Grocery Store Inventory Management Explained

Michael Hickins | Content Strategist | August 29, 2023

When it comes to managing inventory, grocery stores face a unique set of challenges, given their wide range of products—many of them perishable—including items as varied as organic apples, dozens of brands of fruit-flavored cereals, and clumping and non-clumping cat litter.

Grocery stores that produce food on-premises—such as pizza, bread, and salads—also manage the inventory of foodstuffs and ingredients that aren’t for sale directly. The inventory of certain types of goods, such as soda and snacks, is managed by their vendors (known as vendor-managed inventory) and is counted as inventory by the grocer as the vendor adds those items to shelves.

What Is Grocery Inventory Management?

Grocery inventory management is the process of tracking and managing the quantity, value, and location of each item in a grocery store by using barcodes, radio-frequency identification (RFID), electronic shelf labels, scanners, and point-of-sale (POS) technologies.

The way grocery stores manage inventory for online orders is different from the way other types of retailers manage it. Clothing retailers, for instance, can centralize online inventory management through a distribution center, while grocers need more dynamic inventory management control. The distribution centers are important, but stores also play an important role, given that grocers pick and pack online orders at stores closest to the customer to ensure the fastest delivery possible. That means grocers must be able to forecast demand and maintain inventory in both the distribution center and in physical stores to serve traditional walk-in customers as well as customers who order online for home delivery or store pickup.

Grocers also keep a separate inventory for items used in preprepared goods, such as salads and pizzas sold on-premises. An added twist is that grocers can turn inventory that isn’t selling into another product for sale in another part of the store. For example, rather than mark down tuna steaks that are near their expiration date, grocers can turn them into sushi sold in the prepared-foods section. Fewer markdowns help maintain profit margins.

Key Takeaways

  • Effective inventory management helps grocery retailers reduce the need to discard or discount products.
  • It improves customer satisfaction and retention by ensuring that products are available when people want them.
  • Grocery stores use day-level data as a complement to aggregate selling data, letting them fine-tune their inventory to account for days of the week when given products are in especially high demand.
  • Well-run grocery stores use software and simulations to help manage inventory and reduce spoilage.

Grocery Inventory Management Explained

Inventory management is of paramount importance to supermarkets and grocery stores to control costs, maximize revenues, and give customers what they want, where and when they want it.

Understanding Grocery Store Inventory

Supermarkets and grocery stores deal with far more complexity when managing inventories than most other retailers. They manage a combination of perishable and nonperishable items as well as stock different versions of very similar items—for example, fruit-flavored cereal loops, organic fruit-flavored cereal loops, and gluten-free fruit-flavored cereal loops.

They manage the inventory of physical shelves, which also serve as the inventory for online orders. And they manage the inventory of ingredients used by the store to produce its own food for sale, such as pizza, bread, and sushi.

Grocers also set reorder levels for certain items while relying on vendors to replenish shelves of other goods (typically soda, bottled water, and snacks).

Physical vs. Online Grocery Inventory Management

When customers shop at physical stores, the items they select are removed from inventory when the store’s POS system scans them.

To fulfill online orders, grocers usually use stores closest to their customers, which means a given store’s inventory can fulfill either in-person or online orders. Store employees or employees of third-party shopping services, such as Instacart, scan the items picked for online orders. Data reflecting goods picked for that order is then reflected in the store’s inventory management system.

Data from grocers’ POS systems, fed into inventory management and merchandising applications, is used to manage in-store inventory. Online orders are handled slightly differently. Once the store receives an order, it reserves each item selected as “stock on hand” (SOH) so that the item doesn’t appear available to other online shoppers.

After shoppers complete their online order, those order details are sent back to the grocer’s system, including substitutes or “no-picks” (items a customer specifically asked to not be substituted), and the order is updated in the inventory management system to reflect which items have actually sold.

Once the items in each order have been picked and leave the store, the items are moved out of SOH status and considered sold.

Physical vs. Online Grocery Inventory

 
In-store
Online
Fulfillment Store shelves Store shelves
Picker Customer picks Store employee or third-party shopper picks
Inventory status Deemed as sold when scanned by POS Deemed “stock on hand” until order leaves the store
Out-of-stock items Out-of-stock items Employee or third-party shopper chooses a substitute if directed by customer order

There are modest differences between online and in-store grocery inventory management. For example, in a store, customers select the products they want, while online, store employees or a third-party shopper picks.

Understanding Grocery Store Inventory

Supermarkets and grocery stores deal with far more complexity when managing inventories than most other retailers. They manage a combination of perishable and nonperishable items as well as stock different versions of very similar items—for example, fruit-flavored cereal loops, organic fruit-flavored cereal loops, and gluten-free fruit-flavored cereal loops.

They manage the inventory of physical shelves, which also serve as the inventory for online orders. And they manage the inventory of ingredients used by the store to produce its own food for sale, such as pizza, bread, and sushi.

Grocers also set reorder levels for certain items while relying on vendors to replenish shelves of other goods (typically soda, bottled water, and snacks).

Grocery Inventory Management Process

Grocery stores track, monitor, and reorder inventory to ensure that items are available when customers need them.

Ordering

Ordering involves determining which items must be purchased and in what quantity to meet customer demand. Grocers use trend analysis, historical data, and local demographic data (the shopping habits in a university community, for example, are different from those in a predominantly affluent or family neighborhood) to further inform their ordering decisions. When ordering goods, they also must keep in mind promotional activities created by brands.

Receiving

This is the process of verifying and processing the ordered items and ensuring that they meet the store’s quality requirements. Grocers must ensure that only the items they ordered have been delivered and that the vendor hasn’t substituted items it has on hand for those out of stock. Grocers also must account for items that vendors place directly on shelves.

