Monthly Archives: February 2012

Spend Visibility: An Implementation Guide – The Definitive Book on Next Level Performance

Don’t forget to take advantage of this great offer and Download Sourcing Innovation’s “Spend Visibility: An Implementation Guide” – The Definitive Book on Next Level Performance for FREE! No Registration Required!

But don’t take Sourcing Innovation’s Word For It! Listen to these reviews from leading bloggers in Supply Management:

A Rare Medium Well-Done

Vinnie Mirchandani, Deal Architect (January 18, 2012)

This book gets to the science of spend analysis vs. treating it as an art.

Jason Busch, Spend Matters (December 8, 2011)

The guide is well thought-out, practical, and well-written.

Stephen Guth, Vendor Management Office (February 4, 2012)

This guide is very comprehensive and will provide valuable information to both procurement functional and IT implementation focused readers.

Bob Ferrari, Supply Chain Matters (January 17, 2012)

It is, in fact, one of the most comprehensive step-by-step resource guides I have seen for this industry.

William Dorn, The Strategic Sourceror (January 17, 2012)

It Starts By Remembering that an ARS is Used to Carry a LoAD, Not a Store. (HD Part V)

Last week we discussed the recent snafu made by Home Depot during a recent upgrade to its online website on February 1st that “Left Home Depot Customers Running in Circles” and chasing their tails due to incomplete planning and testing. We noted that, despite the fact that it was breaking news for some analysts and bloggers, it is not something Home Depot needs to be concerned about. However, as discussed in following posts, Home Depot does have some serious technology-related problems in the doctor‘s view — problems that it may not even be aware of which, if left unchecked, may only amplify as time goes on. However, as discussed in our last two posts, the problem has an easy solution, and it starts by rolling back SARS and retrenching to ARS at the Local Area Depots.

Done right, an Automated Replenishment System (ARS) is the foundation for next generation inventory management. Just ask any inventory management software vendor (including SYSPRO, that was reviewed here on SI in this post and this other post). However, done right requires that the implementation follow a few simple rules

  1. Forecasting at the item level is only done across a geography
    Trying to forecast item demand at the depot, and especially at the store, level is like trying to forecast the performance of an individual stock. It’s more or less impossible. For an item that moves erratically, a single purchase can shift the entire demand pattern. However, just like the performance of a broad mutual fund across an industry will be consistent over time, so will a forecast across aggregated demand across multiple Local Area Depots and the stores they serve.
  2. Forecasting at the depot level is only done across a short time span
    Again, while the demand for many depots will be predictable with reasonable accuracy, the demand at a single depot will not be predictable with reasonable accuracy over a long period of time. So, the more fine-grained the forecast, the shorter the term the forecast must be for.
  3. Forecasts can always be overridden and adjusted by the depot category manager
    No algorithm is intelligent. Not even close. An expert, who knows of a(n upcoming) promotion, change in local tastes or fashion, or trending feedback on product quality will always have the upper hand on certain items at the local level. Thus, the system should allow the local category expert to override each and every forecast and pull rule as circumstances dictate. As the rules get more fine-tuned, the need for this will decrease over time, but there will always be a special situation.
  4. Forecasts and Rules are reviewed and updated on a regular cycle
    As per our last few posts, the forecasts and rules assume at the minimum a predictable, if not a perfect, world — and the world is never predictable. The system will have to be adjusted as time goes on.

Furthermore, if the retailer insists on maximizing use of the system across each and every one of its locations, including retail stores, then the ARS must be restricted to suggest mode. In other words, there’s nothing wrong with using the rules engine and forecast models to suggest what inventory should be ordered, when, and in what quantity, but the order for any item must be presented for review by the appropriate category or department manager, and corrected if required. Thus, there should be human involvement at the end of each and every order cycle. If the category or department manager knows that only certain items have been presenting (potential) issues, the manager must be able to quickly review the suggested orders for those items, make any mods, and then accept the entire order for submission. In other words, if the system has been doing a good job on the widget category, the category manager shouldn’t be forced to review the widget category on every order, but should always have the option just in case she has an inkling. However, if there has been a continual stock-out of sprockets, the category manager should be able to up the order, and, if necessary, change the rule at the local level (subject to review of the depot manager or category manager if required).

And it must be extremely easy for anyone to report an error in inventory count or historical data at any location so that model, and forecast, is corrected as soon as possible. Without accurate data, the system will never work.

