Tried and TrueTried and True

Making products available at a price, place, and form that appeals to potential customers is the basic value proposition of supply chain management (SCM) technologies. Out of stock (OOS) situations exist when consumers reach for their favorite products, but find the store shelves empty. SCM technologies were designed to minimize OOS situations by matching supply to demand and ensuring a smooth and continuous flow of raw materials and finished products across a company's supply chain to its retail outlets.

Despite the widespread adoption of SCM technologies over the past decade, the global OOS rate has remained stuck at 8 percent, according to an exhaustive research study (see Resources). The research study's findings are of particular significance to corporations looking to use IT for competitive advantage.

A detailed analysis of the OOS occurrences revealed that more than 70 percent of the OOS situations were caused by failures at the primary customer interaction point — the store — not the supply chain. Store managers who forgot to reorder fast-moving items, didn't order enough, or mismanaged inventory caused the overwhelming majority of OOS occurrences.

The typical store manager is expected to keep track of thousands of unique items on store shelves. Given the complexity of managing the sheer volume of unique items, it's no surprise that the OOS rate hasn't gone down despite the huge investments in SCM and point of sale (POS) technologies over the past decade. In-store IT applications haven't progressed beyond POS — there's a shortage of IT applications aimed at helping front-line staff manage and stock store shelves efficiently and effectively.

Based on the research study's findings, I believe that simple IT solutions aimed at front-line store managers can substantially reduce the OOS rate and keep the customer satisfied. After all, the fundamental design axiom of IT systems has been "garbage in, garbage out." In the OOS situation, the most sophisticated SCM and POS technologies can't help if the demand signal (in this case, in-store ordering) is inaccurate, late, or altogether missing. You need to understand the true costs of OOS to develop the justification for IT systems that span business processes from the store to supporting retail distribution supply chains.

THE COSTS OF A DISAPPOINTED CUSTOMER

According to the study, when consumers don't find what they're looking for in a store, 31 percent buy the item at another store, 26 percent substitute with a different brand, 19 percent substitute same brand, 15 percent delay purchase, and 9 percent don't purchase the item at all.

Of particular concern to a manufacturer should be that 26 percent of shoppers would try a different brand when confronted with empty store shelves. Given that it may cost 10 times more to acquire a new customer than it does to keep an existing customer (see "Through a Lens Smartly"), the manufacturer will lose out if disappointed customers like the substitute product and change their preferences. Especially for manufacturers of high-margin, branded consumer goods, OOS situations can not only hurt them with lost sales, but more important, loss of loyal repeat customers!

Retailers have to be even more concerned that 31 percent of disappointed shoppers may go to another store to locate the OOS item. High-end stores and discount retailers are increasingly alarmed by a new breed of retailers (such as Costco) that stock big box discount items along with high-end consumer products from select fast-moving categories. Disappointed shoppers from high-end stores and discount retailers may become enamored by this new breed of retail store that offers a one-stop shopping experience for both low-end bulk commodity items as well as branded consumer products. An OOS situation may force a loyal retail customer to try this new breed of retailer, which not only results in lost sales for that particular item, but the potential loss for a wide range of other products as well. For the retailer, the potential financial impact of an OOS can be the permanent loss of a customer to another retailer.

Every company realizes that it's important to not only get new customers but also keep existing customers from leaving. The seemingly small 8 percent OOS situation can cause significant financial loss to the manufacturer and retailer. SCM and POS technology investments to date haven't had significant impact on reducing the global OOS rate. Business process changes supported by IT systems are the obvious solution. Unfortunately, many factors make it difficult to implement these IT solutions.

BUY OR BUILD?

The study suggests that automatically linking POS data to in-store inventory with automatic reorder triggers could help reduce the OOS situations. In this scenario, the store manager is taken out of the loop for the reorder decision and an automated system (that analyzes and acts on real time information) takes care of reordering for thousands of items within a retail store. Assuming that this solution will work for all retailers (which it won't, for reasons discussed later in this section), the traditional IT approach to evaluating potential IT systems can lead to selections that fail to make an impact on an OOS situation.

Let's call the hypothetical system described in the preceding section, the "Real-Time In-Store Reordering System" (RIRS). Traditional IT methodologies call for developing business requirements for such a system and then going through a build vs. buy analysis to find a suitable IT solution. A buy analysis examines commercial off-the-shelf (COTS) packages that provide the requirements needed for RIRS. To be commercially and financially viable, developers of COTS applications have to ensure that their offerings address a wide range of industries and problems. A buy analysis leads to a short list of products that have much broader functionality and features than called for by the business requirements of the RIRS.

