Tapping Into Tech to Manage Inventory and Purchasing

NHPA Independents Conference Panel Discussion Transcript

Nina Chiavaroli, Vice President of Customer Success at 4R and Jared Brown, Director of Business Intelligence at Aubuchon Hardware, sat down for a panel during the National Hardware and Paint Associations Industry event. Nina, a 12-year veteran at 4R, and Jared, a leader in inventory and supply chain analysis at Aubuchon, shared their insights and expertise in this presentation and discussion.

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Jump to Specific Questions (Full Transcript Below)

What were the challenges that you faced before you were introduced to 4R? How did they help you solve them?

How did you get introduced to 4R?

Has 4R worked with hardware and home improvement retail before Or was Aubuchon one of your firsts?

How has having 4R in place helped take the burden off you specifically, or employees at Aubuchon?

Talk a little bit about the analytics side of the systems that you’re running, why those analytics are important, and how you use them.

From a retailer’s perspective, what are some of the other challenges retailers are experiencing in Inventory management?

Can you talk about comparing the cost of adding personnel versus adding a technology?

What are some of those solutions outside of 4R that you guys have implemented and are using to handle those inventory challenges?

Nina, from your side of the fence, what challenges are you seeing in inventory management across some other industries that could be applicable to the industry?

Talk about what you have learned from your relationship with 4R. Anything that you’ve taken away?

What could a retailer expect in the first year of a partnership with 4R in the sense of inventory analytics and how rapidly can that data be leveraged?

What were the biggest hurdles during integration?

It feels like 4R helped you get over that hurdle. You have to have constant contact to get over that hurdle.

What is the lag between adding a new product with an assortment and 4R recognizing the purchasing trend of that SKU by store?

What should retailers know and consider about the future of inventory management?

How valuable are the 4R solutions for single store operators. Are they scalable?

Does 4R look to work with other technology vendors such as ESL’s or autonomous robots?

What is next on the list of inventory management to-do’s?

How does 4R integrate with promotional buying?

Transcript of Panel Discussion

NHPA:
Walk us through the process. What were the challenges that you faced before you were introduced to 4R? How did they help you solve them?

NHPA:
That’s really impressive. So, how did you get introduced to 4R?

JARED:
4R was a solution, one of the many solutions that we vetted with our CFO at the time, Jeff Aubuchon. It was a finance-driven decision. We evaluated five or six different solutions since 2016. What was really hard for us was a lot of the solutions we were looking at said, “Why don’t you buy my software? I will set it up for you, and I will never talk to you again unless you submit a ticket.” That was really challenging for us.

We have the technical knowledge, but we didn’t have the personnel. We wanted something more service-oriented. We wanted something where we could borrow their expertise, borrow their knowledge, and their ability to do math that we can’t spell or pronounce. That was important to us.

So, we found 4R and we vetted them. We did a prospectus and onboarded for early 2016 to get the ball rolling. We rolled out and we have never looked back. We’ve tested and had other opportunities along the way but we’ve stayed with 4R for just over 5 years now.

We’ve been using 4R ever since then. Excess inventory was the name of the game. We worked together on how we can get that inventory at its lowest and most optimal position.

And some funny things happened in 2020, I think some people remember. It’s when all Hell broke loose. We had to turn the switch around, and we said, “Buy everything. Buy anything. Just buy it.” And now we’re pulling back. We’re saying, “Okay, now that COVID is over, let’s turn some things around.”

NHPA:
Has 4R worked with hardware and home improvement retail before? Or was Aubuchon one of your firsts?

NINA:
Aubuchon was one of our firsts. We did work with another one, but Aubuchon has been one of our longest and closest relationships. It’s a partnership. We’re not just a vendor. We say, “We are here to be an extension of their team.” My team knows their business very well, so we’re able to always be on the same page, planning for things that are coming up every year. It’s a collaborative relationship and I think that’s what makes it successful.

NHPA:
How has having 4R in place helped take the burden off you specifically, or employees at Aubuchon?

