Shrinkage is the retailer’s nightmare. Every year, shrinkage costs retailers billions of pounds. Often, shrinkage is caused by theft or wastage however, some shrinkage, ‘unexplained’ or ‘unaccounted for’, is caused by poor inventory accounting.
Poor inventory accounting is often a result of errors caused by a break down in the process. Inventory going to one store instead of another. The term ‘wooden dollars’ essentially means that the stock is within the business somewhere and therefore, the estate as a whole will not shrink.
However, it is not as straight forward as that. For a start, stores typically have independent balance sheets. This helps with the management of the stores and areas. But, if one store has other stores inventory, creating an accounting inaccuracy, the balance sheet will be inaccurate.
In this scenario, both stores suffer. One has too little stock, potentially creating gaps on shelves leading to lost sales. The other has too much stock to handle, eating up valuable warehousing space and lowering staff productivity.
But the damage doesn’t stop there. Stock ordering systems work off three key data points. Inventory (store stock file), demand and sales. The store stock file is updated automatically at each delivery window. The system assumes everything that is supposed to be delivered, is. But of course, in this scenario, it the inventory has gone to another store. Obviously, without stock, it can’t be sold. So, the stock file is showing a case in stock but no sales registering. This immediately starts to erode demand for the future and will affect future orders.
The industry average for misdirected DU’s is 3%. That may not sound like a lot but when you consider the total inventory held by each retailer, the financial value of 3% is quite large. Buffer stocks are used to protect on-shelf availability but this leads to cash being tied up in inventory, cash that could be used elsewhere to grow the business.
To say that unaccounted shrink is in the business somewhere may well be true. But it is anything but ‘wooden dollars’, directly impacting the bottom line through:
1. Lost sales
2. Reduced productivity
3. Cash tied up in inventory
4. System performance degradation
A better way?
IoT is not magic. It can’t miraculously move misdirected inventory to its correct destination. However, using the Entopy platform to turn goods vehicles and supply chain handling units into ‘virtual warehouses’, stock and it’s location can be accurately seen in real-time. Furthermore, risk of delays can be identified and factored. Critically, combining IoT data with on-premise systems can lead to automated stock transfer, helping to improve the accuracy and efficiency of processes as goods move between sites and stakeholders. The data can be directly inputted into the local system, ensuring accurate data, and inventory can be reordered or moved (if appropriate). By capturing errors as they happen, the accuracy of the systems retailers’ use will improve. This will help to reduce total inventory holding, improve on-shelf availability, and overall drive productivity.