Stock Management System Case Study Essay Research

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A Study of the Safeway Stock Management System

Before looking into this logistics case study it is important to know what is meant by the term Logistics. Logistics can be defined as:

The tasks involved in planning, implementing and controlling the physical flow of materials and final goods from points of origin to points of use to meat the needs of customers at a profit

In effect this means getting the correct product to the customer in the right place at the right time. When talking about the customer it is important to distinguish between the customer in the street i.e. general public, and the customer, the trader, who is buying the goods to sell on at any level. The term logistics applies to all customers but we are applying the term to the trader for the benefit of this study.

In recent years, focus upon logistics has become of paramount importance at all levels of trade and has become a major emphasis in large-scale retail, especially those with a high and fast turnover i.e. supermarkets.

This is reflected in recent reports:

A prime objective of any business should be constantly to seek ways of reducing the total costs of ownership while lowering their own costs K

Cost of ownership is the costs above those charged, for example, inventory carrying, warehousing and handling, ordering and quality inspection. To minimalise these costs, large-scale retailers have spent great deals of money upon centralized stock distribution and computerized inventory management systems, to try and gain a competitive market advantage. Centralized stock distribution involves using one as opposed to many warehouses to distribute stock for more efficient transportation. Inventory management systems automate many of the tasks involved in the control of stock and reordering.

Without effective distribution and effective inventory management systems, other activities and functions carried out within the company may at best, fail to be optimized and, at worst, be rendered a waist of time if time. Therefore no money and (or) time saved in the long term.

Leaders of these management systems include the likes of J. Sinsbury, Tesco, Asda, Iceland and Safeway, the case study I shall discuss in this piece of coursework.

Safeway has a sales base ordering inventory management system, known as Stock Management III (SMIII), introduced in 1992/3. This was fully implemented to centrally distribute many of their product ranges, including; grocery, beers, wines and spirits and non-food department items.

SMIII s aim was to improve the accuracy of stock ordered in the stores, reducing the number of out of stock produce and therefor creating sales maximization. Moreover reducing wastage, reducing backstocks and creating a consistency in merchandising practices.

SMIII uses data collected in each store to work out the sales forecast for each product using the store inventory. It then converts these quantities for ordering. These processes rely on data input for accuracy. There are six key concepts involved in this process.

Firstly, the sales forecast. Line by line information on sales is built up at the checkout. A forecast of how much more stock is likely to be required is then calculated for future ordering periods.

The demand is calculated using specific parameters for each line. The system must take into account: how much stock the store already has; the space allocated for each product; the code life of products (when they become out-of-date); outstanding deliveries; sales opportunities (promotions etc.) and current business policies. The system will then calculate how much stock is needed for sales and the amount needed to fill the shelves.

Case Rounding rules are needed to convert the two figures, that of sales and to fill the shelf, for ordering. This is quite simple. The system will always order enough stock to fulfil the sales. It then decides according to the amount of shelf space, whether to round up or down to the nearest case to fill the shelves.

It must be noted that the accuracy of the orders generated by the system is only as good as the data input. Data is obtained from a number of sources, therefor it relies upon each department or division getting its part of the process correct. The departments are responsible for entering product and item movement information into SMIII and processing stock as follows:

Trading: ranging, space allocation, units per outer (UPO), data integrity.

Supply chain: supply to depot, optimum lead times, data integrity.

Distribution: delivery of right stock to store at right time.

Store: replenishing shelves, scanning, accurate bookstocks.

If any one of these items is omitted then the process will fail. These above activities affect the inventory and range, the two key aspects of SMIII.

The system relies on accurate inventory data. Most item movement is updated automatically; deliveries through the companies central distribution system and sales captured by scanning at the checkouts. The store though is required to inform SMIII of any stock that enters or leaves the store through other channels. For example: spoilage; inter-store transfers; inter-departmental transfers (e.g. purchases for the staff restaurant); cross-picks (stock delivered but not ordered and vice versa); quality control (damaged stock that is not offered for sale).

Moreover stores take a bookstock check.. This is where a check is undertaken for any product out of stock, or where stock levels are exceptionally high or low. If the bookstock is inaccurate, the system is informed, improving the accuracy of the next order.

The range refers to the actual range of products the store holds. For instance, a smaller in-town supermarket will not supply the array of products that an out-of-town hypermarket will stock. Stocking plans are determined by the trading division and are transmitted to the store where they are accepted into the store range. Stores are required to carry the full range of products within their plan size. This is an important factor because it shows that stores are not allowed to delete products from the range. They are however allowed to change the space allocated to a product.

SMIII calculates the optimum quantity of stock required to cover expected sales, safety stock levels (in cases where sales outstrip forecast) and stock levels required to maintain shelf presentation standards. In the case of groceries and long life products if accurate fill and face information is not correctly input into the system by the store, shelf presentation may be affected and, moreover, out of stocks or high back-stocks may occur.

