Justin Patton discusses with Mike the importance of on hand accuracy at retail, how to measure it and the different forms of incorrect on hands.  

Not every inventory inaccuracy is created equal.  Some cause you to have too much inventory and some cause OSA issues for your customers. Learn about the importance of critical overstated inventory and the impact it has on OSA.

Donnie Williams 0:04

Welcome to Season Two of the SCMRC lead podcast featuring epic supply chain lessons from our industry partners. My name is Donnie Williams and I am the Executive Director of the Supply Chain Management Research Center in the Walton College at the University of Arkansas. Season Two of the podcast will be hosted by Mike Graen. Mike is the director of the retail supply chain initiative, and this is a strategic partnership within the SCMRC. The goal of this initiative is to surface the challenges and opportunities of on-shelf availability or OSA focusing on the concepts tools and technologies driving retail OSA. Season two will feature a dynamic guest list of retailers, CPG suppliers, solution providers and industry leaders to drive collaborative efforts and advance learning within the industry. Thank you for joining and enjoy the podcast.

Mike Graen 1:02

Justin Patton 2:30

Sure. Thank you for having me, Mike. I appreciate it.

Mike Graen 2:32

Justin Patton 3:55

Sure I gotta good one, and it's actually from this last weekend. And I think it kind of illustrates how things have changed when it comes to inventory accuracy as well. So the my son is finally at Lego age, right? So he's way into Lego Harry Potter. And he wanted one very specific Lego Harry Potter set. It's literally a bathroom at Hogwarts. They made Legos of everything now I guess. So I looked at the at the app and it was from a local retailer. And the sales Legos has a very large toy section. So I go down there it says they haven't stock go to the toy section. We've all been there. It's wrecked, right? The toy section is like there's just Legos in 500 directions and there's a whole long wall and all the boxes look very similar. So I spent about 10 minutes searching through all of the sea of Legos in there. And I'm not seeing that particular Lego set. So a few things are different about that versus before. First off, I did have confirmation that it was there. So if this was, you know, 20 years ago, you would hope that that store might be carrying that thing because they advertised it in the newspaper, but you have no confirmation.

Mike Graen 5:10

So, what do you mean by, did you actually call them and say, Hey, do you have this particular item? How did you How did you know they had it

Justin Patton 5:15

On the app, right? So you can look on the app, and it'll say, here is order online versus here's in stock at the local store. So it didn't tell me a stock number, it just said that that set was in stock at that store. And I actually have two stores here in town, so I had an option to go to one. So I get there. And I'm like Well, they say it's here. So in the past, if I didn't have that confirmation, I probably wouldn't spend as much time searching for it, because I just don't have some kind of confidence that it's there. But now I got a little bit of boosted confidence, may not search that whole section, I tore that whole thing apart, didn't find it. It's out of stock, right? So now and again, 10, 20 years ago, that'd be the end of the story, we'll mark it up as a loss go somewhere else. But now we have more tools. So I'm starting to think I'm like, interesting. So if the store says it's in stock, then I could go to the app, and I could bopis it right. So and then they can find it because sometimes they'll do those bopis's, same day in a few hours. So I was like, I wonder if I just bopis pick this and then I go over and buy a bunch more stuff, I'm gonna get a notification in a minute where heck I might see some the person walk over there to the same section, I'm searching and do the same thing. And maybe they know some secret area where it is, and I didn't. So I was like, Okay, this is a new tool that I had before that didn't have before. So I do it, and bopis it walk around, do a little bit of searching the store did not hear back by the time I left but then about an hour later, I got a notification order was cancelled, didn't have it couldn't find it. Right? So I mean, what a journey, right? Because before it was very much going to store it's either there or it's not there. And you're done with it. So now I have all these extra tools where I can have some kind of influence or accountability in the system, but they don't always work the way you want them to. So I thought, you know, at the time, I was specifically saying, How do I feel about this? Like, because I know what's happening behind the scenes. But is this annoying like that I did have an option to give it a second shot or a third shot and they still didn't come through? Or do I feel like oh, I really kind of exhausted all the possibilities. And I think that's up to everybody to decide, right? So some folks may not go to all that extra effort. And it may really annoy them in the first place that it said it was there when they didn't. Or it may be that when they placed that bopis order and it got cancelled. Well, they're annoyed that the store told them one thing and then canceled on the other. So, but in another hand, they couldn't have done that at all, you know, a few years ago. So I think we're

Mike Graen 7:44

So how did you? How did you feel about that? How did you react? And did you ever get what you were looking for from somewhere?