JARED:
Pre-4R, I was brought in to replace MI-9 systems for point-of-sale and the backend. We had a lot of spreadsheets. We had a lot of things being bought simply based on what we bought the previous year or what we sold last year. It was a lot of repeated purchases. A lot of “guts.”

It was, “Let’s just buy 10 per store. Or let’s just buy 25 for every store.” Whatever it was, the report would show what we bought to feed the discount. That has changed dramatically. We have grown out-of-state repertoire. I’m talking about going from 12,000-14,000 SKUs per location to over 26,000-28,000 SKUs per location. It got too much to handle.

I remember a conversation with some of our buyers when we were still buying from distribution. We looked at some class-level reports, and I said, “Okay, inventory seems to be a little heavy here. Inventory seems to be a little light there.” They would tell me they didn’t buy that many SKUs in that category. There were even more SKUs in that category than what the buyer even knew about. We needed something that wasn’t reliant on human intervention and wasn’t reliant on remembering what they were buying or what was bought at each store. We needed something that caught everything. That was a big change for us.

And now, instead of our team spending 25 to 30 hours a week just running spreadsheets, running models, running queries, and spot-checking things. We spend about an hour and a half a week with 4R just touching base on projects and not touching base on exact inventory levels. Every once in a while, we’ll have a question, “Hey, this thing seems to be funny… oh that’s the answer? That makes total sense.” Or “Hey, I would like to change the way something behaves or have a process that’s changed, or season that’s extended…” We’re adapting to changes and thinking about projects. We’re not mired down with 2 million SKU store combinations to run forecasting. That’s a gigantic weight off our shoulders.

NHPA:
Talk a little bit about the analytics side of the systems that you’re running, why those analytics are important, and how you use them.

JARED:
Sure. Well, I’m not going to steal all of Nina’s thunder, but I can say I like the fact that we’re not just trying to replace last year’s sales. What I sold last year has something to do with what I’ll sell this year. That is not the model. I’m not going to sell the exact 12 water heaters to the same contractor every year. That’s not a repeatable purchase. I may need water heaters to support that. Trend is really more important. Things grow, shrink, and things come in and out of favor. We need someone who can manage those types of activities.

NINA:
We look at every single store individually. One of the main problems or first things we see when we go in with a new client is that they have the same level of inventory at every store. Well, every store sells out a little bit differently. There’s so much that goes into the math, but part of that is THAT store’s specific selling patterns for that SKU. And we’ll continue to look at that each week. This allows every store to be treated differently and every SKU in that store to be treated how it needs to be in that store, with that geography and with the different demographics. We take these into consideration. Then the client doesn’t have to make those tough decisions. That’s when you lose out on sales or there is stranded inventory and it’s harder to move that inventory around once it’s out there.

We don’t just focus on those top selling stores. We’re looking at them all. We’re looking at the whole picture. There’s a balance that we need to look at and we need to honor and make sure those top stores are maybe getting a little more, but those slower selling stores are getting a little less. Again, it’s at the SKU level. The top selling store may not be the top selling store for a given SKU. It takes that into consideration. It takes the gut feeling out of it. We automate that for our clients.

JARED:
There’s a great study done in either 2004 or 2005, looking at how a human would optimize inventory for how a human would buy. And out of over 900 tests, 90% of the time that person bought too many because they were afraid of stocking out. Stocking out is not great, especially if you need the items. There are times though, when a stockout is temporary. We have Orgill deliveries every week to every one of our stores where we can. And Emery Jensen orders every week, sometimes twice a week. I’m ok being out of stock on some slow-moving inventory. It will only be for a couple of days because we respond so quickly. We respond so fast to position and reposition them. Meanwhile, I think about how many times we’ve attempted to rebalance inventory. We need to move it from one store to another. There’s labor, there’s shrink, there’s loss. I think about the costs of moving inventory and how sometimes it outstrips the benefit of not being able to sell it and make money off of it. Wouldn’t it be better to not have it stranded there in the first place?

NHPA:
From a retailer’s perspective, what are some of the other challenges retailers are experiencing in Inventory management?