That’s the secret to a successful implementation of an Automated Replenishment System — don’t set it and forget it and don’t force it where it doesn’t fit. Monitor and adjust it continually, and as time goes on, it will get more and more accurate with less and less adjustment for any items with steady trends, leaving forecasters free to focus on fashionable or seasonal items in an effort to truly minimize stock-outs and maximize sales.

However, There Is Still Time To Turn Things Around. (HD Part IV)

In Part I, we began this series with a reference to a recent article in StoreFront BackTalk on how a recent snafu made by Home Depot during a recent upgrade to its online website on February 1st “Left Home Depot Customers Running in Circles” and chasing their tails due to incomplete planning and testing. While this was breaking news for some analysts and bloggers, given that it likely won’t even make a blip on Home Depot’s bottom line when all is said and done, for reasons discussed in the post, it isn’t something Home Depot needs to be concerned about. However, as discussed in the second post of the series, Home Depot does have serious technology-related problems in the doctor‘s view — problems that it may not even be aware of which are only going to amplify as time goes on. And these problems are very serious because, as discussed in the third post of the series, they are likely resulting in dissatisfied customers every day in every one of the 2,200 stores across North America. And when you consider that it would only take 3 dissatisfied customers per day per store (which seems entirely feasible in the doctor‘s view) to create 2,200,000 dissatisfied customers over the course of the year, the unnoticeable drops in the bucket become a rip current that could cause some serious damage.

So what’s the problem? As discussed in the last post, it is SARS, short for Storefront Automated Replenishment Systems, which, to the doctor‘s understanding, they have rolled out to the store level across each and every North American store over the past year or two. Advertised by vendors as the ultimate solution to stock-outs and lost sales, as the system is supposed to automatically place purchase orders and replenish inventory at just the right time to insure an item is never stocked out and that the optimum quantity is always on hand, it is sold as a retailer’s dream when, in fact, it is actually a nightmare in disguise. As explained in the last post, these systems only work in a perfect world, but there ain’t no perfect world, and they inevitably break down due to imperfections in the system, incompleteness in the knowledge, and inadequacies of the human operators (including programmers, administrators, and users).

You see, like traditional Automated Replenishment Systems (ARS), also known as Automatic Ordering Systems (AOS), SARS assumes:

  • Initial inventory counts are correct
    for each and every product in the store.
  • POS-based inventory updates are regular and correct
    preferably, on a regular, daily, basis.
  • Damaged merchandise is removed from inventory promptly
    and removed from the system just as promptly.
  • The replenishment model is accurate
    and takes into account weekly, monthly, and seasonal variations in demands
  • The world of tomorrow never comes
    because the model on which the inventory demand is modelled is supposed to repeat cyclicly with no change, ever.

But they are not Xanadu. And, in the doctor‘s view, the source of SARS is the same as that of the Kubla Khan because:

  • A significant number of inventory counts are always wrong … and this number only increases with time.
    There’s a reason retailers typically have all-night inventory counting marathons on a regular, often quarterly, basis. Damage, theft, loss, and human error results in a large number of products having an inventory count that is off.
  • Software is buggy and even the internet is not infallible.
    Errors in the POS system can result in the odd transaction not being included in the summary sent to the inventory system, the update file being cut off, or incomplete transmission. Plus, a poorly timed communication failure can result in the POS system thinking the transmission is complete when part of the file was lost.
  • Even if it is removed from inventory, it’s often not removed from the system!
    A junior associate may remove the item from the shelf, but forget to update the system. This will cause the inventory counts to get wildly out of whack over time.
  • The replenishment model is typically a randomly chosen best-fit model on available data.
    And depending on how much data is chosen, that model could change wildly.
  • The arrow of time dictates that tomorrow always comes.
    Next Monday will not be the same as this Monday. Next February will not be the same as this February. And as soon as an unplanned promotion occurs on an unexpected item, something wildly different will occur.

In other words, at the store level, SARS does not work — at least not in an automated fashion. Thus, if Home Depot wants to turn things around, or at least insure that things get pointed in the right direction before it needs to turn things around, in the doctor‘s view, it needs to (partially) abandon SARS at the store level and go back to ARS at the (local) distribution centre level where, when done properly, ARS can be tuned to work like a charm. How? That will be discussed in the next post.

