Question

Nicole Holdaway sat perplexed. As director of supply chain operations at Best Inc, she was responsible for making sure the right product was on the shelf for customers to buy. She was to do so at the lowest possible inventory costs. Until recently, she had felt pretty good about Best's ability to manage the inventory–service trade-off. After all, the company had invested millions in information technology to help managers track inventory from point of sale back to key suppliers' distribution centers. But after a 3-month study of inventory data accuracy, Nicole knew Best's inventory data wasn't accurate. Dramatic improvements were needed. The question was, "If technology investments hadn't improved inventory accuracy, what would?"

The History of Bar-Code Technology

Nicole couldn't help but think back to her high school days in the late 1970s when she worked as a grocery cashier. Back then cash registers were a place to store money. The idea of bar codes and databases had been completely foreign to her. Ringing up a customer's sale was a laborious task that depended on prices being clearly stamped on each item. Smeared prices required a price check that could cause long lines—and frustrated customers at the check-out.

Bar codes and scanners changed everything. Nicole thought it interesting to recall that the first retail bar-code transaction actually took place before she started working as a cashier. On June 26, 1974, a checkout clerk at a Marsh supermarket in Troy, Ohio, made history as she slid a pack of Juicy Fruit gum over a bar-code scanner. Despite expectations, the use of bar codes didn't take off. Instead, bar-code adoption was so anemic that in 1976 BusinessWeek published an article titled, "The Supermarket Scanner That Failed." However, by the early 1980s mass merchandisers led by K-Mart were adopting the technology. Retail practice was forever changed. Nicole smiled as she wondered if history would repeat itself with RFID technology.

Inventory Accuracy at Best Inc.

Knowing what she knew about the revolutionary success of bar-code technology, Nicole couldn't help but rely on the inventory data provided by Best's information system. Bar codes had transformed industry practice, seemingly allowing stores to track the flow of goods and automatically place precise replenishment orders. Further, suppliers could now use point-of-sales information to synchronize production schedules to real-time customer purchases. In theory, inventory could be reduced without reducing service levels. But at Best Inc. the theory had broken down, and Nicole needed to find out why.

Questions regarding Best's inventory accuracy arose when a disgruntled customer had written a letter to Best's VP of marketing, Kristine Thomson. The letter's tone riveted Kristine's attention.

Dear Ms. Thomson:

I've been a loyal customer for over a decade, but I am so frustrated that I doubt I'll ever shop at Best again. Responding to an online promotion, I visited your local store to buy an electronic keyboard. After 10 minutes of searching, I asked a clerk for help. Since the product wasn't on the self, he checked the computer, which said the item was in stock. After another 30 minutes spent in fruitless search, the clerk promised to track the product down, get it on the shelf, and give me a call. He never called!

I stopped by the store on two other occasions during the week. The product was not on the shelf and your clerks could not find it anywhere in the store. Why do you make promises you can't fulfill? For the last several years, I have spent over $4,000 a year at Best. But no more! I'll take my business and your profits to your competition from now on.

Regards,

Tamara Masters

Kristine had promptly called Nicole, asking her to look into the situation and report back within the week.

Nicole had quickly looked up the inventory status of the missing keyboard and found that 42 units were recorded as in stock. She then called the store manager, asking him to do a thorough physical count of the item. None were found. This finding led Nicole to bring in an outside consultant to help perform a physical count at all of Best's retail stores. Amazingly, the physical audit showed that the actual inventory matched the computer records only 35% of the time—and the disparities weren't all small.

Before the physical audit, managers at Best had thought their systems were achieving 99 percent inventory accuracy. Analysis of the disparities suggested that the profit implications were dramatic. Excess inventory and lost sales probably reduced Best's profits by between 10 and 20%.

Nicole dug deeper, discovering a secondary problem—the phantom stockout. Many items reported as out of stock at the service desk were found someplace in the store, either in the wrong place on the sales floor or lost in the back room. Nobody knew for sure how many customers had left the store empty-handed and perhaps mad because they couldn't find what they were looking for.

Finally, adding insult to injury, before a new retail location was opened, a physical audit was performed. Even before the customers entered the store for the first time, the computerized inventory system had the wrong quantities for one in three SKUs. The average discrepancy was an unbelievable 25%.

Now that Nicole understood the magnitude of the problem, she wondered what her next steps should be.

Questions

1. What are the sources of the data inaccuracies at Best Inc.?

2. What changes does Nicole Holdaway need to implement to eliminate the data inaccuracies? Where should she start?

3. Is RFID the answer?

Answer 1

This the case of using advanced technology to streamline the business. Let us answer the individual questions:

1. What are the sources of the data inaccuracies at Best Inc.?

The most important source of data inaccuracy i.e., inventory mentioned in the computer mismatched the actual physical inventory. This happened primarily at the stocking stage itself. Even before the customers entered the store for the first time, the computerized inventory system had the wrong quantities for one in three SKUs. The average discrepancy was an unbelievable 25%. Best thought that the inventory managment accuracy is 99%. Many items reported out of stock in computer were found in the store somewhere. other items which were shown in stock had no trace of it in store or in back storage.

2. What changes does Nicole Holdaway need to implement to eliminate the data inaccuracies? Where should she start?

The most important step at the start of filling an empty store is to ensure the ordered quantity is matching the instore loaded stock and that same is refleted in inventory management software at the store. Next is to make sure there is a map of the store, a planogram where the category wise assortment is made to ensure products are found at apropriate place for inventory count even without software. Final thing to ensure is that POS data is accurate, all the barcoes are being scanned properly. Regular audits shall be done intermittently where software data is matched with actual inventory.

3. Is RFID the answer?

RFID is the next big thing in terms of technological advances after barcodes. This RFID tag can give us the proximity location presence of the product without physically counting the inventory. This RFID technology combined with POS barcode will give us extremely accurate data that will give us the correct inventory 100% of the times. Yes, Best should go ahead with RFID im[plementation.