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Don't rely on retailers' automatic replenishment systems

Supply Chain Visual

It’s not often I feel inclined to ‘push the wares’ of another company through the newsletter; but with our focus on growing the sales and profit of retailers & suppliers businesses, I ask that you indulge me.

The retailers automatic stock replenishment systems don’t work effectively for home improvement products. I don’t mean that the technology, the systems and the processes themselves are poor, in fact the retailers have been investing in and refining the systems for years, but the fact is that the systems were designed by and for grocery retailers and they just don't work that well for slow selling home improvement products. 

In the food industry, products can sell up to 50 units per store per day. In the DIY Industry, as a supplier, you’re lucky if you have any lines selling more than one unit per store per week. Of course, there are exceptions; batteries, light bulbs, paint brush sets and white paint can shift significant volumes, but in general, the majority of our products are SMCG's – ‘slow moving consumer goods’.

A retailer client of ours said that their average sales rate, including every product across their entire store was less than 0.4 per store per week. For those of you unfamiliar with what this means, effectively the retailer will sell 0.4 units of a product per store per week or 20.8 per year. If the retailer has 200 stores, that’ll be 80 units they sell every week or 4,160 per annum. Not very much really is it and that’s the average; there are many products with sales rates far less than that.

Home Improvement retailers are therefore holding huge quantities of stock just to make sure that they have a particular widget, socket, flange, or colour of paint available for when you or I might decide we’re finally going to get round to doing the job that we’ve being putting off for months. So, where I am going with this, well I’ll tell you. 

The retailers automatic stock replenishment systems basically work as follows. A retailer opens a new store and before opening day, it fills all it’s fixtures with stock. In the hardware category it orders a box of 10 of a particular item, let’s use a small pad-lock as an example, retailing at £20. This product sells on average 0.5 units per store per week and the store therefore orders 20 weeks stock.

Within the system the stock control team has entered the re-order quantity at 2 units, so once the stock falls to that level, the automatic replenishment system will order another 10 from the warehouse, normally for delivery the following day. As each sale goes through the till, it registers with the system, so if sales run at the average level of 0.5 per week, after 8 weeks, 4 padlocks will have been sold. Hopefully, you’re still with me at this stage!

Now that’s all great and everyone’s happy. The supplier has delivered a couple of thousand units to the central warehouse, the store has stock and customers are finding what they need on the shelf. What nobody knows is that during that 8-week period, 2 padlocks have unfortunately been stolen; a customer returned one as it wasn’t what they wanted and another was left in a basket at the back of the store. Two were secondary located on clip-strips by store-staff and another was torn off its backing card, as the customer wanted a better look at it.

At the start of week 9, the system thinks that there are still 6 padlocks in stock, as only 4 have actually gone through the till. In reality, the store has 5 in stock, one of these is underneath the customer service counter (the return from the customer), two located on clip-strips, one in a basket at the back of the store and one lying at the bottom of the fixture with a damaged card. In week 10, the two on the clip strip have been sold and the system thinks that there are now 4 padlocks in stock. One is still hidden underneath the counter, one on a damaged card and one still in a shopping basket that no one can find.

Confused, well so am I and so is the system. The main fixture is completely empty, the clip strip is also empty and yet the system thinks there are still four in stock and as a result will not order any more. Customers walk in and there’s no stock available of the product they wanted. Guess what, the weekly sales rate of that product drops to zero, which interestingly drags the average weekly sale figure down, so even when back in stock, the system will be ordering too few products to replenish the true weekly sales rate.

Imagine what happens when a customer buys 4 paint tester pots of different colours and the sales assistant scans just one colour and puts it through the till 4 times (believe me I have seen this happen many times). The system thinks four tester pots of the colour ‘soap scum’ have been sold and so orders more soap scum to the store, when they actually needed to order more of the other three tester colours.

Hopefully, you can already see how sales are being lost across those lines. Well, multiply this by all the products in store, all suppliers and across the store estate and the size of the prize in lost sales and profit for suppliers and retailers is enormous. So why isn’t anyone doing anything about this? Well, store staff do what they can, stock counting is occasionally done and systems are corrected, but this only tends to happen with the better selling lines (of which there’s normally plenty of stock anyway) and when the moon is blue.

So, why have I decided to go down this route? Because I believe that most suppliers need to be fully aware of this issue and because you can do something about it. The business I’m talking about today is Benchmark Retail Services, a merchandising company that effectively resolves this problem. They’ve been operating for the last 15 years within the home improvement, homewares and garden sectors and their services include merchandising, placing/filling of secondary locations, audits of actual stock versus retailer systems and order placement.

I'm going to be as bold to say that taking on a merchandising company like Benchmark will guarantee to increase a suppliers business in any specific retailer by as much as 10% in year one – assuming everything else remains the same. I’m so convinced of the sales benefit of taking on a merchandising company that Insight DIY and Benchmark are today introducing a trial service for the first 10 businesses that respond. For the one-off fee of £500 plus vat, we will complete an audit of up to 50 of your products across 10 stores of a specific retailer. The output will be a detailed audit report for the 50 lines including the following: -

  • Stock quantity & minimum/maximum stock levels according to the system.
  • Actual stock quantity ‘available for sale’ - both fixture & secondary locations.
  • The average weekly sales for the ten stores.
  • Images and a list of the secondary locations for those 50 lines.
  • A list of recommendations and proposed actions to resolve these issues.
  • An estimate of the ‘size of the prize’ for that specific business, taking into account the audit sample and applying it to the full store estate of that retailer.

Wouldn’t it be interesting to find our exactly what the current situation is for your brands and the size of the prize for your business? If you want to be one of the ten companies to take advantage of this offer, then email me today at Steve@irg.co.uk.

Source: Steve Collinge – Managing Director – Insight Retail Group Ltd

28 July 2016

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