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Improving Inventory Record Accuracy within Retail Store Operations – UA06-InvAcc

Sponsor:

Wal-Mart Stores, Inc.

Research Team:

Manuel D. Rossetti, Ronald Walker, Seda Gumrukcu, Long Yu, Nebil Buyurgan, John English

Universities Involved:

University of Arkansas

Start Date:

01/16/06

End Date:

01/16/07

Summary:

The main goals of this research are to:

* Quantify the costs of inventory record inaccuracy and misplaced Stock-Keeping Units (SKU’s) at the store and system level so that savings justifications can be articulated for process changes.
* Develop process improvement recommendations for the store and distribution centers to improve in-store inventory record accuracy and to reduce misplaced SKUs.
* Identify current inventory accuracy levels within departments and stores.
An inventory record, at a minimum, should consist of the following fields: Stock number, location, quantity on hand, condition code. Given the above fields, we can define a record as inaccurate if it has an error in any of the fields. For example, if the quantity on hand does not match the true item count. For the sake of materials requirements planning any discrepancy in quantity, location, and condition should be considered serious. In the retail industry, especially at the store level, it is especially difficult to track the exact location of the item in the store. In fact, many retail operations do not have fine-grained location systems. In addition, due to stock loss, transaction errors, and inappropriate processes, the quantity on hand and the condition code may become inaccurate.
In their 2001 paper, “Execution: The Missing Link in Retail Operations”, Raman, DeHoratius, and Ton discuss the ongoing problem within the retail industry of inaccurate inventory records and misplaced stock keeping units. Their confidential examination of leading retailers indicated that inventory record accuracy values in the range of 35-65% were typical for inventories at the SKU-store level for well-known retailers. For a particular retailer in their study, they estimated that profit loss due to inventory record inaccuracy was about 10% of profit and that misplaced SKU’s amounted to 25% reduced profits at another retailer. Clearly, there is room for significant improvement in this area. Raman, DeHoratius, and Ton also found through statistical analysis that the primary drivers for these problems in the stores that they examined were:
* Replenishment and sales processes at the stores and the distribution centers
* Merchandising and inventory management
* Employee turnover

They also recommend a variety of tips and solutions for improving these processes including:
* Cycle counting and auditing techniques to identify and eliminate errors
* Awareness and training of current and new employees
* Managing the proliferation of SKU variety
* Benchmarking

Because of the importance of this problem, the objectives of this 2005/06 CELDi Wal-Mart research project will be:
* To quantify the costs of inventory record inaccuracy and misplaced SKU’s at the store and system level so that savings justifications can be articulated for process changes.
* To develop process improvement recommendations for the store and distribution centers to improve in-store inventory record accuracy and to reduce misplaced SKUs.

A process has been developed known as Perpetual Inventory Record Sampling (PIRS), which utilizes both control group sampling and statistical process control to track and maintain inventory record accuracy. The primary goals of PIRS is

*To identify the causes of errors.
*To correct the conditions causing the errors.
*To maintain a high level of inventory record accuracy.
*To provide a correct statement of assets.