Is the time right for perpetual inventory?

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1 WHITE PAPER Is the time right for perpetual inventory? Does perpetual inventory in your mind seem a lot like dating a movie star nice dream, but hardly reality? With tens of thousands of items in each store, localized assortments, unknown loss, and unreliable SKU counts, the idea of knowing the exact inventory balance of each item in each store in real time, and keeping this count accurate over time, may sound a bit farfetched. But is it? Leading grocery companies are, in fact, leveraging perpetual inventory practices and technology today to provide item-level visibility across the enterprise, reduce inventory levels and costs, improve inventory turns, and better understand demand and loss by store. As a result, they can do a much better job than their competitors at getting the right product mix and quantities into each store to match demand. This can make a critical difference because in today s segment-blurring retail marketplace, grocers are competing with everything from big- box retailers, such as Walmart and Target, to restaurants, drug stores, dollar stores, convenience stores, and even Amazon- Fresh for consumers food and grocery dollars. In addition, how consumers are shopping is changing. Progressive Grocer reports that 33 percent of grocery shoppers are now using mobile apps and online sites to stretch their shopping dollars. As these discount options continue to gain popularity and cut into already razor-thin margins, operators must become even more efficient to stay profitable. The companies that succeed will be the ones who best meet these changing customer expectations while also achieving corporate cost and margin targets. Perpetual inventory can be an underlying foundation for achieving these results.

2 33% of grocery shoppers are now using mobile apps and online sites to stretch their shopping dollars. Progressive Grocer The perpetual inventory vision There is an old truism you can t manage what you can t measure, which grocers must take to heart when thinking about store inventory. If you don t have visibility to the inventory levels in your stores, along with how it is being consumed, moved, sold or lost, how can you understand key variables such as local consumer demand, price sensitivity, promotion effectiveness, or forecast accuracy? And without that information, how can you get product assortment right, reduce both out-of-stocks and over-stocks, and free up critically-important shelf space to launch new products? It s a house of cards balanced on incomplete inventory visibility. The vision for perpetual inventory is to create a solid foundation upon which to build all of the capabilities for improved operations and decision-making. It not only provides inventory visibility at the item within the store, it shows the usage and movement of goods within and between stores, distribution centers and DSD depots to get a complete supply chain picture. For example, to understand true demand for lettuce, you have to know not only how much was sold from the produce department, but also the amount used in the deli to make sandwiches and other prepared foods, what was transferred to other stores that were short, and how many had to be thrown out. Thus, perpetual inventory tells you not only how many of each item is in the store, but where it is and how it is being consumed. This level of detail allows you to make informed decisions that increase revenue and margins while reducing waste. It is also the gateway to centralized replenishment, production planning of fresh items, and computer aided ordering, which add further benefits. The challenges The biggest challenge to implementing a perpetual inventory program is conquering the fear of the unknown. Since most grocers do not currently track inventory at a detailed level, and often use manual paper-based matches of invoices and sales or notoriously unreliable cycle counts, the fear is that any attempt to reach this level of detail would either be overwhelming in scope or prone to failure. As will be explained below, this doesn t have to be the case. Another fear is that to gain the level of inventory accuracy required, you would have to turn your stores into mini- distribution centers. In fact, some companies have mistakenly tried to adapt warehouse management systems (WMS) to work in stores. But stores are not DCs. DCs don t have delis or bakeries or give out free samples. Nor do they have endcaps, promotional displays or shoppers who pick up an item from one shelf and place it back on another shelf when they find something they like better. That s why you need inventory management capabilities designed specifically for retail grocery stores. Of course, there is also the fear of applying new business processes at the store level. For example, how do you re- train cashiers who have always scanned one flavor of the ten assorted yogurts on the belt and hit quantity ten to now scan each UPC individually? (Simple answer disable the quantity key, plus a little training.) Or how do you get store managers who have always done their own ordering to rely on centralized replenishment? (Perhaps by showing them how they will save time on the ordering process while also reducing out-of-stocks and freeing up shelf space.) Through a combination of best practices and specialized technology, you can remove the fears that have kept many companies from implementing perpetual inventory.

