Imagine that you have a meeting with a C-level executive of a supermarket chain. You know that the chain suffers from 12%, on average, shortages, at any given day, at any store. The chain operates 1,125 stores throughout the country.
In order to prepare yourself for the critical meeting you approach a well known international TOC expert for a free 30-minutes Ask-an-Expert service.
You already know that a typical store holds about 30,000 different items. Every day 3,600 items are missing from the shelf.
The main question you have in your mind:
Is it feasible to ensure excellent availability of all the items?
What level of unavailability should be considered good enough?
From now on there is a (virtual) dialogue between Y (you) and E (the TOC expert). Eventually an answer, not necessarily to the original question, but to the practical need, will emerge.
E: The chain objective is to sell more, leading to higher profit, right? Suppose the percentage of shortages would go down to one-third, about 4%, how would that lead to additional sales?
Y: Two different effects lead to more sales. First, 8% of the items, which have been missing, are now available for selling. Second, it’d reduce the number of disappointing clients and add new clients that could not found good availability at the competing stores.
E: Just a minute, how much sales are truly lost due to unavailability? First we don’t know whether the missing 8% items are sold at the average rate of all items. Some items that seem very important to many customers, like Coca-Cola, are in excellent availability, because the store handles them with greater care. Slow movers have higher probability to be short. But the more critical point is that in many cases the customer easily finds a similar item and no sale is lost. So, let’s think again what is the impact of unavailability of 12% on the sales?
Y: But, the customers are still disappointed, even when they find a replacement for the missing item. Within time customers would learn that the particular chain has much better availability than other chains.
E: How would customers realize that one chain has only one-third of shortages relative to another? Do you expect customers to make tests? How would the customer know what items are missing and what items are simply not offered at this store? How long would it take to customers to realize that the advantage is real?
Y: Do you suggest that once the availability level goes up significantly the chain should advertise that the availability level at their stores is higher than the competitors? Not sure customers would buy such a vague message, after all, some sporadic items are still missing. It is not safe to offer compensation for a shortage in such state. I think that even without advertising better availability, sales would, after some time, go up 3-4% due to better availability, and as the TOC solution also reduces the inventory levels profitability would go up nicely.
E: Yes, but it’d be very hard to prove it was due to the TOC methodology. Without radiating the added value to the market the increase in sales would be slow and the benefits under certain controversy.
Y: This is what concerns me – it is important to show fast results leading to truly impressive results. Do you have an idea what else can be done?
E: Let me ask you:
Why do you strive for perfect availability for all 30K items?
Many of the items are easily replaceable by other items. They are on the shelf in order to offer wide choice, but one missing item does not bother the vast majority of the customers.
Y: So, you say to offer perfect availability only to few key items?
E: Not just true key items. All items that some customers enter the store with the intent to buy exactly these items. Customers do not expect every brand and size to be available. The store chooses holding 30K items, which means there are many items that are not held at all. But, there are items that customers actively look for and they expect to find those items on the shelf. It could be that there are 2,000 or even 5,000 such items. A chain using the TOC replenishment solution can provide excellent availability of 5K items and gain a decisive-competitive-edge. It is much more effective than trying to provide perfect availability for 30K items.
Y: Sounds interesting, I suppose the chain should publish a catalogue containing the items for which the chain guarantees perfect availability at every store.
E: out of the 5,000 items, 3,000 could be chain-wise commitment to hold at every store, while the rest depend on the choice of the store. So, there is an availability-commitment catalogue of the chain and an additional catalogue of the store. Handling the store-commitment items would have some logistical impact on the central and regional warehouses, but it is relatively easy to solve.
Y: How do you suggest managing the stock of the items that are not on full commitment for availability?
E: You keep a buffer for every item/location and continue to replenish in the same way. The difference is that buffer-management should not have a red-zone for these items. Green and yellow are enough not to let the system “forget” the availability of those items.
Y: How would you monitor the size of those buffers?
E: By statistics of the time the item is in black and the time it is in green. Anyway, this is not part of your first meeting with the C-level executive of the chain.
Y: Thank you.