Inventory Inaccuracy: That Three Percent Really Counts

By Jonathan Gregory, RFID Program Manager, Checkpoint Systems

When it comes to employing RFID to ensure accurate retail inventory, the traditional focus has been on in-store use. That’s fine, except retailers often misperceive that implementations earlier in the supply chain aren’t as important. But every time a store receives shipments without using RFID to check their compliance, inventory accuracy decreases, with associated damages.

I don’t mean to imply that in-store use of RFID isn’t important, because it certainly is. Scanning incoming cartons at the shipping dock upon arrival and performing periodic cycle counts via RFID scanners can quickly and accurately provide store personnel with information about their stock. And that information is vital to ensure retailers know what they can sell in-store or ship elsewhere for omnichannel sales. But if a carton with the wrong merchandise arrives at the store and it subsequently takes weeks to receive the correct merchandise ordered, the impacts are far ranging.  Typical DC audit rates are around three percent, so it makes sense to use RFID to automatically audit 100 percent. In fact, why not detect and correct in-transit inaccuracies before they leave the DC, or even earlier?

Experience with retailers and brand-owners shows that DC processes, outsourcing arrangements and corporate concerns vary widely.  While some retailers spend the time to manually audit all received items at stores, (certainly a time-intensive investment that RFID-based receiving streamlines) others infer receipt without any check, risking (as seen in pilot research) erratic accuracy levels in some product categories (e.g. women’s intimates).  In all cases for all companies, in-transit accuracy enables higher store inventory accuracy with lower cycle count frequency.  Consider the increased efficiencies and omnichannel uplift when retailers justifiably have high confidence in the accuracy of incoming shipments from distribution centers. The retailer can lower safety stocks and narrow excess inventory assignments, which in turn lowers working capital.  Stores can market items that are in transit, or hold omnichannel shipments until in-transit items arrive, consolidating the number of packages per order.

Many retailers have already taken advantage of this. A great example of the use of RFID in distribution centers can be seen in Spanish retail giant Inditex’s use of RFID-supported inventory monitoring system, which is implemented from source to shopper, including through the use of RFID tunnels in DCs. You can see it here.

Logistical Impact

Perhaps the biggest, or most readily realizable, opportunity in ensuring inventory accuracy at the DC level is automated claims compliance. This is such an important issue that instead of taking the time to track and prove non-compliance, some retailers simply impose a blanket charge-back fee of about three percent to suppliers. I know of one major retailer that places a surcharge on all factory shipments based on the assumption that there will be a few percent of shipment inaccuracies. Over the course of the year, it adds up to millions of dollars.  Similarly, Wal-Mart’s “On Time In Full” policy charges suppliers or carriers a three percent COGS fee for early, late or short product deliveries, with a 95 percent compliance target and narrow delivery window.

There is a substantial recurring financial benefit to automating claims compliance.  The opportunity is so large, that one SVP of logistics commented that financial penalties would be too great, and contracts would have to be softened if claims from automated auditing were enforced.  This has already been proven in pilots, which show that when adding RFID-based automated inspection and correction at brand DCs, shipment inaccuracies are virtually eliminated.  This benefits both the brand owner and retailer, and results in retailer whitelisting of such items from ongoing manual audits. 

But what happens when DCs receive out of compliance cartons from contract manufacturers? With technology such as RFID tunnels, they can use the data for vendor scorecarding and to drive better planning.  They can quickly make adjustments to ensure shipments have the right SKU mix and quantities.  This can save suppliers non-compliance penalties and ensure retailers receive all their ordered merchandise on time vs. waiting weeks for non-compliant cartons to be replaced with the correct merchandise.

Additional value can be found when capturing and sharing item-level data collaboratively across the supply chain.  Consignment tracking is enabled.  A brand owner can observe the effectivity of promotions by tracking the specific items used in promotional kits.  Sharing in-store item visibility with brand owners enables brand-driven optimization analysis and replenishment.  Retailers can tap into data collected about the items history – such as using source data for DC auditing efficiencies (e.g. isolating audit evaluations to specific sources).

Generally, if one carton out of a large shipment is found to be non-compliant upon inspection, all cartons may then be redirected down to an area for manual inspection. Consider the time and resources tied up when one such 1,000 carton order comes through. But using RFID, a retailer may discern that the carton in question came from a specific source factory. As such, it may decide to only audit those cartons from that factory, instead of the entire shipment, saving time, labor, and throughput.  Being able to see beyond the immediate source and leverage supply chain history enables retailers to set up business rules to determine what happens when specific cartons arrive from specific factories or locations or contain specific merchandise.

Other Benefits

Brand owners have sought to protect their brands by tracking their products found in gray markets. RFID enables them to know exactly where their products went after leaving their factories or DCs, so when merchandise is found in the gray market, they know how it got there and can act on this information accordingly.  Likewise, luxury brands have a vested interest in knowing chain of custody for their goods because of counterfeiting, not just at the store level, but also at e-commerce retailers – where there is a propensity to mix genuine and knock-off items. In addition, consumers are increasingly interested in knowing where and under what conditions these products are made.  For these retailers, having this information available is indispensible.

Where Is this all Headed?

The next logical step is industry action in which cooperating retailers share non-proprietary item-level data, such as track-and-trace details.  They may also share aggregated information about suppliers, such as quality and shipment “ratings” of factories, similar to how retailers currently use credit reports on consumers. If these modern relationships seem farfetched, many retail competitors are already sharing SKUs that are most at risk for shoplifting. In this manner, they are able to prioritize protection for selected inventory and collectively lower their shrink.  Industry cooperation has also led to what previously might have seemed to be an unlikely alliance: Kohl’s is now accepting Amazon returned merchandise. It drives increased foot traffic into Kohl’s stores, while lowering returns costs.

Summary

RFID is a great solution, but underutilized in the supply chain.  As noted, by catching inaccuracies more easily and faster in the supply chain, it can improve omnichannel fulfillment, get promised inventory to customers earlier, reduce order cancels and reduce retail costs by consolidating order shipments (based upon higher confidence). Ultimately this can lead to improved item-level decision support as well as increased customer satisfaction, margins and sales.

 

 

 
Jonathan Gregory serves as RFID Program Manager at Checkpoint Systems, a division of CCL Industries. He is responsible for driving various major retail-industry RFID implementations of the Checkpoint RFID solution.