Through these factors the, sales forecast is achieved. Inaccurate sales forecasts will result in incorrect orders being generated. This could result in out of stocks, excessive back-stocks and/or unnecessary wastage. The above factors must, in tern be undertaken accurately. To achieve this the store must enforce a number of disciplines throughout, from stockroom level i.e. tidy, with stock in correct place to maximize stock level efficiency. Through to daily checks for out-of-date goods, and ensuring shelf space is allotted correctly and displays are correct.

A mid-morning inspection of a Safeway supermarket has been undertaken. There were a number of factors that can be seen as unsatisfactory from the stores point of view. I shall undertake to identify theses and solve them with minimum disruption to the store.

There were a number of problems with the produce department.

Firstly presentation was poor in a number of the commodity groups such as root vegetables and loose apples. If the display does not look good or is not up to a reasonable standard, this can affect the customer s discussion to buy, this could affect forecasting levels especially if it occurred on more than one occasion. If the produce looks bad on a number of occasions it could affect the customers decision to shop at the store in the long term.

Moreover, If the displays are not full this may jeopardize the SMIII s calculation of quantities reordered as it runs on the assumption that the shelves are always optimally filled. Therefore sales cannot be maximized as the space allocation is not being followed. Finally it can be seen that if the display is bad this could mean that some of the produce is being caused damage unnecessarily. Creating wastage and again potentially affecting the customers decision to buy.

This needs to be sorted out quickly and efficiently, although not at a busy time, as from experience it can be off-putting trying to shop when people are filling the shelves. Moreover it must be noted that blame should not necessarily be rested upon anyone due to it being a mid-morning inspection on a Friday; a popular day for the weekly shop, the morning probably being the busiest time especially just after the school run. It is quite possible and probable that the poor display is due to the morning rush of customers.

There was only one item out of stock, cauliflower due to a delivery shortage at the depot. Obviously nothing can be done about this at store level. But this information needs to be input into the SMIII to keep the store inventory updated so that this will be taken into account when forecasting. This reflects well on the produce department as the whole range other than this is shown giving people the most possible choice. There are wider implications for an out of stock item in a situation where there are two competing supermarkets. If a different item on someone s shopping list is out of stock each week, it may be a factor in persuading them to shop elsewhere.

The produce delivery was being worked and the shelves were in the process of being stocked. Although this may cause shoppers some inconvenience it shows that the department is keeping the stock rolling, maximizing space used in line with the SMIII thinking . Deliveries though should ideally arive and be sorted before opening to minimise inconvenience for both the shopper and staff, as it is easier to attend to the task in an empty shop.

Product quality was generally good, although a number of grapefruit, which were below standard, were now being removed. These grapefruit must then be counted and entered into the system to update the inventory for forecasting. It can be seen as good that the bad fruit were being removed, but bad stock must always be removed as soon as possible as customers will notice and may be put off buying. In a wider aspect though, perhaps stockholding levels should be looked at as they may have been in the store too long due to excess stock. This could also be damage through bad storage or transportation, which would need looking into if it recurred continuously.

Overall it can be seen that bad stock, shortages and displays should be checked regularly and sorted out as soon as possible. People look at these factors when making buying decisions. This is concerned with relationship marketing where there should be a twin focus on total quality and service as a source of customer satisfaction. Customer satisfaction ensures better customer retention and therefor greater profitability.

The customer can be put off by too many staff filling shelves as it can distract from the pleasure of being able to browse whilst shopping. Therefor a balance must be found.

The forecasting potential was good in the produce section as long as out of stock and wastage was entered into the SMIII system. Otherwise stockholding levels could be affected especially with the non-full lines. Moreover the presentation must be kept to a high standard as this may affect peoples opinion of the shop and therefore customer loyalty.

The grocery department had three main problem areas.

The promotional point of sale was missing from an on-shelf promotion on the tea/coffee section. This is a major problem as it would have a great affect on the forecasting. The store would expect to sell more of this product through the promotion, and therefor have ordered in more to compensate. Sales would not reflect the expected response to the promotion, as people would be unaware of it. This needs to be rectified as soon as possible and the system notified as the anticipated extra demand would not be apparent. This would affect forecasting and therefore future orders; potentially causing a shortage once the promotion was displayed.

Loose stock was stacked behind other adjacent products on the soup section and appeared to have been there for several weeks. This reflects bad organization. Stock may not be noticed by the customer and space allocation disrupted. Space for the stock is allocated so that the system can accurately forecast the quantity of goods required to both fill the shelf and for sales. Using the space incorrectly can affect stockholding levels due to the amount predicted to be on the shelves and in storage. Although actual recording of sales will not be affected, it must be noted that sales could be, if the product namely soup couldn t be found. This needs to be sorted out immediately, and could possibly reflect a lack of motivation in store, as the shelves were not stacked correctly. It also reflects badly on myself as acting manger, as this problem appeared to have been so for weeks. Store inspections must be held regularly to ensure this type of problem does not occur.

