How Machine Learning Can Help Grocery Retailers Solve an Age-old Problem

Grocery Retailers operate in enormous complexity when it comes to fresh food

Grocery retailers face a particularly difficult challenge in their daily operations to achieve the fine
balance that needs to be struck between availability and waste while meeting the increasing consumer
demand for heathy and fresh food. While lack of availability risks turning loyal customers towards
competitors, excess stock results in spoilage and wastage thus eroding profits. This situation is further
exasperated by factors such as complex processes, large-scale multi-outlet operations, thousands of
suppliers, and weather. Through their replenishment process, grocery retailers balance these factors
and overlay local demand to predict how much to order and stock for each store. Getting
replenishment right is one of the most critical capabilities needed to ensure shoppers get what they
want, when they want it and through the channel they want to purchase it through.

Despite its complexity, key aspects of the replenishment process are still completed manually such as
entering different types of data (e.g. existing stock levels, price shifts, and on-going promotions) into
demand planning systems. These manual processes are time consuming, error prone, and heavily
reliant on the individuals experience and instincts. In a study conducted by Blue Yonder1 (a survey of
750 grocery managers and directors in the US, UK, Germany and France) it was discovered that nearly
50% of retail managers still use instinct to make key stock replenishment decisions. 30% of the
respondents also noted manual decisions slow the replenishment process down.

Machine Learning will revolutionize this space

Machine learning is a solution that has the potential to revolutionize the replenishment and supply
chain planning process. Using algorithms, machine learning software is able to learn from data, thereby
dramatically reducing the need to rely on manual processes and individual judgements. This can
significantly improve the accuracy of forecasts as well as automate tasks such as placing optimal
replenishment orders, thereby allowing personnel to focus on other customer-focused activities.

Today, these systems have advanced to the point where demand forecasts can be made not only based
on historical sales but also taking into account various internal (price changes, promotion campaigns
and store timings) and external (holiday periods, weather, etc.) factors. In addition, these systems can
manipulate data at a very granular level i.e. predict the impact of different factors even at the SKU
level.

1
FoodBev Media and Blue Yonder
With ever-increasing competition on price and availability, grocery retailers need the margin gains and
optimal shelf availability that machine learning algorithms can offer by delivering the best decisions for
their replenishment strategies. Retailers who have adopted machine learning technology have realized
multiple benefits including reductions of out-of-stock rates, improvements to write-offs and days of
inventory on hand, and increases in gross margin.

Morrisons, a chain of supermarkets in the U.K. is an example of a retailer that has deployed machine
learning to optimize replenishment and automate the re-order process. Using a machine learning-
based replenishment optimization platform, the retailer analyzes sales data across its 26,000 SKUs in
~500 stores and combines it with external data, such as weather and holidays to predict the level of
demand for a product at a store-level. This system has enabled a reduction in shelf gaps (lack of
availability on shelves) by up to 30%. This new automated ordering system has helped reduce costs,
optimize stock levels and save personnel time.

Another UK grocery retailer, Ocado uses machine learning and artificial intelligence (AI) algorithms to
spot missing items, populate a basket of groceries based on learned consumer preferences, and
suggest versions of products that are lower in salt or sugar, thereby significantly improving customer
experience. This enables a more compelling customer offering/ experience.

Retailers need to overcome four hurdles to adopt machine learning successfully

1. Quality of Data

Many companies who have adopted machine learning technologies have realized that the quality of
output is only as good as the data that feeds it. Delivering on the promise of machine learning is hard if
customer, sales and supply information in a retail company is noisy, non-standardized or incomplete.
Many retailers collect large volumes of data, but often have no single source of truth across functional
groups. Typical causes of poor data quality include inconsistent definitions, disjointed sales and supply
systems, lack of customer data, inconsistent data entry by employees, etc.

2. Discipline of Analytics & Automation

Retailers that adopt machine learning without first putting in place the discipline to execute basic
analytics can find themselves saddled with expensive systems that dont deliver on the value that was
promised. By contrast, companies that make significant progress with such advanced technologies are
the ones that first layer in strong basic analytical and automation capabilities.

Grocery retailers need to automate repetitive data processes especially where intelligence from
analytics or speed can be an advantage. Without such automation, retailers may discover that their
new sophisticated systems are reaching the wrong conclusions due to analyzing out-of-date data. For
example, some grocery retailers adjust product prices/ promotion timings periodically based on
automatic collection of competitors prices. However, retailers that execute the same task manually by
checking what their rivals are charging can require as much as a week to gather this information. As a
result, they can end up with price adjustments running perpetually behind the competition because of
obsolete data.

3. Patience

A machine learning system will not produce the most optimal results overnight. As the name suggests,
for a machine learning algorithm to be successful it must first learn. This means feeding the software
large amounts of historical and future looking sales, replenishment, stock, customer and loyalty data so
that it can understand key influencing variables, make connections and identify patterns. It will take
time to build up the speed and ease with which a machine learning system can deliver sustained
impact.

4. Willingness to test and experiment

Trial and error are a core part of the machine learning process. The best measure of business impact is
by applying the model in a real-world context i.e. trial. For some companies at the start of their
journey, the prospect of launching a large-scale machine learning project which hasnt already
demonstrated its value can be daunting. Willingness to adopt such projects can be slow as enterprises
are risk averse and less willing to venture into the unknown. To overcome this barrier and ensure the
smooth adoption of machine learning technologies, companies should foster an experimental culture
and provide the leadership and infrastructure to support it.

Summary - In it to win it

In todays highly competitive environment, machine learning has the potential to deliver an edge,
support higher margins and provide an improved customer experience by optimizing and automating
replenishment processes. However, for retailers to realize the full potential of machine learning, they
need to install the necessary processes required to collect good quality data quickly and change their
mindsets from playing it safe to being in it for the long haul.

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This article was co-authored with John Piatek, an A.T. Kearney Principal in the Consumer Industries and Retail Practice. For
more A.T. Kearney insights in the grocery and the broader retail industries, please visit
https://www.atkearney.com/consumer-products-retail/ideas-insights

#machine learning #grocery #retail #replenishment

Read about how machine learning will solve the age-old problem of replenishment for grocery retailers @A.T.Kearney