Justin Patton 7:50

I did. And actually what I did is I just did the online version. So it because the bopis cancelled, I was like they have it. So I'll just do the ship to actually just ship to home from that one.

Mike Graen 8:02

Got it.

Justin Patton 8:03

So I and again. So I had another recourse. Right. So it wasn't total loss, I could still do it. So I guess it was annoying that, you know, I spent the time to drive down there and spend the hour but at the same time, that's my job. So it was kind of research and it feeds back into here too. So I guess, technically I worked that day. But who knows?

Mike Graen 8:23

I wonder how many people I mean, devices are everywhere. Everybody's got their phone with them. And they're always on their phone, etc, even when they're shopping. Sometimes I wonder how many of these people came to the store to find what they were looking for, couldn't find it said I'll just pull it up and order on Amazon. I just wonder how many retailers realize how much stuff gets ordered on Amazon because they're in a store and stuffs not on the shelf is pretty interesting.

Justin Patton 8:50

Oh, well, yeah.

Mike Graen 8:51

You are you are a expert on inventory accuracy. You've been doing this for 16 years working with retailers, working with manufacturers. And the concept of inventory accuracy, I would think that in most people's minds say Yeah, that's probably pretty accurate. And the reality is it's not. So give us some sense of first off what is inventory accuracy, from your point of view? How do you how do you measure it? And then honestly, what is it? Is it a 0%? Is it a 100%? Or where's it in the middle? How do you how do you know what inventory accuracy is in a retail environment?

Justin Patton 9:27

It's a loaded term. And what I found is when you talk to people and you start talking about inventory accuracy, even if you're if you're listening and watching this now just pause and think in your mind like what does inventory accuracy mean in your head, especially if you're not necessarily in stores dealing with it all the time? We don't use a consistent definition across the across the industry at all. I mean, we don't even use the same units a lot of time. Like you mentioned this Mike like percentage, right? So a lot of people do inventory accuracy percentage based and there's different versions of that which we'll get to in a minute, but some people don't even think in terms of percentages, they think in terms of dollars. So especially when you talk to the finance team, they're thinking about, you know, total dollar value of the store versus total dollar value on hand, well, that may or may not match up with the number of units, which is kind of how we normally think of it. And then some people do it by unit volume. And then some people do it by kind of percentage. And then there's various ways to break that down as well. So there's no right or wrong answer on what inventory accuracy means. And I did an academic search a few years ago, looking at just papers and books and things that people written on the subject. And it's not something you're going to learn in any one particular class, there's no consensus. It's just a it's a it's a term that the industry defines and redefines as we as we move through the years.

Awesome. Well, let's just talk about how acca, So what is best in class, from your point of view, as it relates to on shelf availability? Because you're right, some people weight it based on the volume of the item, some people do it on the dollars, etc. But what we're trying to figure out, is exactly what you had with your Lego experience, is that product on the shelf or not? So from an on shelf availability perspective, which how would you best help guide a retailer or for for that matter of supplier in terms of what is the right way to think about on shelf availability? Or on hand accuracy? Is it really so OSA?

