What drives positive inventory discrepancies in retail stores?
PARC Institute of Manufacturing & Logistics
A joint industry-University initiative producing world-class research logistics and manufacturing management.
What are inventory record inaccuracies?
Inventory record inaccuracies (IRI) can be defined as the discrepancy between the recorded and the actual (physically available) inventory in a store or warehouse. These discrepancies are a severe problem in retailing due to store processes highly relying on accurate inventory records. Earlier empirical research has shown that the share of stock keeping units (SKUs) affected by IRI may reach 65%.
Why are positive inventory discrepancies relevant for retailers?
Ensuring high on-shelf availability at low inventory costs remains an important challenge in retailing. Inaccurate inventory records have been identified as one of the most important drivers of retail stockouts and lost sales in the past. Negative inventory discrepancies (where the stock that is available in the store is less than what the system displays) and their sources (theft, shrinkage, etc.) have been discussed quite frequently in the literature. Less is known though about positive discrepancies (where the available inventory exceeds the system inventory) and especially their underlying causes, despite the fact that recent research (that is available here) has found that such discrepancies may also improve sales performance when corrected in the inventory system.
What causes positive inventory discrepancies in retail stores?
A paper recently published by Julian Best, Christoph Glock, Eric Grosse, Yacine Rekik and Aris Syntetos in the International Journal of Physical Distribution & Logistics Management addresses this research gap. We first report the results of a workshop with retail experts from the ECR Retail Loss Group that gives insights into possible influence factors and the relevance of positive IRI in retail stores. We then introduce a simulation model of a retail store that considers various error-prone processes and studies how the different errors may drive (positive) inventory discrepancies. The conceptual setup of the simulation model is illustrated in the following:
The results of the simulation show that the misplacement rate of items is one of the main drivers of positive IRI. Especially misplacements of products during shelf replenishments boost positive IRI, while the misplacement of items by customers or the misplacement of incoming orders in the backroom has a much lower influence. The simulation also showed an improvement of IRI with an increasing frequency of stocktakes, but that too many stocktakes impose the risk of falsely updating the inventory records due to overlooking misplaced items, creating positive discrepancies. Case packs were also shown to have a very significant positive impact on discrepancies. Especially in interaction with the misplacement of items during shelf replenishments, a large positive effect could be observed in the simulation data.
What’s next?
We hope that the results are helpful for managers to better understand the drivers of incorrect inventory records and to isolate factors leading to positive inventory discrepancies. The insights obtained from our work can educate the selection of countermeasures in retail stores to reduce IRI and ensure higher on-shelf availability.
Interested readers can access the paper by clicking here or sending a message to the authors.
This paper is part of an on-going research project that investigates causes of and suggests measures for reducing the IRI problem. Further research results will be published soon.