Efforts to rationalize and reduce the industry's inventory levels are set to achieve new levels of accuracy -- and complexity -- as attempts are made to tie replenishment more closely to what's actually sold at retail.
Attention is shifting from warehouse-level inventory reduction efforts, such as continuous replenishment, vendor-managed inventory and cross docking, to store-level initiatives, such as collaborative planning, forecasting and replenishment.
Industry observers say focusing on the store is the logical next step in attempting to reduce inventory, noting that most efforts so far have concentrated on distribution centers and areas further up the supply chain.
"There's still a lot of excess inventory in the pipeline, even after CRP," said Ralph Drayer, vice president of Efficient Consumer Response at Procter & Gamble Co., Cincinnati.
CPFR and related efforts such as scan-based trading, tested last year at H.E. Butt Grocery Co., San Antonio, show significant potential to tie store inventory levels more closely to what's on the shelves and what's actually being sold.
CPFR, which has been under study by a group sponsored by the Voluntary Interindustry Commerce Standards Association, Washington, involves coordination among retailers, wholesalers and manufacturers to ensure the right product arrives at the right store at the optimal time.
A 1996 CPFR pilot program with Wal-Mart Stores, Bentonville, Ark., and Warner-Lambert, Morris Plains, N.J., was able to increase in-stock positions of the manufacturer's Listerine products.
The VICS group plans to publish a document by the end of March that will address how companies can engage in collaborative planning efforts, according to Joe Andraski, vice president of customer marketing operations at Nabisco, Parsippany, N.J.
"CPFR engages the manufacturer and the retailer into exchanging marketplace information in order to come up with a customer-specific plan that can substantially reduce inventory," said Andraski, who is co-chairman of the VICS-sponsored group as well as serving on the ECR Operating Committee.
Retail-level efforts are required for significant inventory reduction to take place, said Andraski. "One of the major problems with CRP is its lack of forecasting," he noted. "It's usually done by a manufacturer based on logarithms and history, but its ultimate success is dependent on the skill of the continuous replenishment analyst working with a particular account. But real forecasting needs to come from the retailer."
A process model for CPFR has been developed that will be tested within the next six months, according to P&G's Drayer, who is a former co-chairman of the ECR Best Practices Committee and is currently chairman of the CRP Process Improvement Group.
If the CPFR concept can be successfully piloted, linking demand creation and supply planning, "it will have a dramatic impact on what the inside of a store looks like," said Drayer. "It will also have a dramatic impact on the manufacturer's total supply chain, to the extent that I believe manufacturers will be able to drop pricing to the consumer."
While CPFR and other inventory reduction efforts offer significant potential rewards, they also face large challenges. One of the most basic is the lack of store-level information, including scan data gathered at the point of sale. Even efforts to refine existing initiatives such as CRP have been held back by the lack of such data.
Andraski, whose ECR group has been working on a new CRP document, notes that unit-level POS information would be helpful in making CRP more effective. "Clearly there's very little [unit-level data reporting] being done today," he said. "Stores basically use a financial inventory model rather than a unit inventory. And most stores don't use computer-assisted ordering programs."
Without such data, inventory reduction and control efforts run the risk of increasing out-of-stocks and decreasing customer-service levels.
"The flip side of too much inventory is not enough, meaning out-of-stocks," said Douglas Adams, vice president at Prime Consulting, Bannockburn, Ill. Retailers engaged in inventory reduction efforts aren't sure "how long people will tolerate out-of-stocks before they say 'I'm not shopping here any more.' The view is that they can't risk that."
One way to address these concerns is for the retailer to have a solid idea of the optimal assortment for a category. "Part of inventory reduction is getting rid of items that aren't needed to excite a customer," said Adams. "The category management piece deals with getting the right assortment in the store."
Another challenge is that inventory rationalization requires significant levels of coordination among trading partners. "Cutting inventory is no longer a one-function, one-dimensional activity," he noted.
"One aspect of inventory reduction, for example, involves communication of information between trading partners, so they're both not holding safety stock," said Adams. All partners need to look at "how that can be done in as few places, and with as little inventory, as possible."
The interrelationships and cooperation needed for inventory reduction efforts are also shown in wholesalers' efforts.
As part of its overall effort to cut the days of supply it has on hand, Supervalu, Minneapolis, is looking at handling fast-moving products differently than it handles slow-moving ones, according to John Vegter, vice president of logistics for the Northern marketing region of Supervalu.
"In the past, we've handled all product in the same fashion, whether they are high-volume movers or slow movers," said Vegter. "We'd like to handle fast-moving products on a much more efficient basis than we have in the past, via the use of cross docking and special handling sections in our distribution centers."
To deal with slow-moving products, which represent a large percentage of the total items stored in the warehouse, Supervalu is looking at "handling them in a different way, by putting them in a different section of the warehouse and putting them on limited access ordering, rather than having to ship and handle them every day," said Vegter.
More limited access to slow-moving items involves "working with our retailers so that they still have the service levels they need. But service levels for fast-movers are different than for slow-movers. It's an education process, but retailers are understanding it," said Vegter.
Another initiative that should reduce inventory levels for the wholesaler is to reduce the amount of old inventory on hand. "Beginning with our new fiscal year March 1, there will be [internal] disincentives for hanging on to aged inventory, including finance charges to individual product departments if they do so," said Vegter.