11 Ways to Improve Your Supply Chain Management

Late last year, Enterprise Apps Today had a great article on 11 Ways to Improve Your Supply Chain Management. A few of these are not repeated, or not listened to, enough, including:

  • Throw Away Your Spreadsheets
    As Sourcing Innovation has reminded you, Spreadsheets, which are riddled with errors and outdated information, Will Cost You Billions! Billion dollar accounting errors have resulted from spreadsheets on more than one occasion!
  • Manage Information, Don’t Use Information Management
    If the system doesn’t facilitate proper collection, identification, and analysis of the information required to make an informed decision, and make such easy to do, it’s not the right system for your supply chain operation.
  • Monitor the Performance of Each Partner in the Supply Chain
    Whether that partner is up stream or downstream. Waiting until a shipment is missed or a customer is late with a payment is too late to begin a problem diagnosis or issue resolution.
  • Remember that the Supply Chain Doesn’t Begin at the Warehouse or End on the Store Shelf
    More important than ensuring products are stocked on the shelves is that those products are [considered] desirable by your customers. If the product ain’t selling, it don’t matter that it’s stocked. It’s all about the end customer, and making sure the product is what they want from the raw materials up, with no child labour or sweatshops in the equation.

… As Their New SARS Could Spell the Beginning of the End! (HD Part III)

In our first post we discussed the recent snafu made by Home Depot during a recent upgrade to its online website on February 1st where some incomplete planning and testing “Left Home Depot Customers Running in Circles” (which is terrible as there was no danger and there should have been no doubt*). We concluded that, while it probably upset a few customers with its incompletely planned upgrade, it was definitely not the end of Home Depot (online) and probably won’t even make a blip on its bottom line when all is said and done. However, this isn’t to say that Home Depot doesn’t have problems. In the doctor‘s view it has big ones, which are likely getting bigger by the day, and the worst thing is that Home Depot probably isn’t even aware of these problems which are, ultimately, guaranteed to increase its unsatisfied customer count by the day as people, including programmers, aren’t perfect and systems can be even worse.

You see, as per our last post, over the last year or two, Home Depot has rolled out its new centralized automated replenishment system to the store level across all of its North American stores and this is causing, and will inevitably cause it, problems as time goes on as SARS, Storefront Automated Replenishment System, assumes a perfect world and this world is far from perfect. As a result, every imperfection gets amplified into a real world problem that is often worse than the stock-out problems the system is supposed to prevent.

First of all, ARS will only re-order stock if the stock level drops low enough or it detects inventory is moving fast enough. This won’t happen if (1) there is a POS failure, if (2) the initial inventory is reported too high, or (3) associates don’t bother to enter damaged inventory. In each of these cases, the inventory levels will appear to be high in the system, and in no need of restock, when, in fact, they are (too) low. For example, I went to the local store to get some high-end 20″ by 96″ laminate pine project panels, that cost about $38 a board. (For that price, you can get 5/8″ 4″ * 8″ sanded pine plywood.) I wanted 5. They told me they had 8, but in reality they only had 3 that were saleable. Why? (a) For reasons unknown, they only had 5 in stock. An unknown inventory error told the system there were 3 more than there actually were. But 2 were badly water damaged — chipped and covered with black mold — which no one caught because “the system tracks inventory, so why should we check it”. Since no one confirmed the inventory count or recorded the bad inventory, the system did not reorder a low-stock and/or high-moving item, leaving customers, like me, unsatisfied. What retailers being wooed with ARS fail to understand (as the vendor will never, ever tell them) is an error in POS file transmission, a data entry error in initial inventory levels, or failure to record damaged inventory will skew counts and break the system — as products will remain understocked or stocked out until the system is corrected. (This was one disappointment.)

Secondly, it won’t check whether or not the product should be stocked at all. For example, if a nut can only be used with a certain bolt, and the bolt is no longer available, why stock the nut? In my case, I wanted a certain track lighting system. After going to a number of stores, I finally found something close to what I wanted (on the display), but I had to buy the track, the lights, and the connector separately. A set would have been more convenient, and probably more cost effective, but no big deal. I quickly found the track, and the lights, which were not next to each other on the shelves for some unknown reason (and that’s ok too), but couldn’t find the connector. So I asked the associate in the department who told me that they were probably just stocked in the wrong location or temporarily out of stock, and if I came back tomorrow (or on the weekend) when the department manager was working (as it wasn’t his regular department and the store was closing in five minutes), she’d be able to either find the matching connector or order one in because it wouldn’t be on the wall if it wasn’t available. Annoying, but understandable. So, a couple days later, I return, find a long-time associate who says “sorry, we don’t carry that connector — the manufacturer is out of business and we can’t get them anymore”. This dumbfounded and annoyed me as I was told everything on the display was available, so I asked why the store was still selling the tracks AND lights if the connector was not available anymore, or at least not indicating the products were “for replacement only” and informing customers that certain products were no longer available. The answer was “because our new system automatically replenishes these parts and tells us to put them on the shelves and we have no control over what is ordered, stocked, or displayed”. What? No control over your own department, inventory, or display? Really? Isn’t that just a disaster waiting to happen?