Is it really OSA. So the the category that we deal with most frequently that has, I would say probably the most inventory accuracy problems is apparel, because apparel is much more challenging to visually verify. For example, if I go to the grocery store, and I'm looking for Froot Loops, okay, I go down the cereal aisle, and there should be a pretty big section of Froot Loops. And if we're out of Froot Loops, I'm gonna have a big hole on the shelf, if we have them, I can see two cans, Sam from 15 feet away. So I still know that they're there, right? And the flip side of that, if you're talking about blue jeans, and you go into a store, and you look at a section of denim, and you ask someone, alright, do we have any size 36, 32 blue jeans on this wall? How do I know I mean, there's, there's 200 pairs of blue jeans, and they're all different sizes. So I'd have to go through each one to kind of look so visually, it's much more challenging, and, and there's a lower substitutability factor in denim because if they don't have Froot Loops, I might get Cheerios, if they don't have 36, 32, blue jeans, I'm not going to go out there and buy, you know, 40, 32 because they don't fit, I need my size. So for inventory accuracy on apparel, we a lot of times focus on it as accuracy by SKU. So we say for each SKU, is it right? Or is it wrong? So and we give it a score of one or nothing, it's a binary. If you're right, you get a good score, if you're wrong, you get a bad score. For example, if inventory says I have two size 36, 32 pair of blue jeans, and I have two on shelf, then that SKU gets a score of one, it's correct. If inventory says I have two and I actually have zero on the shelf, then it's wrong, I get a score of zero. If they have four on the shelf, and I say I have two it's still wrong, because it doesn't match. So it doesn't matter how far off it is. It's just if it doesn't match, what's the system, we call that exact match by SKU. And typically, what we'll find is based on a number of SKUs in a store, that exact match by SKU falls somewhere in the 50 to 65% range for most apparel retailers. Which sounds terrible.

Say that again, 50-65?

Right? It's generally about 50 to 65%

Oh, wow

accurate. And it depends like you'll have like some of the super high end apparel retailers, especially the boutique stores. And they have maybe 30, 40 skews and one or two representative examples of each one. And they're very expensive. So they have more, I guess, eyeballs and hands on the on the inventory sometimes and they have a little bit higher volume. And then you'll have the opposite end of the spectrum you may have like a discount shoe store. And it's just like total chaos in there in terms of inventory control. But for the most part, we find that we hover in that 50 to 65% range.

So So I have used with his audience before the following charts, I'm gonna just show it to you real quick because this is where your sweet spot is, right? These are four different SKUs at a particular retailer. They all have a description, they all have a store on hand which is what the system says they have. They also have an actual on hand which is physically how many are in the building. So walk us through this this first one. All of them have a reorder point of two, but so the first one obviously is the best case. Right? What would you that? Is that would you consider a perfect match inventory accuracy,

You know, 4 and 4

Perfect, so let's, let's look at the second one, the store says it has three, but it actually has four. What is that called? And what's the implication if it's wrong?

Right. So that we would call understated, okay? So understated

because understanding what you think you have, okay.

Right, so stated, is what the store thinks they have, that's the computer right? Okay. So, my stated amount is three, my actual amount is four. So, I am under stated. So I have I am saying that I have less than I actually have, right. So,

so is that a problem?

It is not a problem for the walking customer. It is a problem for the online customer. Because or the bopis customer, right? So a walking customer, if I am understated, so if I, if I think I have three but I actually have four generally means that Okay, going back to my Lego example. Well, they thought they had three, they actually have four on shelf I don't care, I'm just buying one, right? So that works in my favor. But for a bopis customer, online customer, it may be a problem because that customer doesn't see things that are there. So for example, on going back to that Lego example, if the store thought that they did not have one, and they actually did, I don't get to see that they have it and I'm not going to either buy it for bopis or go down to the store to pick it up. Right. So

you're okay, so, so play this out. If that particular second example, this 32 by 34, if the store on hand said you had zero, but you actually have four, you'll call them and go do I have any? Nope. Sorry, we don't have any, but they really do that. Gotcha. So that would have saved you an hour in the store, though. Right?

Right. Yeah. Yeah, it's true. So but you, you're, you're you're robbing Peter pay Paul here, right? Because the in store customer gets the benefit, the bopis customer does not. And that's what we're moving. We're not we're trying not to do that. I don't know, like what your other guests will talk about. But most of us will all say we're trying to consolidate the experience between, you know, online customer and the at home customer and the in store customer. We're not trying to make the experiences more divergent. If we're showing two different levels of inventory or two different versions of the store to those different customers, then we're dividing those channels, and we're creating a lot more pain and effort for everyone then unifying.

