Devadas Pattathil, retail thought leader, co-founder of Nextuple and previously online grocery executive at Walmart.
Over the past decade, and especially since the pandemic, the online grocery market has experienced remarkable growth. With consumers increasingly opting for home delivery or store pickup options, online grocery orders account for nearly 12.5% of all grocery sales in the U.S. in 2024.
Most online grocery services are operated through traditional grocery stores, with only a few high-volume retailers experimenting with micro-fulfillment centers. However, effectively managing online grocery orders presents unique challenges. A major one is ensuring that inventory data is accurate, both at the time an order is placed and when a store associate is picking it up—whether that’s within 15 minutes or the following day.
During my tenure managing technology and digital experiences for Walmart’s online grocery program during its early growth years, I gained invaluable insights into the challenges of getting it right for the customer. Since then, I have collaborated with some of the leading online grocery retailers, including Kroger, BJ’s Wholesale Club, Sainsbury’s in the U.K. and Loblaws in Canada.
Across the industry, even the most advanced operations face challenges with inventory accuracy. From my observations, this often leads to approximately 1% to 2% of grocery order lines being canceled due to stock shortages and an additional 2% to 5% requiring substitutions to fulfill customer orders.
The Debate On Inventory Tracking
There are two main approaches in the online grocery industry when it comes to tracking inventory:
1. No Real-Time Inventory Tracking: This approach assumes that all in-store items are available online, without tracking real-time stock levels. This method, popular among early adopters, relies on demand forecasting and regular replenishment to keep shelves stocked. However, without precise forecasts and restocking, the likelihood of order cancellations and substitutions remains high.
2. Real-Time Inventory Tracking: In this model, stores use near real-time data to manage their inventory like a fulfillment center, making products available online based on current stock levels. While more accurate, this method still has limitations, particularly when orders are placed for future pickup or delivery. Inventory fluctuates throughout the day due to both online and in-store purchases, making it challenging to ensure the availability of items ordered in advance.
The Ideal Solution: A Hybrid Approach
The key to a more reliable online grocery experience lies in combining real-time inventory tracking with predictive demand forecasting and replenishment schedules. Here’s how grocers can make it work:
• Real-Time Inventory Tracking: Set up systems to monitor in-store inventory in near real time.
• Hourly Demand Forecasting: Estimate stock depletion by tracking hourly sales, both in-store and online.
• Replenishment Integration: Align inventory data with replenishment schedules to forecast future stock levels accurately.
• Predictive Inventory Availability: Create a forecast of inventory availability by hour, extending into the future, to guide online product listings.
With this approach, grocers can display all store items online, differentiating between those immediately available and those available at a future date. Customers can add items with future availability to their cart if they choose a pickup or delivery window that aligns with the predicted restock time. Machine learning can further improve these predictions by identifying patterns and adjusting forecasts.
Benefits Of The Hybrid Model
This blended approach to inventory management offers several advantages:
• Reduced Cancellations And Substitutions: With a more accurate view of inventory, grocers can fulfill orders with fewer errors.
• Enhanced Customer Satisfaction: Consistent availability and reliable service increase customer loyalty and trust.
• Operational Efficiency: Forecasts and predictive tools optimize stock levels and reduce waste.
Challenges With The Hybrid Approach
Implementing a hybrid approach to inventory visibility and promising offers significant benefits but is not without its challenges.
• Forecast Accuracy: One significant challenge is achieving accurate demand forecasting. Predicting future inventory levels depends on estimating the rate at which supply will be consumed, which is complex.
To address this, businesses must invest time in developing a reliable forecasting system, iterating and improving it as new data becomes available. With the benefit of experience, my recommendation is to start with less perishable categories like dry groceries before expanding to fresh produce and other highly perishable items.
• DSD Inventory: Another critical consideration involves direct store delivery (DSD) items—products like soda, chips and bread that are replenished directly by vendors. Retailers often do not maintain detailed inventory tracking for DSD items, making it essential for forecasting systems to account for vendor delivery schedules. Without this alignment, future availability predictions for DSD items can be inaccurate.
• Backroom To Store Floor Replenishments: A final challenge lies in the actual execution of inventory promises. The accuracy of inventory made available to online shoppers depends heavily on whether personal shoppers can locate the items. Having inventory in the backroom is no good if the shopper cannot access them in time for order fulfillment.
Establishing a consistent procedure to identify and address shelf-level out-of-stock is crucial. A basic solution is enabling store personnel to mark items as out of stock by scanning shelf locations. For more advanced operations, technologies like computer vision and drones are being adopted by some grocers to detect stockouts and streamline replenishment.
While these challenges require effort and investment to overcome, addressing them effectively lays the foundation for robust hybrid inventory visibility and a promising system, ensuring better customer satisfaction and operational efficiency.
By refining inventory management practices, grocers can better meet the needs of today’s online shoppers, positioning themselves for continued success in the rapidly growing online grocery sector.
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