JARED:
Fill rate. I don’t know if anyone else is struggling with fill rate, but it is just monstrous. Labor is a gigantic challenge. We’re trying to get more for the dollar. I want to get the same amount of productivity per dollar, but now there are more dollars per person. I want to make my staff as productive as we can from send to serve. We want everybody doing what they can. “Where can we eliminate?” is a good question. We often think about, “What else can I ask my staff to do.” Sometimes you need to ask, “What do I want my staff to not bother with any more because this is highly repeatable. Is this worth it every single day?” That’s where your target optimization is.

You can’t optimize and automate a project. That’s something that takes discovery and takes learning. But, you can automate systems. You can automate processes. You can take humans out of staff work so they can spend their time working on projects and working on things that take a higher level of thinking. That’s really where we’re headed. We’ve acquired a number of stores that before we acquired them, they were ordering with a torn-off cardboard box top. They would tear it off and start writing down while walking down the aisle, “I need six of these and four of those…” It’s like Rodney Dangerfield in a pro shop, “I’ll take four of those, six of these, and two of these and that looks good.” That’s a common mentality we deal with in a lot of our hardware stores.

And I see that as wasted time. These are smart people that are walking the store every day, which is great, but do we want them bothered with the “Do we need four couplings or do we need six couplings.” Let’s take that burden off of them. These are repeatable practices. We can take the risk away. We can take the time away. 4R is a huge asset to us in that realm.

Our managers are making decisions. They’re thinking about, “What’s my product line up and what are my other opportunities?” Spending time on repeatable monotonous processes is an opportunity cost. It’s spending time doing that and not spending time on something else.

NHPA:
Can you talk about comparing the cost of adding personnel versus adding a technology?

JARED:
I would be hard-pressed to find the right number of buyers and analysts for 110 stores. Forget the cost. Could I find them? Could I train them? Nina does a much better job hiring analysts than we do.

NINA:
And what if they leave? You spend all that time with them and then they leave. We’re with you guys. It’s like a relationship. If there is turnover in Aubuchon, even if there is turnover at 4R, there will always be experts at 4R. We will always have an expert working who can pick up where someone has left off. We’ll cover while Aubuchon needs to focus on hiring someone for a more strategic role. We’ll take care of all the heavy lifting.

JARED:
I like that fact too. Zoe is one of the analysts on the calls every Thursday. Zoe can take a vacation and there is coverage. I can take a vacation and the calls keep happening.

These are things that can make things really hard. I think that’s another opportunity cost with our staff is can they take a day off? I imagine in some of these stores, if they’re not there to take orders, then who’s doing it? Are they doing it well?

That’s the hallmark of any solution that we’re looking for. Are you looking for inventory optimization? Are you looking for point-of-sale? Do you have a partner? You want someone who’s a partner at the table, and who is an extension of your team. These are really important trademarks. There are important trademarks for hiring people inside the organization too. Are they part of the team? Do they show up? Are they reliable? These are the things that you’re looking for everywhere. Make sure you apply the same metrics if you’re looking for a solution or a tool: make sure it’s reliable.

NHPA:
What are some of those solutions outside of 4R that you guys have implemented and are using to handle those inventory challenges?

JARED:
We have Smart Cycle Counts, which is a process that we put in place. We leverage tools within our point-of-sale and have solutions to help with those cycle counts. But we’re really working hard at counting the right items.

We use a number of triggers that go through our high value items. We go through recently adjusted items, and recently returned items. We target those items, so we don’t have to spend so much time doing physical inventories. That’s a huge component of making sure your customer has the right experience and that your e-commerce or your BOPIS process is working and can show the correct inventory on hand.

We actually use data from 4R to help trigger some of those cycle counts. They have the ability to say, “Ten of your stores are selling those items really well, and they have ten units on hand. This store has ten units on hand and they’re not selling them well. I think something’s wrong. You should go check.” We pick that up and 9 times out of 10, there’s something wrong. And it may be still in the store, but it’s on the top shelf, not on the peg hook. Cycle counting is a big part of this. Phantom inventory is a big part of what they do. Zero auditing has its own process and is another big component of inventory accuracy. That’s really where the most bang for the buck comes from.