The back stockroom had been left tidy by the night team but was not laid out correctly leading to a pallet of stock being inaccessible. It is notable that the stock room was left tidy, but the importance of the layout must be emphasized. This is essential as it allows efficiency when replenishing and counting the stock. The fact that some of the stock is not accessible reflects this. Moreover it will cause problems when that item of stock needs to be filled. The shelf space will not be used to its entirety until access to the stock is possible. Therefor sales may not be maximized, and space allocation in the warehouse different to that recorded on the system. This must be resolved as quickly as possible although may not be essential as it could cause a great deal of disruption to other processes. This will depend on the degree that the stock room is incorrectly laid out and the number of sales of the inaccessible item. If the item is selling quickly it will be important to sort the problem out, so the shelves can be refilled. If the item is not selling then it may be better to wait until the night team start and fix the problem when closed. The night team must be spoken to, to stress the importance of the stockroom layout.

Although there were not many problems with the grocery department, the problems that were found were all significant. Promotions must be displayed as they are part of the sales strategy, forecasting could be greatly affected as people would be unaware of the special offer they are likely to want to take advantage of. For example, if the promotion was to Buy one, get one free and people were only buying one. The forecast would allow for approximately twice as many items sold. With people only buying one item, the forecast for the following order would reflect this. With the promotion publicized, stock shortages are more likely to be incurred.

Stock must always be placed in its correct allocation so the system can forecast the goods needed on shelf and in stock. Incorrect placing of goods can warp the sales and therefor the forecast for reordering.

Bad organization in the stock room cannot be tolerated. The stock room has to be set out correctly as this allows replenishment of goods functionally and easy stocktaking. This relates to space allocation, which is fundamental to the inventory of the system. All parts of the system need to be correct and precise for its smooth and accurate running.

These factors seem to mirror a lack of motivation in the department. The importance of these factors needs to be conveyed to the employees so it does not recur. If this can be achieved successfully it would mean more efficiency in processes throughout the store. This would then help to maximize the shopper s satisfaction with service in the long run. Furthermore, achieving greater customer retention. This can be seen in the work of Reichheld (1990)

The only rationale for any commercial organization is to generate orders and to fulfil those orders. Everything a company does should be directly linked to facilitating this process and the process must itself be reflected in organizational design and its planning and control systems.

Following the relaying of the frozen food department earlier in the week, the general level of presentation was poor although sales did not appear to be affected according to the sales readout. This can be seen in both a positive and negative light. There is evident disruption to this department, so it is understandable that the displays are poor. It is also worthy to note that there are no missing lines or related problems. The presentation though should be sorted out as soon as possible without disrupting the customers. This would allow the maximum number of lines to be placed in their allocated sections, maximizing the accuracy of the system. In addition this would improve the customers pleasure of shopping, and although sales do not seem affected, the likelihood is that they are to a certain extent. This will be on the margin. For example, an item that someone is not actually shopping for, but something that catches the eye making them decide to buy. Poor presentation will put people off these marginal items. So customer satisfaction and sales are not maximized at the margin.

The deli had a very good display, which is very positive. The staff should be praised for this and encouraged. Customers will see the good display and appreciate it subconsciously. Furthering customer satisfaction and retention.

Presentation of fresh meat looked excellent. The quality of the meat was good, with code-life products able to last through the weekend. This too is very encouraging. The Meat counter follows the SMIII culture well. This is good as it helps to maximize the efficiency of the system for the inventory and forecasting. Helping to minimize disruption throughout the weekend. The staff should be praised for this.

Ready meals presentation looked weak, although the adjacent fresh pasta lines had a full presentation, with additional back stock to meet expected sales. This must be sorted out immediately, as weak presentation may mean the customer is less likely to buy at the margin. The pasta section is encouraging but the meals need to be brought up to standard so that use of shelf space is maximized, and disruption with re-stocking is minimized over the weekend. This is essential to keep the systems stock holding levels accurate and up to date.

Cashiers had not recognized the difference between two types of loose apples and had been recording sales inaccurately. This is disagreeable, as it defeats the object of the system and therefore ruins the forecasts for the apples. All sales for the particular apples must be erased. Then the apples counted and the actual sales figures entered to rectify the problem. It is unfortunate but probably cannot be helped as one apple looks much the same as another. A solution for this could be to put a sticker on one type so they are distinguishable. This problem has no affect on sales, so can be seen as a minor problem as long as the system is updated correctly.

There were no cues at the checkout. This is obviously good, as customers will be pleased they can be served quickly, helping customer retention and helping to maximize sales. For example when in a large cue remembering a forgotten item, the customer is less likely to go and find that item as it will mean loss of place in the cue. With no cue the customer is more likely to search for the item and return due to less time wasted.

To conclude, it can be seen that the shop was generally to a high standard, with only a few problem areas. It is important that these are sorted out quickly and efficiently to ensure the smooth running of the system at all levels. This allows accurate forecasting and therefore, in the long run efficiency in the store. This will reflect upon the customers who will have satisfaction and therefor return. Allowing the store to maximize retention and in the long-term profit, whilst minimizing costs through supply chain management.

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