Improving Execution in Retail Operations Research by Nicole DeHoratius
Problems with operational execution plague even the largest,
most successful retailers, resulting in inaccurate inventory
records and misplaced products. A new study examines the causes
of poor execution and suggests plans for improvement.
As retail organizations have expanded, retailers have come to
rely more on information technology (IT) to manage inventory
and operations. In recent years, retailers have invested nearly
$30 billion a year on IT. Using bar codes, point of sale scanners,
and automatic replenishment systems, retailers track merchandise,
automate transactions, keep inventory at optimum levels, and
collect data to make important supply chain decisions.
The key to taking advantage of such IT investments is operational
execution. Execution in retail operations can be thought of
as the many activities necessary to get the right product in
the right amount to the right place at the right time for the
A new study, "Execution: The Missing Link in Retail Operations,"
by Nicole DeHoratius, an assistant professor at the University
of Chicago Graduate School of Business, Ananth Raman, a professor
at Harvard Business School, and Zeynep Ton, a doctoral student
at Harvard Business School, indicates that operational execution
is surprisingly inadequate even at leading retailers.
The study draws on information provided by leading retailers
in the food, apparel, book, music, and office product industries,
and extensive data from audits at two major retailers, referred
to as Beta Corporation and Gamma Corporation to preserve their
anonymity. Beta and Gamma are both leading publicly traded retailers
with hundreds of stores and billions of dollars in annual sales.
Both are also well regarded in the industry for their excellent
operations. However, DeHoratius, Raman, and Ton found two widespread
execution problems: inaccurate inventory records and misplaced
Two Common Problems
Problems with inaccurate inventory records and misplaced items
have significant and expensive consequences. Contrary to popular
belief, most retailers cannot precisely identify the number
of units of a given item available at a store. At Gamma, more
than 65 percent of the inventory records were inaccurate, indicating
that the recorded quantity of an item failed to match the quantity
found at the store for nearly 240,000 items across 37 stores.
Inaccurate inventory records can mean carrying too much inventory
without realizing it, or carrying too little inventory and not
reordering it - a problem that reduced profits at Gamma by more
than 10 percent.
Even when inventory records are accurate, misplaced items mean
that customers can have difficulty finding sought-after products.
At Beta, 16 percent of items in a store could not be found by
consumers who approached a sales associate for help. The items
were not out of stock, but rather misplaced in storage areas
or in the wrong aisle or location within the store. Misplaced
items reduced profits by more than 25 percent at Beta.
Inventory record inaccuracy and misplaced items can lead to
a substantial decrease in profits due to lost sales, additional
labor costs, and higher inventory carrying costs. These problems
may also have a long-term negative impact on a firm's brand
image. For retailers like Beta and Gamma that rely on computerized
replenishment systems for managing store inventory, these execution
problems may result in inaccurate demand forecasts. Demand forecasting
systems rely on historical sales data to estimate future demand
for each item in the store. If an item is out of stock at the
store and no sales transactions occur, but the item is not recorded
as out of stock in the system, the new forecast may be inaccurately
low, causing the retailer to drop what may actually be a popular
"The question is: Can retailers make better use of the
technology they have spent substantial amounts of money and
time implementing?" says DeHoratius. "Because automation
is only effective if the data it utilizes accurately reflects
what is happening with the organization's operations."
What Causes Poor Execution in Retail Operations?
The study identifies three main causes of poor execution. First,
replenishment and sales processes at stores and distribution
centers (DCs) affect the quality of execution. Errors often
occur during the simple process of scanning items at the checkout
counter. For example, when a grocery store checkout clerk rings
up a lemon yogurt and a plain yogurt, the clerk may erroneously
scan the lemon yogurt twice instead of scanning each item separately,
inadvertently creating errors in the system. Ineffective use
of scanners may also occur when salespeople process exchanges,
such as sizes of clothing, by handing over the new item to the
customer and taking the item to be returned, instead of scanning
both barcodes into the system to reflect the exchange.
Other related problems include the many potential errors at
the distribution center. For example, DCs may send the wrong
items to stores, and these shipments may not be diligently inspected
upon arrival. The authors find that merchandise shipped directly
to stores from vendors tends to have more accurate records than
that shipped from a retailer's own DC. Vendors are more careful
since store managers check vendor shipments closely to ensure
A second cause of poor execution is inadequate merchandising
and inventory management. The study shows that a greater variety
of products creates more confusion for employees at both the
DC and the store, and therefore increases the likelihood of
inventory record inaccuracy and misplaced items. Additional
inventory also leads to more crowded stores, making it harder
to keep track of items.
"Increasing variety increases complexity, and it's difficult
for many stores to manage that complexity appropriately,"
says DeHoratius. "It is critical to recognize that some
stores manage this complexity better than others and to understand
Third, employee turnover can result in more misplaced items.
Stores with a higher turnover of floor employees, who are responsible
for reshelving merchandise, had more misplaced items. These
stores rely on employees to know if an item is in the storage
area, and new employees get confused more easily. Store manager
turnover also disrupts operations.
Improving Retail Execution
The quality of execution at stores in the Beta and Gamma retail
chains varied considerably. The authors suggest that operational
execution can be improved quickly and dramatically if retail
managers make the severity and impact of execution problems
in the supply chain known at all levels of their organization
and learn from those stores that are executing well.
In response to the three major causes of poor execution, the
authors recommend three strategies for improvement. First, retailers
should create awareness of the problem and its impact on the
Stores tend to train checkout clerks to scan quickly rather
than accurately, so they may not realize the impact of their
actions on the accuracy of inventory records. Employees must
be made aware of how data is collected via the point of sale
scanners, and how inaccuracies have repercussions down the line.
At Gamma, calculating lost profits due to inventory record
inaccuracy was a vital step in gaining the commitment of senior
management to address the problem. At Beta, efforts to create
awareness of execution problems and store training initiatives
reduced misplaced items by 22 percent.
Second, retailers should count and inspect store inventory
more frequently. At Gamma, stores that were audited twice a
year had substantially lower errors than stores audited annually.
The study also recommends spot checking items and inspecting
the location of items in stores.
Third, retailers should take note of the stores within the
chain that are executing well. These benchmarks can offer useful
pointers to the other stores and provide motivation to managers
that operational execution can be managed and improved.
Recommendations for Immediate Improvement
To see immediate results, t0he study suggests the following:
1. Retailers should measure performance along the dimensions
of operational execution that are important to their business.
Depending on a store's particular problems, a retailer should
measure inventory record inaccuracy or the fraction of misplaced
items using physical audits or other sampling methods.
2. The measurements should be used to create awareness of the
3. The measurements should also be used to set up a plan for
continuous process improvement.
4. Large retailers can benefit from the fact that they typically
control hundreds or even thousands of stores. They can use the
differences in processes and performance at these stores to
understand how execution can be improved.
5. Retailers can improve performance by using operational data
for decision making.
Focus On the Process
In order to identify why employees are not executing according
to plan, retailers need to have an in-depth understanding of
their store and DC processes. Once retailers begin measuring
execution problems, it is important to share that information
throughout the organization. By measuring the problem, retailers
can then begin to manage the problem and track improvements
Getting the broad buy-in necessary to focus attention on these
problems is sometimes the toughest part. Only when retailers
realize the extent of their problems with inventory record inaccuracy
and misplaced items-and the subsequent impact on profits through
unnecessary inventory carrying costs and lost sales from out
of stock items-will they be able to initiate changes in their
policies and practices that result in improved supply chain
Nicole DeHoratius is assistant professor of operations management
at the University of Chicago Graduate School of Business.