Got it. Okay. The third one, it says that says we have three but we actually only have one, what does that called? And is there any business consequences for being wrong this way?

Yes. And that is called overstated. Because again, our stated amount is our, our store on hand. So our store on hand says we have three. So that's what stated. And then but we actually have one. So we are over stated we have less in the store than than we think we do.

Okay. All right. And, and again, is that hurt us from an on shelf availability perspective?

It does. And that's the real one that causes the most pain and problems. The majority of the time, when inventory is inaccurate, it is going to be overstated. The store thinks that they have more than they than they actually do. And I'm pretty sure everyone who has ever shopped in a retail store has experienced this in the past, where they go to the shelf, there's none on the shelf. They ask someone Hey, you guys have any of these and they look it up say says we have five but I just don't see them so sorry, I guess we don't. And usually, you know, kind of overstated, is caused by shrink or loss or theft, or there's a lot of reasons why it can happen. But that you that's the normal way that we push off from accurate when it comes to.

Alright, so let me clarify that. So if the store on hand is bigger than the actual on hand, that's overstated. You already said inventory accurate is somewhere between 50 or 65%, which you've also said is when it's wrong, which is the other 50%. It's usually overstated, so you think you have inventory. So the understated is probably a smaller percentage. It really what you're saying is somebody has lost inventory for whatever reason, and we don't have what we think we probably have, right so we lose confidence in exposing those on hands to customers. Because just like your Lego example. In this case, I would argue, if I'm pretty sure I have three, I'll expose that on hand. If I think I have one, I might not because I don't want somebody coming all the way across town and finding out that one was wrong.

Right

Right. Even if I'm 95% accurate, I might not expose that on hand because I don't want to take the risk of disappointing the customer. Is that correct?

That's absolutely right. And

Okay

For the in store customer, the the impact is obvious, right? Because the in store customer, you don't get it, okay. And they even if they can't see the store inventory, even if they just walked in off the street, they still don't get it because it ain't there for them to buy. Right. So that's, that's, that's clearly a lost sale. For the for the online customer, the bopis customer, you're right, Mike, it's a generally it's a scenario where you tell them that they can order it, or that you have it. And then you don't actually, so when they like my example, in the beginning, when I placed that bopis for the Lego and they cancelled it like an hour or two later, it was because it was overstated. And in that scenario, that tends to really annoy consumers, right? Because I want to use it's a harsh term, I won't say lied to, but you do kind of feel like that, like we had a deal. We had an arrangement, I gave you money, and you didn't give me what you were supposed to and had to refund it. So that's, that's a deal gone bad. And that's not the way we want it. And your point, too, is like, if the store is not confident, then they're not going to show that to their online customers. And then they have less options for for buying things as well.

Gotcha. All right. So now we get back to the last one. The last one looks to me, if the one right above it, item number 85 ending in 85. Said it had three and we only have one, you called that overstated? Isn't the one right below it the exact same thing, is there any difference between item number 85 and item number 42 on this list?

There's a there's a big difference. And that last one on the list is what really costs us a lot of money and costs as a retailer and as a product manufacturer, and causes a lot of confusion for a customer in store. So that's what we would call critically overstated. Some people use critical overstays. Some people use critical out of stock, some people use frozen out of stock, but it's all basically the same thing. So in that last scenario, your this is where your reorder point comes into play. So the store thinks they have three, right? We don't have any. And our reorder point is two. Well, if we don't have any, we're not going to sell any. Okay, so we'll never reduce that three amount down to two so that we order more, so that we're hung there in limbo for however long it takes before someone goes out there and does a manual count manually readjusts that. So that will not heal itself. That is an inventory out of stock that will persist for it may be days, it may be weeks before someone actually goes out there and checks that, and that's a serious problem. Whereas on the line above it, yes, it is overstated, but they do have one on shelf. So when they sell that one, then that's going to take their on hands down to two. And that's the reorder point and they'll order some more. So it has an opportunity to heal itself, it may not be perfectly accurate. But at least we're gonna have some stock out there for the customers. That last one is a big loser because that can't You can't sell anything, and it can't fix itself. So it's hung.