We looked at other solutions for task-orientated feedback loops. We really settled into trying not to overburden our store managers and our store staff with too many apps and too many tasks and too many things to check through or too many things to have open. We were really looking for that minimum effective dose for what’s going to make the right inventory, what’s going to put the right inventory on the hook and how do I make sure I don’t overspend.

NHPA:
Talk about what you have learned from your relationship with 4R. Anything that you’ve taken away?

JARED:
How much time do we have left? I’ll do this short then. I think one of the biggest things we found with 4R was, there were things that we knew we needed to work on when we first rolled out. Our product taxonomy was a mess. We did have good mins and maxes and shelf capacity was another thing, kind of that floor-to-ceiling. But we always would get hung up on, “Let’s get it perfect and then we’ll do the max thing…. No, let me fix this 100% now and then I can do the next project.”

From the beginning, 4R said, “You don’t have to have this perfect today because, by the way, your reorder points, your mins, your maxes, your assortments, your sales history, it’s always going to be wrong and it’s always going to be incomplete to some extent.” This is not a project that you finish, like a model, and put it on the shelf. You are constantly working through these things. What’s really beautiful, is that we’re spending around an hour and a half to two hours max a week for 110 stores to go manage mins and maxes and reorder points. It wasn’t perfect, but it’s gotten much more perfect.

We’re also changing some philosophies. We’re focusing more on the truck-to-shelf model because we have some inventories being depressed, provided Orgill ships it. Once it shows up and we have the right amount, now we can lean on that. That’s a foundational aspect of what we do. We can break things into little pieces like, ”I just need to focus on my plumbing fittings just a little bit.” Or “I’d like to go see if I can get more sales out of that.”

So I said, “Hey Nina can you help us with our plumbing fittings?”

And she goes “Yeah, let’s go look at the class…yup, the lost sales are a little high. Let’s just dial this up just a little bit and we’ll see if we can get some more juice to squeeze. “

We’re focusing on projects. We’re focusing on thinking critically about our inventory because we’re not constantly focused on the, “Let me finish this project.” We’ve accepted that until the end of time, we’re going to be managing our inventory. This is not a project. This is a process. We need to think backward for the outcome. We want the right inventory at the right time. So we focus on that. We’re diligent. They have taught us to just get started. Don’t try to complete this thing in an afternoon. Don’t put deadlines so you can check them. Make progress. That is the biggest takeaway for us. That was a velocity change for us, not just a lesson. And we have fully adopted that.

NHPA:
Feel like there’s this overarching theme kind of coming out of the conference—collaboration. Collaboration with industry, collaboration within your operations and collaboration with between vendors. I think that you guys are a good study in that.

We do have a couple of questions.

What could a retailer expect in the first year of a partnership with 4R in the sense of inventory analytics and how rapidly can that data be leveraged?

NINA:
Immediately. It can be leveraged immediately. Depending on what the solutions are, the shortest implementations might take us 8-12 weeks, if they have good data to provide for our bread and butter, replenishment for stores or DCs. As soon as you start using that, you see the benefit within the first few weeks. As soon as that inventory gets to the store, you’ll see lost sales and inventory carrying costs diverge immediately. Because what is happening is you are usually putting too much inventory into a top-line store. We honestly feel a lot of the benefit in the slower stores, because you’re not paying a lot of attention there and there’s a lot of opportunity there. We don’t continue to push inventory in the top sellers assuming there’s inventory there. We’re targeting the stores where the opportunity is, which is probably your slower-selling SKU stores.

JARED:
When we first rolled out early on, we had some thoughts about where we would get that bang for the buck. But one of the surprising ones was we added almost 8% to our plumbing and hardware inventory and actually watched the turn increase. That’s a really funny thing, we added inventory and the turn got faster. We didn’t have enough. We were understocking on what we considered to be slow movers. We stocked heavily at the high-volume stores and we stocked heavily in the A items. We were missing this whole benefit of those B, C, D items that so often get overlooked.

