Eliminating all waste is generally good advice in any business setting. However, in practice zero spoilage is rarely the best goal of perishables inventory management – and the optimum level depends on your store concept.
Companies Differ so Supply Chain Solutions Must Differ
I am often asked what are the control practices of our different customer companies like each other. I can, fortunately, answer that even though the basic fundamentals of good inventory management are always the same, there are peculiar differences in each case. Fine tuning solutions to fit different customer’s supply chain is the important flavor in a supply chain engineer’s work life.
A good example is the inventory management of perishable products such as fresh meat, fish, bread, and vegetables. The basic solution building blocks for all our clients are the same:
- Accurate day level demand forecasting
- Day level safety stock management
- Advanced promotion, season and weather based forecasting
But as our clientele in the food retail business consists of high end food markets as well as discounter formats for price conscious customers, there are significant changes in some approaches of control.
Maximizing Customer Service and Availability
Customers focusing on high-end offering tend to press the importance of high availability and well-looking shelves. They generally command good sales margin, which enables them building appealing shelf presentations even with the expense of increased spoilage.
With perishable goods, our customers are maximizing availability by taking forecast spoilage into account in ordering in addition to the spoilage recognized by scanning out-of-date products. To ensure that shelves are not left empty or half empty after the removal of a spoiled batch, our solution keeps track of the simulated spoilage of each order batch in the shelf and automatically orders a fresh batch to replace the old one going to be picked out. The functionality ensures impeccable shelf presentation at all times.
However, the customers with concepts relying on lower prices and with lower sales margin do not want to fill shelves with new fresh batches to ensure that older ones are left in shelves to perish, as it definitely increases waste. With these customers, it has proved more important to get automatic alerts on products where the product is deemed unprofitable for example due to forecast case-pack sales duration related to shelf life.
It is actually possible to find out the best potential spoilage/availability level by factoring in estimated lost sales in out of stocks and sales margin of the product. The result is highly dependent on substitution probability in the product group as well as sales margin. However, many customers also want to consider the effect of availability on customer satisfaction, and in the high-end chains, it is the most important goal.
Different Goals, Different Treatments
Zero is not the spoilage level with which the gross margin contribution of a short shelf life product is maximized. The optimal spoilage level depends on the store concept and customer targets. These issues also affect directly on the control solutions our customers have configured for their use.