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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

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1 Contents Research problem Project steps Added Value Project status Next steps

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2 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)?

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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 3

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Added Value for the participating retailers 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. 4

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Added Value for all ECR-retailers 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: 1.Showing that waste is a choice, 2.Finding the optimal balance between on-shelf availability (OSA) and waste, and 3.Identifying, quantifying and prioritizing improvement projects for fresh product categories. 5

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Project status (based on steps in the proposal) 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 SKUids 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 6

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Next steps 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 7

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

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Examples of ways to increase on-shelf availability for fresh products 1) Changing the minimal order quantity 1) Reduction of lead-time and/or review period 3) Optimizing assortments 4) Exploiting demand substitution, e.g. by differentiating OSA targets 5) Special replenishment logic Requires awareness first! 10

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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 Research proposal summary Research title:Establishing an efficient frontier for shrinkage and on-shelf availability Project duration: 9 months Research partners: Technische Universiteit Eindhoven Rob A.C.M. Broekmeulen (r.a.c.m.broekmeulen@tue.nl)r.a.c.m.broekmeulen@tue.nl Karel H. van Donselaar (k.h.v.donselaar@tue.nl)k.h.v.donselaar@tue.nl 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 are the deliverables? Tool (Excel based) Project report (White Paper) detailing insights and best practices that will help you Seminar/Final presentation delivering the outputs to you and the Shrinkage & OSA group 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 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 11