Study: Researchers search for better ways to nix inventory errors
| August 27, 2020
You log onto your favorite retailer’s app to look for that must-have pair of sneakers you want to buy. The shopping site says shoes are in stock. But when you arrive at the store, an empty shelf says otherwise.
Inventory errors like this frustrate customers and can eventually lead to dwindling customer loyalty and lost sales, says Rafay Ishfaq, Ph.D., the W. Allen Reed associate professor of supply chain management at Auburn University’s Harbert College of Business.
“If I go to the store and this happens three times, I’m unhappy,” says Ishfaq, “and I’m going with another retailer.”
While today’s advanced technologies are helping retailers keep more accurate inventory counts, errors still occur, says Ishfaq. But a novel idea regarding more effective inventory audits could one day help retailers lower inventory error rates.
The causes of inventory errors are many, from data entered inaccurately and failures to update data to operational mistakes in scanning, picking mishaps at the warehouse and late deliveries at stores. Such errors cause major headaches for consumers. This is especially true at a time when many American consumers are foregoing visits to stores because of fears of COVID-19 and are shopping online instead.
In fact, the Census Bureau of the U.S. Department of Commerce reports that U.S., retail e-commerce sales during 2020’s second quarter — when adjusted for seasonal variation, but not price fluctuations — came to $211.5 billion, a rise of nearly 32% from the first quarter of 2020. Total retail sales for 2020’s second quarter came to more than $1.3 billion, a decrease of 3.9% from the previous quarter of 2020.
In addition to online shopping, consumers’ demand for greater convenience over the years has forced many retailers into offering more varieties of products, says Ishfaq. Consequently, many retailers have automated their replenishment processes in their supply chain to handle the demand. But that means operational glitches resulting in inventory errors can occur on a bigger scale.
“Because many stores today offer so much variety of products,” he says, “if the computer system thinks a store has three items in stock of a particular brand when, in fact, it has only one on the shelf, if the reorder point for replenishment doesn’t happen until the system record is down to one, a store wouldn’t be aware of the need to replenish the stock until a customer walks up and says, ‘I can’t find this product.’”
“The complexity that arises comes from the variety of products that we’re selling and the length of the supply chains and the sheer number of stores that need replenishment,” he says. “Thus, the scale of retail makes it difficult to keep inventory errors from happening.”
Retailers have typically relied on physical inventory audits. Their inventory managers usually conducted the audits twice a year, closing the store for a day so employees could physically count the stock and reconcile the number with what was in the system. The process, however, has proven to be laborious and expensive.
Then came technology solutions like universal product codes (UPC). Then later, faster and more expensive tools like radio-frequency identification (RFID) and quick response (QR) codes came along. The technologies today help retailers to track stock, automate and speed up inventory counting and replenishment.
Inventory errors, however, still happen.
The problem, says Ishfaq, is that not all stock in a retail store are prone to inventory errors equally.
He, along with Auburn University’s Gayle Parks Forehand Endowed Professor of Business Analytics Uzma Raja, Ph.D., recently co-authored an empirical study in the International Journal of Logistics Management on the effectiveness of frequent inventory audits in retail stores. They set out to develop a possible new framework for conducting inventory audits.
They asked the question: How effective is an inventory audit in a high stock keeping unit variety store?
“There are certain attributes that every item has such as price, sales volume, how much is in stock and how frequently the item needs to be replenished,” he says. “These attributes can identify which items in a store are more likely to have significant inventory error problems.”
So Ishfaq and Raja created a simulation model of a store inventory management system. They also developed error profiles for the inventory, putting together data on sales, price, demand, and inventory levels for each piece of “merchandise.”
What they discovered is that conducting audits based on items’ error profiles was a more efficient way of auditing inventories, he says.
“The benefit,” says Ishfaq, “is that if you can identify those profiles, you can target your inventory audit on those few items in the store, which is less expensive and much faster to do than an entire store.”
“The one thing that comes out of this research is a heightened level of awareness that inventory errors are a problem that’s real,” he says. “If all of the focus is on retail success and making sure stores are successful, then we must focus on this problem.”
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