Needless to say, at this time I asked to speak to the store manager because this is just sad when, at least in my view, Home Depot used to be the best Home Improvement store with the most knowledgeable associates and best run departments even up in the often forgotten Great White North. He said, yes, that’s how it works, and he doesn’t like it but it takes so many e-mails, calls, and approvals to override anything that it’s just not feasible to fix some of these problems. But no problem, I could take the products back, no questions asked, because of the snafu. Fine. So I leave, unsatisfied again.

I return a few days later, when the manager does not happen to be there, and then have to wait to speak to the department manager and explain the situation again, as the return desk clerk couldn’t understand how only part of a system would be for sale as if it was a complete system. (Which illustrates yet another problem with SARS — these systems aren’t designed to let you record problems or inform all affected parties of inventory problems. Why should a customer have to explain it to three different people? As soon as an associate knows of a problem, a good supply management system would let her record the problem, which would immediately be reported to the department manager and manager when they next signed in.) So, I finish the explanation and then I am disappointed again. I am told that if I want, I can go back and pick something else out, and get 10% off today, but only today. However, because I had to go back to the store a third time and didn’t want to waste time on the weekend, I stopped in on the way to the office and didn’t have a lot of time to spare (especially as I had to repeat my story again). Plus, this wasn’t a decision I was willing to make alone. So, in addition to misleading me (come back and we’ll find the part for you), I was figuratively slapped in the face with an insincere discount offer. (If Home Depot was sincere about compensating me for wasting a lot of my time, they could have given me a 10% of your next purchase voucher.) Yet another example of bad customer service, and the real reason I believe that Home Depot could be in jeopardy.

And then, to add insult to injury, a few days later I want to look at a specific product in Storage and Organization. Specifically, I want to look at it in the store, but I don’t want to go back to the store unless I know it’s there. So I check online. Is it in stock? Sure thing — 3 units. Is it in stock when I get there? No! And I’m told the store doesn’t carry the item. (Which is not the first time I’ve been told the store doesn’t carry the item when it’s not on the shelf. Which would be okay except for the fact in a few instances the item has “magically reappeared” on the shelf the next time I’m in the store.) All in all, I am now a very unsatisfied customer of Home Depot and given the apparent inability of local store managers to prevent similar situations from happening again (as they are never supposed to override the all-knowing system), the disillusionment of long-time pros who used to be able to run their department like a tight ship but are now subject to the whims of an inanimate piece of software they don’t understand, and the utter indifference of new employees who would rather just proclaim “we don’t carry it” then try to figure out a system that, as far as I can tell, isn’t useable and doesn’t work anyway — I can’t see the situation getting any better.

Now, I’m just one customer, but from what I’ve been told by associates at the local store, something like this is happening to a customer every day. And given known ARS system error rates (which vendors don’t advertise — an 80% reduction in stockouts still leaves room for errors that will never be discovered without human intervention), I believe it’s actually a few customers every day at the local store. Now this would only be 1,000 a year at the store — a drop in the bucket in a municipality with 400,000 residents split between only 2 Home Depot stores — but when you put this in perspective, an entirely different picture emerges. There are over 2,200 Home Depot stores. This means that 2,200,000 customers could be left unsatisfied every year because of an improperly implemented (S)ARS system across North America and the indifference in customer service it is slowly instilling in the store associates. And that’s not a drop in the bucket. In fact, that’s a rip current, and rip currents are dangerous things. One has to remember that, in retail, it is your brand that matters, and if your brand becomes synonymous with poor customer service, you will have a problem. The question is, will Home Depot fix the leak before the rip current forms?

*Don’t get it? Too bad … but on the bright side, you feel just like a Home Depot customer who visited the site after 11:59 am on February 1st or how the doctor felt each of the last five times he visited his local Home Depot store!