And then there were other items that we just stopped rebuying… the things we already had too much of. That was just another instant benefit. We stopped spending on the excess. It was really amazing.

NINA:
Just to add… We will have weekly calls with you. We’re going to figure out what your pain points are, and what sort of reporting really resonates with you, so that, not only are you getting automatic order points but there’s a tracking mechanism that is valuable to you. Not all retailers are created equally, even within the hardware space. There are KPIs that are important to you that may not be to Aubuchon. My team works to understand what those are. We’ll display a PowerPoint, we’ll send you reports, we have the user interface, and we can teach you how to leverage that so you get the reporting you need or the exception management you want to see. You will see the benefits right away. You might see inventory go up at first, or you might say you want to keep the inventory There’s always a little bit of an order bubble but then you’re going to see that lost margin dip and your total cost is going to go down, in six weeks of that inventory being in the store.

NHPA:
What were the biggest hurdles during integration?

NINA: Data

JARED:
Making sure you have the right data. Making sure you understand your own data. We didn’t always know what we were looking for, what we were passing. I think there is a certain hurdle and this goes for any new system. Can I trust it? Can I vet it? What do I compare it to? So there was a lot of dialogue. We still periodically vet it and say, “Would I have done this differently? Do I think I would? And why?” Those are big hurdles you could have internally.

And then probably the biggest hurdle is, my least favorite reason to do anything, is, “Because that’s the way we always did it.” You will constantly fight that regardless of what new solution you adopt. Even if it’s just using more of the tools that you already have. What’s in Epicor or what’s in ECI or onboarding a new third party? Change is hard. Change is not always hard technically, but change is hard philosophically.

NHPA:
It feels like 4R helped you get over that hurdle. You have to have constant contact to get over that hurdle.

NINA:
Yeah, I agree. Adoption is the hardest. Data. Sometimes we identify a lot of issues and decide, “Maybe we should work on that one.” It’s mainly adoption.

We’ll have weekly calls forever. As far as if we need them, we can have calls every day. I have one client where we have standing calls every single morning to go through what the data looks like, and what’s still outstanding. It’s just 15 minutes but it made sure everyone was on the same page and kept us on track with the project. We’ll work with you to make sure it happens as quickly as it can.

NHPA:
What is the lag between adding a new product with an assortment and 4R recognizing the purchasing trend of that SKU by store?

JARED:
We usually get good reorder points within five weeks on brand-new items, if we have never seen it before. If it’s a new item to that store but someone else stocks it, it’s almost immediately. So there’s very little lag time but it’s not so much on the purchaser or sale to the customer side. As soon as we start seeing that it works out fairly well.

NINA:
We have a lot of configurations. If you’re willing to wait 4-5 weeks, we like to see that read before we give you a reorder point or give you an order. We also have configurations where we just want to have a certain display and then we can put that in and we may regurgitate it back to you for the first two weeks. On that third week, we will have read a few weeks of sales and we can give you a reorder point back. There are tons of configurations you can do to tailor it to meet your needs.

NHPA:
I guess this question is for both of you- what should retailers know and consider about the future of inventory management?

JARED:
I think that there’s going to be more use of, “Less algorithm driven and a little bit more AI driven.” I think that there’s the tendency of, ”I want someone else to try it first. I think I’m a little leery that we can guess better than trend.” Trend is your friend. History is a mystery. I don’t know where AI fits between the two. It could have some huge benefits. Trying to figure out that first week’s optimal order that would be a good place. To figure out what items are influencing sales in a basket. Basket sales may make for another untapped region. I think the next wave that we use 4R forecast to provide back to Orgill or back to Emery Jensen to give the warehouses and wholesalers better visibility to our needs.

I think the real practical next step will be, “How do we get more information into more useful hands? How do we get within some short amount of time that it sold at the register and when I can notify my distributor that I buy it from that the change in demand has happened.”

So buy less, buy more, because really it’s about, “How do I get the most inventory?” Maybe we include the manufacturers. Our supply chain is complicated in hardware. Manufacturers make you buy through distribution. You may be redistributing or doing your own last mile. Sprinkle a little bit of buy online, pick up in store or a little bit of delivery to customers and we’ve got a lot of stuff. I think trying to get more visibility further up the food chain is really where the next level of optimization is going to come from.