3 It s true that more tightly controlled procedures are required for maintaining accurate perpetual inventory balances, and these new practices require associate training and compliance, however, these changes will help you run your business operations more efficiently whether or not you choose to pursue perpetual inventory. Let s take a look at what a perpetual inventory program might look like. Perpetual inventory best practices and technology The basic building blocks of perpetual inventory are an accurate database of all active SKUs, an inventory balance for each SKU across all locations, and the ability to track every transaction that impacts that inventory. It sounds like a simple concept, but can be challenging to implement. The solution is to employ a step-by- step best practice approach and perpetual inventory software. If a journey of a thousand miles starts with a single step, the journey to inventory accuracy starts with choosing a pilot store and getting an accurate physical count of inventory in a single area within that store, such as dairy or frozen foods. This direct physical count is necessary to have an accurate starting point and serves as the basis by which all subsequent inventory transactions are applied. This data is loaded into the perpetual inventory software based on user configurable rules for how you want to count, group and report on inventory. Perpetual inventory software must contain journaling capabilities that track every transaction that increments or decrements inventory balance. These transactions include receiving of new products and returns, sales, transfers in and out of the store, and any adjustments such as for shrinkage or use of product as ingredients or supplies. The key to the journal is that all transactions are captured in one place, avoiding the inaccuracies that occur when inventory data has to be extracted or integrated across multiple sources. Receiving is especially critical in the inventory tracking process since this is where the bulk of your inventory movement comes from besides sales, which are captured at POS. Automated receiving greatly reduces errors and omissions from manual entry while saving time and labor. Therefore, the software must be able to process Electronic Data Interchange (EDI) transactions such as Advance Ship Notices (ASNs), Direct Exchange (DEX) documents and Network Exchange (NEX) documents. Integration with your POS system is another important aspect of a perpetual inventory implementation. POS data is a key input to demand planning. Together, an accurate view of inventory and an accurate picture of demand enable you to make profitable decisions on inventory placements, replenishment, localized assortments and promotions. Associate training on best practices for recording inventory transactions is important to the success of any perpetual inventory project. This includes procedures such as cashiers scanning every item, the use of automated receiving technology, scanning items used as ingredients, and proper handling of returns and transfers. These practices must become ingrained in the organization to maintain inventory accuracy over time. Once perpetual inventory is running smoothly in the initial areas within the pilot stores, you can begin rolling it out to more departments and more stores, repeating the steps used in the initial pilot. This phased approach makes data collection manageable while leveraging the experience gained from earlier implementations. In addition, this type of approach allows you to tune your training and communication procedures based on what you may have learned from the pilot. The benefits of perpetual inventory While there are many benefits to be gained from implementing a perpetual inventory program, they can be grouped into three main categories providing visibility to improve day-to-day operations, enabling deeper analysis of the business to affect longer term profitability, and as a foundation for adopting additional technologies such as computer automated ordering and e-commerce. Visibility benefits Perpetual inventory provides near real-time views of inventory positions and movement across the enterprise. This is especially important as grocers attempt to better match product mix and available quantities to local markets. Specific visibility benefits include: Reduce inventory levels and costs Knowing exactly what inventory is in each store and what is in the replenishment pipeline allows grocers to run leaner since there is less risk of out-ofstocks, and thus, less propensity to overstock. Total enterprise inventory and costs are reduced without sacrificing service levels.

