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Using AI to Manage Inventory, Reduce Shrink & Create Picture-Perfect Shelves

By Mike Wilkening, ARC Communications Manager

“Supermarkets Turn to AI” read the recent headline in the U.K.’s Daily Mail newspaper, which detailed how leading grocer Morrisons had turned to technology to accomplish key retail business goals, such as reducing out-of-stock items and ensuring better planogram compliance.

San Francisco-based Focal Systems is providing the technology behind Morrison’s AI-powered enhancements. In addition to Morrisons, Focal Systems counts a number of U.S. retailers as clients, including ShopRite and Fairway. 

To learn more about how retailers are using AI to make better space decisions, we caught up with Focal Systems vice president of sales Jeremy Pugh. The following Q&A is edited lightly for clarity and brevity.

Q: The Morrisons project has drawn a lot of attention for its scope, and the fact that a major U.K. grocer has leaned in so much on AI. How did that come together?

Pugh: We have a huge amount of appreciation for them being thought-leaders and visionaries on understanding what technology can unlock for them, and really leaning in and embracing the technology to streamline store operations and drive better availability. They have done a lot of work talking to their customers on where they see opportunities, and what can they do to better serve them, and availability was at the very top of that list. They’re making investments on this to be able to deliver on that promise to their customers. It’s helped streamline things both in-store operations as well as vertically up with the supply chain.

Q: What’s the No. 1 pain point most clients want you to solve?

Pugh: The first one is availability. It’s a very competitive market. Customers have options on where they shop, whether that be in store or online. And if you don’t have the products available that they want, they are going to go elsewhere. From a retailer perspective, you almost can’t focus enough on driving availability and making sure that you always have the right items available for your customers whenever they shop. People shop at different times, different days of the week, sometimes in store, sometimes online, and you need to be able to serve them in all those capacities.

The second one is around labor. The cost of labor in stores has been going up. The availability of labor is the worst it’s ever been. From a retailer perspective, with the eye on driving availability, I need to look to technology solutions to help me augment and compliment some of the tasks that I typically did with a manual workforce in my stores and make sure that we are capturing the data.

Q: How do your systems help in planogram compliance?

Pugh: A store might send out someone to do audits and [on] the third Tuesday of every month, you know how that store is doing at that single point in time. Well, with our solution deploying cameras in stores that are digitizing shelves every hour of every day, you now know all the time how compliant they are. You know exactly when a planogram got implemented, [when] you’re supposed to roll out a seasonal change. Well, did that happen on Monday, Tuesday, Wednesday? Did it happen at all? Right now, they don’t have a good insight into that. This now gives them that insight down to the hour. I know exactly when the change was made. When we [put] in a new item, whatever that may be at the shelf level, I can track the performance of it, and I can do that on a per-store level. I know the planning and compliance, I know the availability in individual stores.

Q: How can your tools help with out-of-stocks?

Pugh: It also helps to assess transferability in substitution. For example: if I notice this particular item goes out of stock, that’s when sales picked up in this other item, so you understand a little bit of where that demand transfers. With our system and the recommendations we produce, we’re focused on optimizing planograms on a per store basis. Right now, they’re typically built centrally and applied across the region or some sort of set of stores and you get an average of averages which may not be right for every individual store, and basically the way they do that is historical sales. Well, historical sales is not the right indicator of demand. Historical sales is the minimum of demand in forecast. If you don’t have enough on the shelf and you’re out of stock, you’re not able to sell more.

Q: Can you tell us how the technology allows for more customized, localized assortment?

Pugh: We always use this example. You might have something where you sell 100 units a week. Well, you sell 100 units a week, but if you’re out of stock half the time, demand could be 200 units a week. What this does is allow you, on that localized per-store basis, to assess availability and then create an availability adjusted demand forecast to optimize planograms in each individual store. You can really localize that assortment and that shelf allocation on a per-store basis with the objective function of making sure you maximize availability, reduce the labor spend, having to restock the same items in every store and ultimately can better serve your customer.

Our system always knows what’s gone out. You may have a top-mover, a promo item, something that’s out. At the same time, [you might have] mint jelly that you sell one a month. Don’t treat them equally. I want you to go focus on the things that are higher-movement, higher-selling, not disappoint customers from that regard.

Q: Can you give him an example of how your solutions have saved retailers money and/or driven positive results in a different way?