Huge, huge. So let's go back to the summary. If if our on hand accuracy is 50%, which is the top one which is it matches correctly. And of the 50% it's not perfectly match. It's overstated. If you said that a high percentage of it if it's wrong, it's overstated. Give us a ballpark. I know it depends on retailer categorical, what percentage of the inventory is so inaccurate it causes a critical out of stock, which creates that last environment where you don't sell any and you don't reorder any any any feel for how big a number that we're talking about.

Mhm, and critical, you know, when you get to 5%, that's, you know, Danger Zone, Red Flag Warning Sign, that's real dollars. So we've seen anywhere from three to 20%. 20% is a pretty extreme example. But it happens especially whenever you have categories that have very low shelf capacities and very low reorder points because it doesn't take much to you just take a single unit to push you into a critical and for whatever reason, I don't know why this is an academically we've been really interested in this. Looking at a lot of retailers and it's not just us. It's other labs and the European retailers even and some of the labs over there in academics. We always find that in apparel in particular, we're always in that 55 to 65 or 50 to 65% Exact Match API range. I don't know what it is about that, that's magic. But um, but when it comes to criticals, they are heavily impacted by how frequently they cycle count that store department. So if you got somebody who's doing it like every week, then the criticals heal themselves faster. If you got like a big department store that's doing it twice a year, man, they really stack up. So there tends to be more fluctuation based on the the execution of the retailer.

Wow, this is tremendous. Wow, you know, you just don't understand that when I've talked to people, it says, well, the products not on the shelf, well, must be all those boats in the harbor. We haven't unloaded yet. And there's so many other reasons why things are happening. So how does how does a retailer or supplier for that matter? How do they measure on hand accuracy? How do they you mentioned the word cycle count? I want you to define that term because that's one of the methods that people do. What are the methodologies that people use if it's such an important measurement to actually get the on hands to a point where they're not negatively impacting your business?

Right. Okay. So Cycle Count is a fancy term, that means counting inventory, right? So in, people have been doing this since the days of the wild, wild west, when they would, you know, walk around the general store and count up how many cans of beans they have, I guess, but uh, you know, I think in the past, before barcodes, it was kind of paper based, right? So you would say I have five of this, six of that, eight of that, two of that. And it's walking around looking, counting it and once we got barcodes, cycle counts, and to this day tend to persist into a barcode counting technique. So you'll have people go around, and then scan, scan, scan, scan, scan, and all those items, and then it goes back into your mentor. And then we have new technologies that are coming into play like RFID, or computer vision or others that will allow machines to do that inventory count more faster and more accurately. But at the end of the day, it's all I'm counting how much of each inventory item I have is a cycle count.

Gotcha, gotcha. So I can't help but ask you this question. Because 16 years of your life has been dedicated to this give me the Reader's Digest at least a little taste for the podcast listeners. RFID. We hear about that a lot. We hear it's been around for a long time, it seems to be kind of just an apparel play. Exactly what does it work? Who's using this thing? Is it really have legs underneath it? Obviously, you've dedicated your life to it so you're committed to it, but what role do you believe, specifically RFID plays in helping drive inventory accuracy.

Okay, so it's a great question. So RFID, you Google it, you're gonna find 9 million things, but at its core is a way to count things faster and more accurately. So you know, typically RFID that we use in retail store a lot of stuff you'll see in apparel, like if you go to a Macy's or a Dillards, or you know, a Nike or Under Armour or Walmart or Target any of these retailers, they'll use RFID tags on apparel. To put it in context. Last year, about 20 to 21 billion items were RFID tagged globally, with UHF. And the total amount of apparel manufactured globally was probably around 80 there abouts. So about a quarter of apparel that's being manufactured today is being RFID tagged for inventory purposes. And an RFID scanner, it's usually like a little gun, you can scan about, you know, anywhere from 200 to four or 500 tags per second. So if I'm trying to take inventory of an apparel section, I can walk through that section with my RFID scanner. And I can very quickly take a an inventory account of every single SKU of every single item that's in that section. So it's about speed, and it's about accuracy. So when I use that term, you know Cycle Count earlier, having the ability to go to a section of a store, and it's not always apparel, it can be electronics, it can be anything you name it into quickly, within a minute or two, take a inventory count of everything that's in there and use that to update my on hands and correct all that understated, overstated. criticals saves a lot of time and effort. And it also saves me a lot of sales and a lot of disappointed customers and their time as well by truing all that up.

