Retail Technology Quarterly, May 2005
When Giant Eagle took a
hard look at its in-stock positions,
it found it was leaving money on the table.
If the chain could just eliminate out-of-stocks, according to a 2003
study from consulting firm Bain and Co., the Pittsburgh-based grocer
could seize a $20 million profit opportunity
Now Giant Eagle is on the path toward unlocking that opportunity. One
of the reasons is collaboration. The company teamed with St. Louis-based
Anheuser-Busch (AB), the brewer that makes nearly half of allbeer sold
in the United States, to take part in Anheuser’s Efficient Order Writing
(EOW)program. The program leans heavily on forecasting software from
San Ramon, Calif.-based Market6, which promotes its ability to turn more
than a hundred mathematical models loose on a single forecast.
Speaking at the Food Marketing Institute’s recent Marketechnics conference
in Washington, D.C., Giant Eagle’s Diane Roberts, director of merchandising
systems, said the retailer found that two areas account for 70% of the
profits it loses due to out-ofstocks: store-ordering practices and directstore
delivery (DSD) management.
DSD accounts for 20% of the improvement opportunity Roberts described.
“Not bringing enough product in to meet demand, and bringing the wrong
items in to meet demand” are two key problems that fall under DSD management
related to the issue of out-of-stocks, she said.
Signing up with Budweiser: From the numbers, the chain realized that
DSD out-of-stocks should be a key focus of the chain’s improvement efforts.
“We formed an internal team to try to address the issues,” said Roberts.
Some of the strategies included assortment reviews, planogramming and
tagging of all DSD sections, revision of delivery schedules and a renewed
effort to get vendors to stock to the planograms, she said.
The chain also got serious about collaboration with suppliers. “Giant
Eagle has made a large investment in its data over the past 10 years,”
said Roberts. “Our primary focus has been on utilizing data for internal
operational use, or relationship marketing. Recently, we’ve been shifting
our thinking to leverage our investment in data with the technologies
and experience of our suppliers.”
Giant Eagle picked six test stores and six control stores involved in
a forecasting and ordering pilot with Anheuser-Busch. The test stores
provided two years of POS data tokick-start the EOW forecast engine.
Roberts called the program’s results to date impressive: The stores’
out-of-stock rates decreased dramatically from 6.6% to 3.6%, as Anheuser-Busch
sales at the stores increased 2.5%.
In the United States, the supermarket industry’s average out-of-stock
rate (the percentage of items that are unavailable at a given time) is
7.9%, according to Market6 figures. More importantly, retailers can increase
sales 4% if they eliminate their out-of-stocks. Items on promotion run
at a much higher out-of-stock rate, 13.1% on average. Market6 estimates
that in dollar terms, the problem of out-of-stocks in U.S. grocers’ top
25 product categories alone amounts to an average of $200,000 in missed
revenue per year, per store.
Technology-assisted ordering is the best solution for predicting what
inventory retailers need and when they need it, according to Market6
CEO Bill Purcell. Anticipation is the key, he said in the Marketechnics
session. “You can’t fix outof- stocks unless you better anticipate consumer
demand,” he said.
“The science of forecasting hasn’t really changed dramatically since
the 1950s,” said Purcell. “However, what happened is the computing power
has grown so much faster at assembling the combined information.”
Today, companies have 64 times the computing power they had in 1995.
Strategy has improved, as well, through the use of more “demand drivers,”
Purcell said. The biggest demand driver for allergy medication, for example,
is pollen count. For beer, it’s not only weather (high temperatures translate
to high sales), but also regional sporting events. These demand drivers,
combined with historical POS data, are fuel for efficient forecasting
engines.
As the theory goes, the more numerous the demand drivers, the better
the forecasts, the fewer the out-of-stocks, the greater the sales. All
this comes without the need to raise inventory levels.
Another key to modern forecasting is the use of multiple forecasting
models, as opposed to the historic method ofcreating a single model and
applying it to all items every day. Market6’s own forecasting tool uses
more than 100 models and uses statistical measures to select the best
forecasting model for each situation.
Purcell called Wal-Mart’s Retail Link the best-known forecast and ordering
solution. “Most retailers either have or are putting into place methods
to compete with that.”
POS data is still key to accurate forecasting, and not as challenging
to collect as in years past. “What we’re finding is most large retailers
have the ability to extract and deliver this type of data.”
Giant Eagle plans to deepen its involvement with Anheuser-Busch’s EOW
program. Also, some other manufactures have expressed an interest in
what Giant Eagle has been doing with Anheuser-Busch. The retailer will
continue to work on improving its own internal processes to reduce out-of-stocks
of Anheuser-Busch products, particularly on promoted items.
“We encourage other DSD vendors to bring us their ideas and new technologies,”
said Roberts.
— Ken Clark
