The pandemic presented a number of challenges for the retail industry, but supply chain issues that severely impacted product availability in stores has been especially concerning. While the worst of the labor and materials shortages that caused these issues seems to be over, new waves of Covid continue to cause breaks in production that are accompanied by months of fallout. This presents a uniquely modern retail challenge that the industry is working to solve. One promising solution is virtual merchandise planning, which can be used to forecast on-shelf availability (OSA). This type of virtual research can provide more accurate predictions regarding when products and categories could go out-of-stock (OOS).
For example, retailers can obtain metrics on approximately how many shoppers can purchase a product until it’s out out-of-stock. Throughout this article, we’ll be discussing why the adoption of this technology is so necessary in the retail industry, what existing methods it would be replacing, and how virtual research goes beyond those existing methods.
Why do we need better OSA prediction?
If recent supply chain shortages are any indication, it can be difficult for retail executives to forecast how much inventory they will need on shelves at a time when production, labor, and material availability are so unstable. So many factors have contributed to supply chain issues, so it’s difficult to pin down a singular root cause. But one thing we do know is this has been a recurring problem for the retail industry since the start of the pandemic. And it doesn’t seem to be a problem that’s dissipating any time soon.
Let’s examine some of the recent and current retail shortages, what may have caused them, and how they are impacting not only the retail industry, but people’s lives. While the toilet paper shortage of 2020 was certainly a retail crisis nobody could forget, we’re looking at different examples in this article. Though it was an unprecedented product shortage, it was the result of abnormal shopper behavior and panic buying during the pandemic that likely could not have been accurately predicted by anyone.
Baby Formula Shortage
The baby formula shortage has been big news since May, sparking a national discussion about the attainability of breastfeeding for all parents and putting an emphasis on the necessity of access to formula. It‘s also important to note that the shortage has impacted poorer families disproportionately, as shortages inevitably led to higher prices.
The crisis reached its height at the beginning of May when baby formula in the US was 43% out of stock. It’s said that the shortage was caused by “pandemic-related supply chain shortages” and the closing of a Michigan facility that manufactures formula. According to the FDA, they shut down the facility because it was dangerously unsanitary and was falsifying records in order to cover it up. After this information surfaced, the company also had to recall a lot of their product due to contamination concerns.
In order to deal with this crisis, the government has had to ease import rules for foreign baby formula manufacturers and even airlifted European formula to the US. It’s clear that the compounded issues that cause these mass shortages are not something that retailers can control. The best retail stores can do is be able to see these challenges coming, and take corrective action accordingly.
More recently, the tampon shortage has become the latest supply chain challenge facing US retail stores. It’s estimated that tampons are currently only 30% stocked, and it’s not lost on most people that tampons are yet another essential item that is vital to daily life for many. In fact, tampons are actually regulated by the FDA because they are classified as medical devices. In addition, Arkansas and West Virginia are two of the most affected states so far, which also happen to be among the 10 poorest states in the country.
One tampon manufacturer, Playtex, said that the shortage is a result of “supply chain disruptions and a lack of raw materials.” In addition, they have also had to deal with a labor shortage, with 10-15% of the company’s workforce out sick with Covid in December 2021. The unfortunate result is price hikes in e-commerce spaces and retail stores nationwide.
It is apparent that retailers need better methods of estimating when products will be out of stock so shoppers can buy the products they need. What needs to be done to ensure we don’t see any more empty shelves where essential consumer goods should be?
Current strategies retailers use today
Dealing with on-shelf availability is not a new challenge; the retail industry has developed methods and tools for dealing with or predicting out-of-stock products and categories. The following are a few notable inventory management strategies:
Prioritize core items: This strategy is based on the allocation of in-demand goods. Instead of trying to have every brand, flavor, scent, size, etc. stocked, retailers prioritize shelf space for the most popular items. For example, retailers might decide to give Jif more facings than other peanut butter brands because they know this is the brand shoppers buy the most. That way, the products that are more in-demand stay in stock longer and don’t require replenishment as often.
Historic sales data: Using historic sales data to predict when items will go out of stock will always be a valuable approach. Past shopper behavior can be a powerful insight into future behaviors. Retailers can predict how fast products will be out-of-stock based on the rate people bought them in past years. While there is certainly value in this method, it’s important to not rely solely on historic sales data because it doesn’t address current shopper trends and behaviors.
Shelf audit: Shelf audits are another common tactic retailers employ to get an accurate estimate of the condition on-shelf availability is in. They are essentially manual audits where someone goes out to physical stores and assesses what categories are low, the number of products available in backrooms, etc. They use current data to assess on-shelf availability in real-time at the store level. For example, they might evaluate store execution questions like, are the products being displayed in the way retail planners intended? Are new products selling as anticipated? What does on-shelf availability actually look like in stores?
Predictive AI software: Some retailers and brands may utilize predictive software that analyzes historic sales data, current on-shelf availability, and current shopper behavior to forecast when stores may be out-of-stock.
What sets virtual merchandise planning apart?
The most limiting problem associated with the majority of current methods is they don’t recognize the problem until it’s too late to roll out solutions. Shelf audits are limited to showing what on-shelf availability is like now, instead of what it might be like in a few months. And you can’t always predict unprecedented shortages with just historic data.
The advantage of virtual merchandise planning is that virtual store tests give you the tools and insights to predict outcomes with a high degree of accuracy. Identifying actionable insights through testing leads to informed decision-making. It’s a faster method that’s also less expensive, less labor-intensive, and prevents inaccurate forecasting.
In addition, this technology gives you the time to act, work with CPG brands, and implement solutions before a shortage becomes a crisis. Predictive insight into changes in shelf availability can also impact how quickly facings are shopped down because the insights give retailers the time they need to adjust.
Virtual merchandise planning also allows retailers to test a variety of scenarios to optimize a plan for long-standing on-shelf availability. Take, for example, the current tampon shortage. The main issue is with a single manufacturer, Playtex. Retailers can conduct virtual tests to see if prioritizing other brands in a more favorable position could offset the disruption in on-shelf availability.
The important takeaway from this article is that retailers don’t have to be powerless in these situations. While you can’t control the roadblocks in the supply chain, whether they stem from manufacturing issues, labor shortages, or material shortages, you can control your response as a retailer by testing and understanding potential out of stock issues before they arise. Virtual merchandise planning allows you to plan for the best shelf set up and to create the most favorable outcome, given the difficult situation.
Contact InContext Today
As the retail market faces new and unique challenges after the pandemic, we’re ready to help guide you through them. Contact InContext today to learn more about virtual merchandise planning.