So if I'm at 50% accurate, what you said is kind of the industry standard and I implement successfully. And I'm sure there's a lot of pieces that go into that but I successfully implement an RFID solution specifically in apparel, general merchandise etc. What can I expect my on hand accuracy to be?

Typically you'll see that bounce up to about 95 to 97%. And that means exact match by SKU. So that means 95 to 97% of your SKUs in the store the the will match between, you know, the store on hand and the actual. Now a lot of people misinterpret that and says, Oh, that means the RFID guns only scanning 95% of items. No, it doesn't. It's scanning all of them basically, way more than you can manually count. But there are other factors that come into play that will cause those to go off a little bit. For example, shrink, somebody dropped it and broke, somebody threw it away, somebody stole it, people steal stuff all the time every day. So there's little factors that come in that will go, I don't think you'll ever get above like 97, 98, unless it's something that's just kind of locked up and the customers don't have access to and you're constantly monitoring it. But but that is a very strong inventory accuracy adjustment, and it allows the retailers to make some pretty significant changes in how they sell and merchandise inventory.

Awesome. Well, I've sort of teased the audience a little bit, because you are the expert in the industry when it comes to RFID. So if you're okay with that, we would love to have you come back on a future podcast and unpack this topic. Because I believe this is a critical and by the way, you and I have been working on for 16 years. So we know, it works, we wouldn't do it this long if we didn't think it worked. But I think there's a lot of topics to unpack on that and we just kind of scratched the surface and was some appetite. So I'd love to have you come back and do that. Just as a wrap up, my question for you is what else is what else should the listeners know? I've asked you a lot of questions around on hand accuracy. What else? What else? Should I, What didn't I ask you that I should have?

I think you've covered it pretty well, you know, a lot of this stuff seems a little bit pedantic to just a person who's going to the store shopping. Because, you know, my mom and dad don't really care if it's understated or overstated, whatever, they just know if they can buy it or not. What it does help to know like, why things don't match. People get really frustrated when they go to a retail store and their systems wrong. It's like how can you not know what you have? And then I'll ask them is like, how many pair of shoes do you own? I don't know. I mean, you know, how many plates do you have? I don't know. And then you get scary questions? Like, how many things do you own that cost more than $5,000? And most people will be like, I don't know, but I probably should know, right? So, like, by nature, humans we're awful at inventory, we're not good at it. We don't like counting things. It's just not something that we are good at as a just human nature. So you know, there's this expectation that you know, these retailers that have just a sea of inventory, and all this complex movement in there should have a very high accuracy. In the meantime, the rest of our life, we spend half the day looking for our keys. So like, you know, I think that understanding kind of why inventory is important more than just beyond whether my cereals in stock or and I can get the Legos I want is important. And then people will start understanding and seeing how it matters. And it will start mattering more and more all around them than it has in the past.

Justin I can't thank you enough. This is incredible. This topic is so important, but so misunderstood, not only by people who shop but frankly industry experts. Because I think some of the things you enlightened us, just because it's inaccurate not all inaccuracies are equally important to making sure the product is on the shelf. So thank you so much for your time. I really do appreciate it. We will welcome you back. And we'd love to talk about RFID and any other technologies that are out there that can help retailers because again, this podcast is all about helping retailers and suppliers drive on shelf availability, and I think you are absolutely an expert in that area. So thank you very much for being here.

Thank you for taking the time for this epic discussion. And a special thanks to Mike Graen for leading the retail supply chain initiative. On behalf of the Walton SCMRC, we are delighted to lead with you as we learn, engage, address and develop all things supply chain to lead the world of commerce from Northwest Arkansas. Have a great day.

Transcribed by https://otter.ai