Establishing an efficient frontier for shrinkage and on-shelf availability

1. Establishing an efficient frontier for shrinkage and on-shelf availability Status update research project for the ECR Europe Shrinkage group, sept 2014 Rob Broekmeulen and Karel van Donselaar

2. Contents • Research problem • Project steps • Added Value • Project status • Next steps

3. The problem • Not enough insight in the trade-off between shrinkage and on-shelf availability • Majority of shrinkage at grocery retailers is caused by perishable food due to waste • Shoppers want choice and freshness in food How can we improve on-shelf availability without increasing waste (or reduce waste with constant on-shelf availability)?

4. Project in 3 steps • Step 1: Identify awareness and current practice w.r.t . the trade-off between on-shelf availability and waste • Step 2: Identify best practice • Step 3: Quantify - The retailers’ current performance - The improvement potential when specific changes are made (based on the best practices) Methods: Interviews, best practice literature, data analysis and using an Excel-based benchmark tool

5. Added Value for the participating retailers 4 We provide each participating retailer an independent view on their current operations and insight in the gap between the current and the optimal situation: • Which improvement opportunities have been made already? • Which further improvement opportunities exist? • What are the most promising improvement opportunities (quantification and prioritization of the benefits)? They receive an individual feedback based on the analysis of detailed operational data for 9 representative stores and three fresh product categories: meat, fruit and vegetables and convenience products.

6. Added Value for all ECR-retailers 5 By providing a project report, a final presentation and the benchmark tool to all ECR-members they can benchmark themselves and identify and evaluate improvement opportunities with minimal amount of time and data needed. In this way their senior management can be assisted, e.g. in: • Showing that waste is a choice, • Finding the optimal balance between on-shelf availability (OSA) and waste, and • Identifying, quantifying and prioritizing improvement projects for fresh product categories.

7. Project status (based on steps in the proposal) 6 • Step 1: Identify awareness and current practice • All 3 retailers have been visited; first interviews have taken place • Step 2: To identify and evaluate best practices • Interviews and best practice literature study are halfway • Step 3: Quantify current performance and improvement potential • Most data received from 2 out of 3 retailers (matching front and back office data via SKUid’s relatively good) • OSA cannot be determined from transactional data since match supply/sales/waste not perfect -> Additional data on availability and replenishment logic needed • Benchmark tool is ready for project use

8. Next steps 7 • Further interviews with retailers for current and best practice • Gather additional data and replenishment logic • Analyse data • Present preliminary results to individual retailers • Write final report • Present results to ECR-working group

10. An efficient frontier: examples 9 • Base scenario: • Shelf life 5 days • Average demand 1 item/day • Variance 1 • Daily ordering and delivery • FIFO withdrawal Waste [%] / name of department

11. Examples of ways to increase on-shelf availability for fresh products Changing the minimal order quantity Reduction of lead-time and/or review period Optimizing assortments Exploiting demand substitution, e.g. by differentiating OSA targets 5) Special replenishment logic Requires awareness first!

12. Research proposal summary 11 Research title:Establishing an efficient frontier for shrinkage and on-shelf availability Project duration: 9 months Research partners: TechnischeUniversiteit Eindhoven Rob A.C.M. Broekmeulen (r.a.c.m.broekmeulen@tue.nl) Karel H. van Donselaar(k.h.v.donselaar@tue.nl) • What is this project about? • In retail, there is a trade-off between shrinkage (mainly waste in perishables) and on-shelf availability: Actions to improve on one may often negatively impact the other • While this trade-off is intuitively well understood, there is little ‘fact- and numbers-based’ research on the relationship and what drives it • The purpose of the project is to investigate the trade-off using rigorous, quantitative modelling with a focus on perishables waste • The results will be helpful for retailers seeking to strike the right balance between reducing shrink and improving availability • The project will produce tangible, actionable outputs that retailers can use to implement bottom line improvements through higher sales and lower waste • Any results published or shared will observe strictest confidentiality standards – no retailer-specific data will be divulged • How much time will be needed from you? • Participation in project meetings (every 4-6 weeks) • Interviews (1-2 h each) with selected experts from your organisation, to be identified at project start • Likely to include representatives from operations, supply chain, trading, finance, loss prevention • What data will be required? • A detailed data request will be developed at the beginning of the project • Likely data will include: • Shrink/Waste/Markdown data (at lowest available granularity level) • Availability data (at lowest available granularity level) • Store and item attribute data (as available, incl. sales volumes, forecast data, etc.) • What are the deliverables? • Tool (Excel based) • Project report (“White Paper”) detailing insights and best practices that will help you • Seminar/Final presentationdeliveringtheoutputstoyouandtheShrinkage & OSA group • What are the expected benefits? • Help to validate or set the right targets for shrinkage and on-shelf availability • Reduce shrinkage by addressing the right drivers, without negative sales impact • …and/or improve on-shelf availability, without negative shrinkage impact