NINA:
I think the next thing will be pricing, with inflation, and how quickly pricing changes. We need to incorporate price elasticity but in almost the opposite direction. We think price elasticity is mostly with promotions. When the price drops, how high is demand going to go? But really what we’re dealing with now is when that price goes up, when is that demerit going to start dropping in or do we have some wiggle room? I think that’s going to be important to integrate into the system.

JARED:
That’s a good observation. I think too, is assortment planning. When I change up and have a four-foot assortment at one store and an eight-foot assortment in another, if I change it, what is that assortment going to demand? When we have five rakes to choose from, instead of twelve rakes. We saw that this year with grass seed- we dropped a line of grass seed. We went from four lines to three and we did not get the expected results by store. Each store picked up a new, different sales pattern. Another place where there is room for improvement and where I think AI can help us.

NHPA:
How valuable are the 4R solutions for single store operators. Are they scalable?

NINA:
It’s completely scalable. The smallest we’ve worked with in the past was around 20 all the way up to a couple thousand. Completely scalable. We have a bunch of configurations and parameters that we can set more guardrails since we are working for little less data points. But it still can provide benefits and provide that automation, that automatic reading on the recent trend versus historic. It can be scaled.

NHPA:
Does 4R look to work with other technology vendors such as ESL’s or autonomous robots?

NINA:
Yes, we’re open to it. We don’t right now but we are definitely open to it.

NHPA:
Jared, what is next on the list of inventory management to-do’s?

JARED:
Does anyone need canning jars? I’ll make you a deal. Currently, we’ve liquidated about $3.8 million of excess inventory related to the pandemic. So, we’re just about to get a lot of that activity behind us. I think our next leg is we’re getting into some fancier pieces. We’re still only using 40% of what 4R can do for us feature wise. We also recently implemented what a good store manager would do. That’s how we think — how do I make the solution or solutions behave like a good store manager?

Now instead of just ordering from the Epicor order points that are calculated, and saying, “I want this amount on the shelf.” Now I can say, “I want six, but I’m going to sell down to two before I go back up to six.”

They don’t want to go back to that home so frequently, so we’re working on getting that tuned up. We’re not wasting the payroll dollars putting away $0.49 widgets. Let me make sure that if I’m going to that home, I’m doing it effectively. I’m not going too frequently, so kind of finding that sweet spot and track to shelf. Those are the big tickets at the moment.

We have an acquisition that’s onboarding. We definitely still want to continue putting a shoulder behind it. How quickly can I get replenishment working in my brand new location that has a new assortment? We often do reassess when we buy store, so now we have items in the store that have never been there before. They have no sales history, and it could be tens of thousands of items. How do I get new reorder points on 10,000 new items in the store?

If anyone has any ideas there, you can see me but that’s our next big challenge.

NHPA:
Great and one last question- how does 4R integrate with promotional buying?

JARED:
So, with show buys… we use the promotion side on upcoming retail promotions. But on promotional buying that’s actually a pending project we’re pushing them on, because they have all the math. They’ve been to an Orgill show, which is good. Now we need to build a tool that says what’s the right number to buy if the price is 10% off or 20% off.

NINA:
On that topic, we have a promotional feed. Or you can send us a feed of it. I have a BDR coming up or other BOGO/50 coming up. That would get overlaid on their forecast, we’ll make sure that inventory is there in time for that.  We de-promote so you don’t see that lift next year, unless you have the same promotion

When you go to our website, you may see our six solutions. That’s not all we have to offer. We’ll work with you to get you the reporting you need, or maybe we’ll do a special analysis or we’ll work on something completely new, like a show-buy analysis and something that will help you. Like we said, we’re an extension of your team.

Your success is our success so we’re always open to developing new things to make your life easier and to nurture that partnership.

NHPA:
Well, Nina, Jared, thank you so much for sharing your insights today, and thanks for joining us.