on a 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 these figures:

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

– The Novus supermarket chain

6. Omnichannel as a challenge and test of operational efficiency

The rapid development of omnichannel and online sales 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. While many struggle to make online shopping profitable, few food retailers can afford not to go online at all. In our experience, most buyers value low-priced private-label products and a high-demand product range more than a broader assortment with above-average prices. Here, ABC analysis tools will come in handy, allowing you to make the right choices when stocking your inventory.

7. Provision of similar products

In the absence of a particular product on the shelf, the buyer can easily pick another product that is similar in price and quality. This is especially helpful in the case of perishable products, which are rarely overstocked. But here an important question arises for the retailer: how to choose a similar product and not provoke cannibalization of demand? Our answer is simple: The same ABC analysis tool and "smart" algorithms of the inventory management system for supermakets can be used to 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 the Lotok chain of stores.

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

The growing employment of urban residents in recent decades, as well as quarantine restrictions due to the pandemic the last few years has significantly affected the cost of delivering ready-made food and takeaway food and has taken a hit on consumers' wallets.  In turn, this prompted retailers to acquire their own kitchens, where a wide range of food is prepared on-site, which can easily compete with cafes and restaurants. However, if poorly executed, this can be costly and cause significant food waste. The difficulty is that the dishes involve several ingredients with different expiration dates. This greatly complicates demand forecasting. 

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There is only one solution: 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 for its preparation and stocks on hand. This is also a huge juggling act. But this task is manageable 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 features and challenges that retailers face when doing business in the supermarket vertical. But these challenges can be easily overcome with the help of modern technologies in the field of inventory management. More than 160 companies around the world have already successfully implemented the Leafio Inventory Optimization system.