Nevertheless, if a packaged COTS application is available, the prevailing wisdom is to buy and implement that solution instead of developing an in-house custom solution. I have personally experienced numerous situations where this approach leads to failure. First, the features and functionality of the COTS package tends to be extensive, spanning hundreds of screens and menu options, while the need for the RIRS may be for two screens and three menu options. The in-store manager or back-office order entry staff may find the application difficult to navigate and use properly. Just think of how feature laden office productivity applications are and how few features the average user uses!

Another challenge is the application, data, and process integration needed to deploy the COTS package. Despite IT vendor protestations to the contrary, integrating a COTS package within existing SCM and POS technologies is a difficult challenge. The integration process can lead to situations where the real-time nature of the RIRS can be compromised due to data and application integration challenges. After working through these challenges, the result typically tends to be a COTS package that is riddled with workarounds and doesn't deliver on the stated business goals!

A general-purpose RIRS, while compelling, isn't feasible as the distribution channels differ significantly across different retailers, manufacturers, and product categories. Wholesalers, manufacturer, retail or category management distribution centers, or contract logistics providers perform the actual process of "breaking bulk" from manufacturers, sorting and customizing to different market needs, and shipping to retail outlets. Every entity that performs a market distribution function has its own unique business processes and supporting IT systems. For RIRS to function, successful solutions need to work seamlessly with the retail distribution process and systems already in place. Clearly, this integration dictates the deployment of a custom business process that works with the existing supply chain.

This approach calls for an IT solution that is narrow in functionality and features (addresses the in-store reordering needs and nothing more), but broad enough to coordinate the reorder activities across the supply chain. RIRS can never be fully automated and will require in-store interaction. For example, when the fall season is over, you wouldn't want the RIRS ordering more fall fashions because of a potential OOS situation. There are situations where the store manager may deliberately seek to discontinue sales of a particular product category.

Having a simple RIRS with focused functionality (two screens and three menus) has a better chance at reducing the OOS situation. The traditional training and methodology imparted to IT professionals (including myself), leads us to overanalyze and overengineer solutions to business problems. Simple solutions that solve a specific business problem (no more and no less) in a timely and reliable fashion can deliver business value not only in OOS situations but across the entire enterprise as well.

DECOMMODITIZE IT SOLUTIONS!

Take an inventory of successful IT solutions that are running your corporation's key business processes. An unbiased assessment may reveal certain legacy systems with limited functionality that have been around forever. Numerous attempts to replace this clunker of a system with more elegant, integrated, state-of-the-art technologies have failed over the years. The main reason for disliking the legacy system is often that it's too simple and limited in what it does. Finding a COTS substitute may prove to be difficult as the legacy application supports a business process unique to that particular retailer and supporting supply chain.

This is an example of an IT solution that is not a commodity. The clunker of a legacy system provides a unique competitive advantage to that company and is difficult to imitate, as it enables a business process specific to that company and supporting supply chain. Simple solutions tend to decommoditize IT solutions by supporting unique business processes that are difficult to imitate.

As an IT discipline, if we set aside our natural bias to solve "enterprise-class" problems, we'll realize that "simple" solutions with narrow functionality have delivered tremendous value to corporations over the years. The frustration with these simple solutions stems from having to manage a diverse set of custom solutions, built on diverse technology platforms.

My response to the problem of managing multiple simple solutions is, if a simple custom IT application can deliver business value, the long-term maintenance costs should be evaluated within the ROI context for that business project, not within the conventional wisdom of the total cost of ownership (TCO) approach or a common IT budget. In my opinion, the TCO approach swung the pendulum to the other extreme to standardize and commoditize IT functionality. The simple solution approach (narrow feature set and deep integration across the supply chain) not only delivers immediate and compelling business value, but also decommoditizes IT applications. Most important, the focus of simple solutions is on keeping the customer satisfied by ensuring fully stocked store shelves, as opposed to enterprise solutions seeking to reduce TCO.

Ram Reddy is the author of Supply Chain to Virtual Integration (McGraw-Hill, 2001). He is also the president of Tactica Consulting Group, a technology and business strategy consulting company.