4 Increase inventory turns Grocers can tailor inventory assortments based on visibility to local demand instead of the one size fits all approach that leads to overstocks in some stores while other stores lose sales from empty shelves. Leaner inventories in stores combined with better tailored inventory mix will increase inventory turns, driving higher returns on invested capital. Reduce labor costs Time-consuming full-store inventory counts are no longer necessary since all inventory quantities and movement are accounted for. The exception, of course, is shrinkage. The recommended approach is to do targeted counts on high-risk items such as razor blades to identify problem severity, adjust inventory counts, and provide a basis for corrective action. Improve profitability of fresh departments For perishable goods, especially those used as ingredients within the store, visibility to what is actually being sold or used vs. what ends up as spoilage or waste can have a big impact on profitability. Efficient inventory transfers Having visibility to inventory quantities in each store permits regional managers to see where imbalances from demand variations have occurred. They can then transfer existing inventory between stores to reduce overstocks and prevent lost sales. Analysis benefits Beyond improved day-to-day store operations, following the best practices associated with perpetual inventory management provides a deeper understanding of the many facets of the business, which can have far-reaching impact on performance, profitability and corporate success. With these insights, grocers can better understand: Promotion effectiveness Promotions often fail to provide the expected lift because either there are insufficient quantities of the promoted items in the store, or displays are not restocked with items as they are sold. Tracking POS data and inventory movement on a near real-time basis enables store managers to assign restocking tasks as needed while giving planners a better understanding of promotion effectiveness for improved planning of future promotions. Product movement Stores are often inventory black holes once product is received, there is no visibility to whether it was lost, sold, transferred, or used as ingredients. Perpetual inventory removes the blinders from product movement so everyone from store managers to corporate HQ understands exactly what is happening with all inventory anywhere across the enterprise. This enables intelligent decisions on merchandising assortments, replenishment, loss prevention, promotions and many other profit and margin enhancing activities. Accurate inventory monitoring Real-time monitoring of inventory movement across the enterprise helps provide visibility into inventory loss, including shrinkage and waste, as well as what are the slow-movers that waste shelf space and reduce margins. In addition, this corporate visibility also prevents store managers from fudging inventory numbers at month end to make their results look better. Perpetual inventory exposes these practices to provide a truer picture of results. Foundational benefits The near real-time visibility that perpetual inventory provides can be the foundation for other initiatives that yield even greater benefits than perpetual inventory by itself makes possible. Examples include: Computer automated ordering (CAO) Grocery retailers report up to 65 percent reductions in outof-stocks and 10 percent reductions in inventory levels from implementing CAO. Perpetual inventory management is a prerequisite for CAO to function.

5 Available to promise With 33 percent of shoppers going online or using mobile apps before entering the store according to Progressive Grocer, it is imperative that accurate inventory information is provided to these shoppers. If an item researched online is not available when customers get to the store, the customer experience is diminished. The same is true for lowtech customer services such as when a customer calls a store to see if you have a specific item. The associate answering the phone should have access to accurate inventory information so they can answer intelligently and the customer will not be disappointed when they arrive. E-Commerce Fulfillment Not many US grocers have added e-commerce offerings yet, but there is no question this is coming as consumers continue to demand ever more shopping capabilities at their fingertips. As with available to promise, the ability to take orders online and fulfill them from the store for customer pick-up requires an accurate view of inventory in each store. Perpetual inventory is thus a prerequisite for buy anywhere fulfill anywhere e-commerce initiatives. Summary If you can t manage what you can t measure, then running your business without the visibility offered by perpetual inventory is like flying blind. It puts you at a distinct disadvantage to your competitors who are leveraging perpetual inventory to reduce inventory levels and costs, improve inventory turns, and better understand demand and loss by store. Although there are challenges to implementing perpetual inventory programs, most are more fears than true barriers. They can be overcome with a step-by-step best practice approach that starts small, learns by doing, and offers incremental benefits as you go. Most importantly, the enterprise visibility and analysis benefits that perpetual inventory makes possible far outweigh the effort to get there. And the ability to progress to computer automated ordering, available to promise and eventually e-commerce add even greater value. With leading grocers already employing perpetual inventory to their advantage, can you afford to fall behind? jda.com info@jda.com Copyright 2016, JDA Software Group, Inc. All rights reserved. JDA is a Registered Trademark of JDA Software Group, Inc. All other company and product names may be Trademarks, Registered Trademarks or Service Marks of the companies with which they are associated. JDA reserves the right at any time and without notice to change these materials or any of the functions, features or specifications of any of the software described herein. JDA shall have no warranty obligation with respect to these materials or the software described herein, except as approved in JDA s Software License Agreement with an authorized licensee