Global retail
Optimizing retail stock management in a multi-echelon supply chain
Global retail

Optimizing retail stock management in a multi-echelon supply chain

10 min read
Mary Makarchuk
Mary MakarchukRetail Optimization Expert
Multi echelon inventory

What does optimization of the retail stock management system look like in the VUCA world era? Nowadays, it is taken for granted that changes happen very quickly, and the sooner retailers can adjust to these changes, the more competitive they will be in the market.

The retail industry is undergoing a big change: customer behavior is rapidly changing, and their expectations are higher than ever. Industry trends do not change every season, they change every day; the economic situation in the world is extremely unstable.

According to a study done by KANA Software, today's generation of consumers wants to receive a response within just 10 minutes, whereas the previous generations expected a response within 10 days. To meet the ever-changing customer expectations, offer new products and experiences, and quickly adapt to the marketplace changes, successful retailers must be able to create flexible supply chains. Failure to create this flexibility will result in the loss of customers, and hence the loss of the market share and profit.

According to statistics, retail and distribution networks are increasingly opening their own distribution centers (DC). So in 2020, there was a distribution center for every 25 stores (for non-food chains this figure averages 1 DC for every 14 stores, and for food companies it’s 1 DC for every 27 stores).

For comparison, in 2017, there was 1 DC for chains of more than 30 retail outlets on average, and now this indicator increased by 120% (based on the analysis of the Leafio customers).

How to choose a strategy for effective stock management? Why is it important to organize the supply chain within the network? Is it worth opening your own DCs and RDCs (regional distribution center) if, at first glance, it seems much cheaper to restock the stores directly from external suppliers? What are the risks associated with expanding the network and how to build stock management in multi-echelon supply chains?

We will try to answer all these questions.

What are the benefits of a stock management strategy in a multi-echelon supply chain?

Many store concepts back in 2018 were focused on downsizing, including Ikea, Barnes & Noble and Nike, which opened or announced launching small store formats.

Most of the new formats of trade enterprises do not have storage facilities, and their entire current stock of goods is displayed on the floor. Due to these conditions, deliveries of goods to stores must be frequent and regular, goods must be sorted into small packages and be ready for sale. Unfortunately, not all suppliers can satisfy these needs.

The objective need for DCs and RDCs has become even more pressing along with new trends in the retail sector. A distribution center is the nodal point of the logistics structure of the retail network. Of course, there are companies that own more than fifty stores and manage without DCs and RDCs, relying on direct supplies from manufacturers and suppliers. However, in this case, they have to allocate large areas of each one of their stores for storing goods. At the same time, they are dependent on suppliers, and any disruption of the supply chain could jeopardize the stable functioning of the store.

Moreover, store sales fluctuate and have their peaks and declines. A distribution center is a kind of buffer that allows you to plan the required amount of stocks and accumulate it in case of supply disruptions. It also allows you to smooth out fluctuations in the demand for goods, increasing the volume of shipments when necessary, for example, during the holidays. You can form a safety stock at the warehouse, which can be used to restock the store at any time.

Correct organization of the stock management business processes allows the company to benefit from the implementation of a multi-echelon supply chain:

Difficulties in optimizing stock management

Along with the benefits of switching to a multi-echelon supply chain, any retail or distribution network faces many issues:

If you rationally organize the centralized delivery of goods, the labor resources and transport will be used more efficiently, which will reduce distribution costs. Goods should be delivered regularly on schedule in order to maintain a stable assortment at the store, accelerate the turnover of goods, and reduce their loss. At the same time, the quantity of goods ordered should fully ensure the stability of the assortment and uninterrupted sales before the next delivery.

If the organization of stock management in supply chains is configured incorrectly, having distribution centers will not reduce logistics expenses, but create additional problems, such as shortages of certain items, and, usually, a surplus of merchandise with poor turnover. This leads to other negative consequences.

Overstock vs Out-of-stock

The reason for these problems is a lack of automation and outdated methods of stock optimization. You have to agree, that it can be difficult to manage external supplier orders using Excel, not to mention building an efficient distribution system within the network. Tweaking a block of orders in an ERP system can take years and the costs will exceed the anticipated benefits. This is often the reason for network stagnation and fears to expand.

Studying and understanding the root of the problem creates the need for a solution that will help streamline business processes, optimize stock management, and automate the entire flow of orders, from stores to external suppliers.

Optimizing the stock management system with a multi-echelon supply chain in Leafio

By optimizing your stock management system with Leafio, you increase the agility of your company so that you can effectively respond to market needs. First, let's figure out what the root of the problem is.

Why is there a shortage of goods?

Current mode of operation of most supply chains:

In our rapidly changing world, forecasts can never be 100% accurate. But what about the different degrees of forecast accuracy depending on the level of the distribution system?

If we analyze an outlet during one week, there could be no sales of a certain product at all, and next week, they might sell 10 units of this very same product. Percentage deviations at this level are infinitely larger. If you look at a regional distribution warehouse (RDC), where deliveries are made to several outlets or an entire region, there will be much less variation. The same happens when we move from the RDC to the Central RDC, because of the volume of collective consumption. The forecast becomes even more accurate. This is fluctuation averaging (aggregation). To reduce the impact of forecasts, it is necessary to carry them out at the point in the supply chain where the forecast is most accurate: as close as possible to the source – to the manufacturing plant.

Along with inaccurate forecasts, long restock times also create shortages of goods and the need to keep large stocks, which blocks shelf space, and reduces the ability to adjust the supply according to the actual market preferences.

Shortages and large stock not only reduce the availability of goods, but also reduce sales and increase investment in inventories.

The more frequent the deliveries, the fewer items the store needs to stock and, therefore, you can display a larger range of products with the same shelf space.

Leafio is a solution for optimizing stock management, and it contains automated features that will help you effectively manage your inventory, both according to the direct supply scheme and the multi-echelon supply chain scheme, with a Central warehouse and Regional branches.

In order to satisfy this need, the Leafio inventory system has developed a special DFO (demand-focused order) algorithm. When computing DC’s external suppliers orders, the algorithm accounts for the current demand and the current inventory in stores.

DFO calcualtion

When making an order for each store, DC and RDC, the following data is taken into account:

Analyzing an order from a DC to an external supplier consists of three steps:

  1. First of all, the current and future demand for each SKU at each store is collected.
  2. Then, the RDC restock is calculated, and the demand of all stores supplied from this RDC is added up (p. 1), and the demand of this RDC is taken into account as well (data on its sales/remainder/safety stocks).
  3. Third, the DC restock and the demand of the entire network for a specific SKU is calculated (p. 2) + DC data is taken into account (sales/remainder, etc.).

With this technique, Leafio strikes the perfect balance between guaranteed availability of products for sales with minimal stock.

The benefits of managing a multi-echelon supply chain using the Leafio solution

Economic effects

Do not be afraid to scale and open up new opportunities for your company, and leave stock management to the Inventory system!

Mary Makarchuk
Mary MakarchukRetail Optimization Expert

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