Sales & Operations Planning – The Science Behind Inventory Planning in the European Food Industry

a Guest Author
a Guest Author

There are misconceptions that Sales & Operations Planning (S&OP) requires a big IT project, which is false. In today’s volatile market, what matters most is achieving service levels. From supply shortages to competition, the need to adapt new models of selling is required to accommodate new buying preferences and practices. Driven by a rapidly changing market (leading with ecommerce and pandemic buying), there are trends worth examining as Europe grows in managing logistics and a fluctuating supply chain.

Nowhere are these issues more volatile and obvious than the European food industry.  COVID has caused supermarkets to rationalize assortments – offering fewer and different products. The rationalization strategy is not uniform, nor is it taking place in all food categories. In Europe, fresh dairy and biscuits are falling the most:  There were 16 fewer types of fresh dairy products available in the Dutch supermarket in a given week during 2020.  There was also a significant cut in the range of biscuits; the number of EANs sold fell by 14.  There are 13 fewer types of fresh dairy drinks, while the food industry is seeing more demand for indulgent items such as spice mixes and coffee products.

Consumer Demand Patterns Rarely Make Sense

Oftentimes consumer demand patterns do not make sense. These changes are frequently unnoticed and quite costly to the business.  Whether a pandemic or regular seasonal demand, food consumption patterns often surprise business planning professions. Firms attempt to forecast demand based on past years’ history and educated guesses. This is foolish and costs firms much more in the long run, whether or not that fact is recognized.

Getting an Accurate Read on Category Performance

The only way to get an accurate read on category performance – and even patterns within individual EANs – is with the use of science. That means injecting smart algorithms into demand forecasts.  These data make it clear which products, categories, and assortments make financial sense to carry, and which ones should be rationalized. This assessment often varies across different geographic regions, channels, and even by customer.

Managing Food Inventory Uncertainties

Food businesses are managing inventory uncertainties particularly with longer receiving windows. Supermarkets want longer window times again. This allows them more time to receive trucks with products and stock shelves. Some argue that when supermarkets already ask for extended windows to replenish, they are actually ‘creating a stampede’ which will lead to unnecessary hoarding and supply issues. The problem is even more challenges when it comes to longer window times for perishable and fresh food products.

A More Effective Approach to Replenishment Decisions

A more effective approach is better management of replenishment decisions. Replenishment Optimization software is helpful because these solutions precisely align inventory with demand at every location by automatically considering every relevant business constraint, including:

  • Supplier capacity
  • Order minimums
  • Location-specific inventory levels
  • Order schedules and more

Ultimately, what is needed is the most realistic visibility to future inventory orders and cash requirements. Replenishment must happen under tighter alignment between demand planners and goals across the rest of the business – sales, operations, finan, marketing – functions that are currently siloed from the true inventory picture. 

Consumers Pay for Scarcity

Scarcity drives an increase in food prices, and many consumers are willing to foot the bill.  Throughout Europe, food business owners are forced to spend more to make the necessary adjustments for reopening. Simultaneously, they experience lower revenues because few shoppers are allowed in the store at a time.

Consumers are seeing higher prices on scarce items. While no one likes a profiteer during a crisis, understanding customer willingness to pay is a key advantage for foodservice providers. Advanced pricing optimization software helps food companies anticipate the financial outcome of a price adjustment to shape demand and minimize lost sales or damage to brand reputation. It works the other way around too; pricing solutions can identify high-demand items that are underpriced and present increased margin opportunity.

Sales Soaring, Especially Luxury Items

Supermarket sales are up, and many broke holiday records in the beginning of March. Food sales are not up because of price hikes. Sales are again soaring because of hoarding and indulgence.

People are willing to splurge on happiness when happiness is generally harder to find. Luxury items like chocolates, alcohol, and coffee may provide untapped margin which may be overlooked.

Given the food industry’s huge number of EANs at various stores, locations and channels, these companies lack the time to analyze daily demand on these items. It would require an army of 5,000 mathematicians and another 5,000 person-hours/day to communicate demand plans to other functional business units so that they can execute quickly on sales opportunities.

Never Leave Margin on the Table

No business should leave margin on the table. Integrated Business Planning (IBP) solutions (also referred to as Sales and Operations Planning or S&OP) help align precise demand and supply plans across the organization for synchronized execution.

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Because there is more complexity around pricing, supermarkets always monitor each other’s prices. Doing so now is even more important and time-consuming during the pandemic, as outbreaks continue across Europe.

Although margins are under pressure, the damaged caused by public complaints about large supermarkets raising prices has consequences. The use of pricing software can alleviate the heavy legwork involved in competitive pricing processes.

Establish Real-time Alerts for Trends That Affect Prices

Weather conditions impact food companies. Seasonality causes prices to vary greatly. For example, strawberries are now much more expensive than a couple of months ago, while lettuce and cucumbers are now much cheaper.

Pandemic economics has caused supply problems such as toilet paper.  Reacting more quickly and serving consumers at the moment they are willing to spend more is vital.

EuroCommerce

Western Europe is the most developing, with 70% market share of the total B2C online turnover and the highest number of online shoppers (83%). Southern Europe is the second-highest for ecommerce growth (15%), followed by Northern Europe (7%), Central Europe (6%) and Eastern Europe (1%). Romania, Bulgaria, and Spain are the fastest growers.

Europe’s online shoppers are causing challenges for online merchants because many report difficulties implementing solutions across EU borders, due to regulatory fragmentation and divergent national approaches to the pandemic. In addition, the broader set of selling channels, buying preferences and delivery pressures require a more efficient and reliable science behind keeping customers happy.

The Science Behind Inventory Planning

Only when European food companies accurately measure the cost of a great customer experience can success be determined. There is science behind inventory planning, and it is demonstrated by taking advantage of the opportunities to ramp up or down supply to minimize bottom-line costs. Only when food business efficiently see what people are buying, when, how and how much they are willing to pay for it can we eliminate the “gut check” style of pricing.

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© 2021 Blue Ridge Solutions

Precise Demand Forecasting & Supply Planning

Blue Ridge Supply Chain Planning (SCP) solutions plan and manage $2.9B in Revenue sold in Europe across industries including Retail, Food, Wine and Spirits, and Durable Goods. In 2020, customers accepted 99 percent of the planning recommendations provided by Blue Ridge SCP solutions, enabling them to maintain an overall 95 percent in-stock rate. This accuracy empowers customers to consistently deliver a 98-percent service commitment in tandem with significant inventory cost reduction. In total, 59 million order lines were managed in Blue Ridge SCP.

Author Bio

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Maarten Baltussen is Executive Vice President with Blue Ridge. He works with customers, suppliers, company leaders to support continuous growth for all participants. He was just named a Supply & Demand Chain Executive Pros to Know recipient. Within his 24 years of professional background, he gained profound experience in global, complex software sales and projects across various industries, business processes in different cultures and countries. He worked at several international leading software companies like SAP, Blue Yonder (JDA), INFOR and now at Blue Ridge. He also founded Intellogic and under his leadership the company grew focusing on Business Intelligence dashboards for the Logistics vertical. In 2011 he sold his shares. He graduated from the National Transport Academy in 1996 with a bachelor’s degree in Logistics by a graduation thesis at KLM Royal Dutch Airlines with highest honors. Maarten can be reached via LinkedIn.

This blog post is sponsored by TR Cutler, Inc.

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