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While high out-of-stock rates continue to plague retailers, some are reducing their stockout rates through the use of technology and collaboration.Out-of-stocks in certain categories can jump to as high as 17% during promotions, costing retailers about $75,000 annually per store, according to the most recent data from the Grocery Manufacturers Association. The GMA reported an average stockout rate

While high out-of-stock rates continue to plague retailers, some are reducing their stockout rates through the use of technology and collaboration.

Out-of-stocks in certain categories can jump to as high as 17% during promotions, costing retailers about $75,000 annually per store, according to the most recent data from the Grocery Manufacturers Association. The GMA reported an average stockout rate of 7.7% in 2002, with direct-store-delivery categories ranging from 3.2% for milk to 11.2% for prepackaged bread.

To reduce their out-of-stock losses, more supermarket retailers are collaborating with their suppliers, who also forgo sales when a slotted item is missing from the shelf. Meanwhile, both groups are turning to technology vendors to better understand what is happening at the shelf level.

One such vendor said that in a few cases, retailers are starting to phase out what have become inefficient revenue-generating practices such as slotting fees and billbacks. While these practices generate revenue, they also make it difficult to delist or delete slow-moving items to make room for high-turning products that are vulnerable to being out of stock.

Richard Gunn, executive vice president of marketing and merchandising for K-VA-T Food Stores, Abingdon, Va., said space management is the retailer's biggest weapon in the war on out-of-stocks.

K-VA-T uses its own data management tool, along with Information Resources Inc.'s Apollo space management program, to review stores' space allocations, and identify and manage out-of-stocks, Gunn said.

Recognizing the need to provide top customer service in an increasingly competitive industry, K-VA-T made space management a top priority about two years ago, Gunn said.

Using Apollo, K-VA-T creates both clusters of planograms and planograms for individual stores. The electronic Apollo program Web Viewer has given the retailer flexibility in creating up-to-date planograms, Gunn said.

Although K-VA-T both adds and deletes about 500 items a month, Gunn stressed that the key to minimizing out-of-stocks is reallocating facings to give enough to high-velocity items. "We don't delete items to minimize out-of-stocks," he said. "We try to make sure that the items we keep have the right facings and that they have shelf tags to indicate where their home is."

Gunn couldn't quantify how much the out-of-stock rate has improved, but said that, based on store feedback, stores are getting the space they need to manage their out-of-stocks.

"We feel we have improved tremendously over the last two years," he said. "Our store people are really focused on out-of-stocks. They've improved their ordering procedures, and the focus we now have on allocation, I think, has helped them do a better job."

Space remains one of the primary reasons for high rates of out-of-stocks and voids, which occur when authorized items don't get placed on the shelf, sources said. Over the past few years, the Center Store has steadily lost real estate to sexier perimeter departments that retailers use to differentiate themselves.

"There are so many Center Store items crowding for space that there is a real issue of what should a category manager discontinue without dissatisfying too many customers," said Steve Frenda, executive vice president of IRI's In-store Solutions Group.

ISG regularly sends some 1,700 auditors into retail stores to record what is on the shelf. That audit data is then overlaid with each store's point-of-sale scan data and compared with a list of authorized items. That process detects products that should be on the shelf but are missing due to voids or out-of-stocks. Category managers often work with their vendors, DSD and warehoused, to use that data to maximize shelf allocations and minimize stockouts.

To keep out-of-stocks in check, Pittsburgh-based Giant Eagle sends its own team of auditors into stores. A chainwide program also calls for the retailer to:

o Use managers' out-of-stock store reports to identify areas needing improvement;

o Post "Also Located" signs that tell customers where products are on display elsewhere in the store;

o Work with DSD vendors to identify and correct out-of-stock issues;

o Order all sections in every aisle at least once a day, according to store-specific schedules;

o Keep storage rooms well-organized so that products can be easily found when it's time to restock them.

The time and expense involved in creating store-specific planograms manually has led some supermarket chains to use solutions that automate the process.

Food Lion and about a dozen U.K.-based chains, including Tesco, are using Chicago-based Galleria Retail Technologies' solutions for that purpose.

One tool lets category managers create tailored assortments for a category, using items that have the greatest potential for building brand loyalty, profit and demand. Using sales data, the tool then allocates the appropriate number of units to each item.

Another tool then develops a merchandising schemata that suggests product facings and adjacencies and recommends where items should be placed on the shelf for maximum sales and aesthetics. This tool can produce in four seconds a planogram that would take a person four hours to do manually, said Shaun Bossons, executive vice president of Galleria's U.S. division.

Last year, in a pilot for a major U.S.-based retailer focusing on one Center Store category, Galleria determined that 30 feet was the optimal amount of space for the category in this retailer's stores.

The retailer's larger stores typically allocated more than 40 feet to the category, and almost 20 percent of those stores were getting products and inventory they didn't need, Bossons said. "In some of those bigger stores, they had 70 or 80 days' worth of supply of slow-moving products," he said. "One extremely slow-moving product in the category actually had 200 days of supply on hand."

Today, that chain is taking three- or four-foot sections from the category in its largest stores and giving that space to fast-growing and emerging adjacent categories. Stores with fewer than 20 feet and out-of-stock problems are giving more feet to the category.

Robert Hannah, managing director of Data Ventures, a retail consulting and data analytics company, said better use of loyalty card data is driving improvements in stockout rates.

"You can't afford to lose your loyal shoppers, so you need to use your data to discover which products your particular customers are loyal to, and then adjust your planograms so you don't alienate those key customers by being out-of-stock when they come into your stores," he said.

A growing number of retailers are blending loyalty cards with demographic data and using them to reset Center Store categories based on consumer preferences.

Data Ventures' StockRight SnapShot identifies out-of-stock incidences as they occur by time of day, day of week, and so on. This lets retailers tailor their planograms relative to consumer preferences at the store level. The process is time-consuming, but offers the potential for significant stockout reductions, Hannah said.

IRI's Retail Performance Management, a Web-based tool, uses daily POS and other data to detect potential out-of-stocks based on lower-than-expected unit sales for specific stores and out-of-stock SKUs.

The tool then estimates the dollar value of each correction, ranks stores by opportunity and lists best- and worst-performing items. Manufacturers and their retail partners can then work together to determine potential causes and solutions.

It's not just sales of the out-of-stock item that are at risk when a shopper searching for a product finds a gaping hole on the shelf instead.

"We know that if our customers come in and we're out of stock, they're going to go somewhere else," Gunn said. "If we don't fix that problem, it will cascade and affect our performance everywhere, including our profitability."

Best Practices

Improving direct-store-delivery is another way supermarkets are attacking out-of-stocks.

Retailers that establish efficient delivery processes are able to put 23% more time into activities that, among other things, lead to decreased stockout rates, according to a recently released study from the Grocery Manufacturers Association.

According to the study, conducted by Willard Bishop, retailers with inefficient DSD processes typically devote an average of 16% of total delivery time to resolving backdoor delays, whereas efficient DSD processes can cut that time to 4%.

By working together to streamline the system, retailers and manufacturers can put more time into in-store merchandising, improving shelf-replenishment rates, customizing store-by-store assortments, which leads to increased sales, said Karin Croft, GMA senior director of industry affairs. "By focusing on the reduction of non-value-added receiving and delivery activities, trading partners have produced significant improvements in supplier time of nearly 14 minutes devoted to stocking and merchandising shelves."