Pugh: There have been retailers who have seen improvements to availability of 2-3% and see that also translate to 2-3% increase in sales by doing these localized planograms. (Editor’s note: Case studies for Focal Systems’s work with retailers can be found here.) And there are other (tools) they are using are supply issues. If I’ve got vendor out-of-stocks, warehouse out-of-stocks, I’m trying to order those for weeks on end. If I can’t get it and I just leave a shelf empty, I put up a temporary out-of-stock sticker. I can assure you no one is coming to the store to buy temporary out-of-stock stickers.

Give them an option. Let me put something on the shelf to give my customers more choices, and then when that other item becomes available again, I can cut it back in. I think that’s one of the biggest opportunities — rather than leaving these shelves empty, you’re driving better availability, the store looks fuller, your customers have more options and they’re more inclined to return to the store, they’re more inclined to give their share of wallet to your store. And we’ve seen that pan out with the direct correlation of improving availability, driving sales in those stores.

Q: One of the interesting elements of your products is the use of cameras to monitor the shelves. With on-shelf technology, the concern is always, will I need to install new wiring, new electrical, etc.? How do your cameras work?

Pugh: They’re completely wireless. There’s no store retrofitting, there’s no running power of the shelves or anything of that nature. The cameras themselves are battery powered and Wi-Fi enabled. You’re basically clicking a camera into the shelf edge, which we handle for the retailer. We do the install and ongoing maintenance of the system, then those cameras are completely configurable as to how frequently you want to capture images. By default, we typically do every hour. If you have high-velocity areas or really important items, you could do that more frequently. The camera wakes up, takes an image, identifies what’s in-stock, what’s out-of-stock, what’s running low, what’s planning-compliant, and does that for every single item in the store every hour of the day.

From a retail perspective, you eliminate the need for manual data capture around doing out-of-stock scans, inventory checks, inventory audits. You speed up your replenishment team by being able to focus on items that are out-of-stock and low, so you increase the productivity of your replenishment teams by double.

Q: How can your systems work to combat shrink and waste? These are huge issues for retailers.

Pugh: We have cameras that will outfit the back rooms as well. You’re automating that data collection around, what items do I have? I don’t necessarily care what my stock on hand or my IMS says, I don’t see it on the sales floor, I don’t see it in the back room. I don’t have this item. So it allows you to correct inventory, back to driving a more accurate inventory management system that flows into ordering flows into e-comm.

The flipside of that is identifying items where my stock and hand might be zero or negative, but I actually do see the item, whether it’s a sales floor or the back room, and you’re adjusting your inventory the other way to make sure you don’t order, you’re not carrying excess inventory, you’re not tying up cash with excess inventory, you’re not shrinking out or writing off inventory that you actually do have.

Food waste obviously is extremely top of mind in grocery retail. With this, you’re providing that actual visibility into what do I have again to try and adjust inventory, adjust order volumes to make sure I don’t have food wasting in the back room. It saves a tremendous amount of money for the retailer and also just from a social impact and societal impact.

Q: We know that technology implementations have their challenges. There’s capital expense, winning over store staff. How do you help clients get over those hurdles?

Pugh: We work with retailers to identify what are the things in your current process that you’re going to continue doing, what are you going to stop doing? Then, what are you going to start doing with Focal, and really help them localize it for them.

We’ve seen [our tools] be tremendously impactful. And it gets to the point where you’ve got store managers who are pounding the table, [saying] there’s no way I’m ever going to give this up. I’m not going back to the old way. A lot of the workforces, they want to embrace modern technology. They don’t want to go back to legacy systems or the old way of doing it. And so it is great from a recruiting retention in a really tough labor market. Those things make a big difference.


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About the Author: Mike Wilkening, Communications Manager, for the Association of Retail and Consumer Professionals (ARC).

Mike brings more than two decades of communications experience to the CMA/SIMA. He began his career in journalism, spending more than 10 years covering the National Football League for Pro Football Weekly and NBC’s Pro Football Talk. His bylines have also appeared in CBS MarketWatch, the St. Louis Post-Dispatch, NBC New York, and ESPN.com. More recently, he has pivoted to corporate communications, including strategy and messaging experience for a Fortune 500 company. Mike holds a master’s degree in journalism from Northwestern University and a bachelor’s degree in accounting from the University of Illinois.

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