Stocking

Stocking involves placing the items on the appropriate shelves or in storage areas. This placement is done in concert with merchandizing applications and planograms, diagrams or models that retailers use to decide where on store shelves items should be placed to promote them most effectively. For example, makers of goods intended for children pay for the privilege of having their items placed on lower shelves, where toddlers will see them and hand them up to a parent (who may accede to the child’s request in exchange for a moment of peace and serenity). Retailers also make decisions about where to place items that tend to be bought together (such as salad dressing in the fresh produce aisle).

Cycle Counting

Cycle counting is a process of counting a different subset of items on a regular cadence to verify the accuracy of the inventory system. Retailers can avoid shutting down their operations, which is what typically happens for full physical inventory assessments, by regularly repeating such sequences of checks.

Reordering

Reordering involves automated replenishment of items when inventory counts fall below a set threshold for each one.

Restocking

Restocking involves replenishing shelves with stock from distribution centers, warehouses, or storerooms.

Benefits of Inventory Management for Grocery Retailers

Grocery stores use inventory management techniques to ensure that their stores are stocked with goods that customers demand, while reducing the costs of overstocking, including excessive discounting, tied-up cash, spoilage, and messy-looking stores. Other benefits include the following:

  • Increased productivity and efficiency. Grocery retailers use inventory management systems to track inventory as it comes in the door and as it’s sold or returned, giving them real-time visibility into what’s available for sale, automating replenishment, and improving inventory data accuracy. Grocery retailers use RFID tags to electronically track inventory, which saves time and money by reducing the need for manual counting. Grocers also use inventory management techniques to optimize shelf space, making it easier for customers and store employees to see whether items are available for sale or need to be replenished from storage. Inventory management systems are often paired with predictive analytics to forecast customer demand and optimize stock levels.
  • Reduced food waste. Grocery stores use inventory management systems to help identify patterns of overstocking and to reduce spoilage and food waste. Most grocers use first-in, first-out inventory auditing, which helps ensure that the oldest product sells first, further reducing the risk of spoilage. (That said, many of us have reached into the back of the refrigerated case for the milk carton with the latest expiration date, foiling that facet of inventory management.) Grocers monitor temperatures using sensors to ensure the optimal shelf storage of perishables, which reduces spoilage. Inventory management technology includes expiration date tracking, enabling grocers to prioritize the sale of products reaching their end. Finally, grocers use data analytics to better understand customer buying habits, helping them stock shelves with the right number of products.
  • Improved customer experience. Delighting customers goes beyond using automated replenishment to ensure that grocery staples are well stocked. Grocers also use data analytics to determine which items are in high demand in certain locations due to demographics, weather patterns, and other variables. Grocery stores can create unique inventory profiles for individual stores with different customer makeups while consolidating orders to get the best pricing from vendors. The happiest customers are those who found what they were seeking at the time they were looking for it at the price they were expecting.

Tips to Improve Grocery Inventory Management

Grocers use a combination of historical data and experience to ensure that they have enough items in demand. At a more granular level, consider the following best practices:

Assess day-level data

Grocers know that analyzing weekly data is helpful in managing the inventory of many items, especially packaged staples and nonperishable goods. Analyzing day-level data is important in managing inventories of perishables. As an example, knowing that a given store sells 25 pounds of roast beef a week is less valuable than knowing that it sells 20 pounds of roast beef on Fridays and that it sells twice that amount in the days before certain holidays. Grocers that don’t make use of that granularity of data analysis can lose out on sales because of stockouts; conversely, they can suffer an undue amount of spoilage by over-ordering.

Don’t forget about “ambient” products

Grocers rightly put a lot of emphasis on managing their inventories of fresh or perishable goods, but they also must pay attention to their stocks of ambient goods (those that can be preserved at room temperature). For ambient goods, inventory management should focus on ensuring that stocks fill shelves, not just meet demand until the next scheduled delivery, to minimize the number of times staff must restock those shelves while indicating to shoppers that the store is well-run. Grocers can improve efficiency by scheduling deliveries and restocking of ambient goods for specific weekdays, which also simplifies workforce management and reduces the chances that stockers will get in the way of shoppers.

Be aware of product-level shelf life

Grocers tend to put the oldest perishable goods at the front of the shelf, but shoppers often reach behind for the fresher items. Inventory management and merchandising systems help grocers keep track of when items near their sell-by date and adopt strategies to mitigate this type of shrinkage. Tactics can include weekly “manager’s specials” or using the older but still perfectly fine products in higher-turnover store-made goods, such as salads and prepared meals.

Use simulations to forecast spoilage

Grocers use data analytics, including simulations that take customer behavior into account, to reduce spoilage. This can help thwart the well-known “reach into the back for the freshest carton of milk” phenomenon, and it’s crucial to maintaining margins. For example, running simulations can help grocers identify ahead of time how a colder-than-expected summer might lead to lower demand for milk-based beverages; the simulations may also help grocers realize that they can adjust their air conditioning levels accordingly. A combination of analytic simulations and sensors has enabled food retailers to reduce food loss by 40% and lower energy costs by 30%, according to a 2021 study by the World Economic Forum.

Find a special approach for ultra-fresh products

Ultra-fresh products, such as store-prepared salads and sandwiches, as well as highly perishable goods, such as seafood and ground meats, are often a key differentiator for grocery retailers. But these items also require grocers to manage their inventories at a more granular level. Not having enough supply on hand can turn off repeat customers, but having too much inventory is an invitation to daily write-offs on a massive scale. Discounting day-old salads isn’t an appealing alternative either.

This is why grocery retailers must pay special attention to which items are in high demand on particular days of the week. That data can vary wildly depending on location. A store near a college campus might have very different demand patterns (a regular run on bagels and lox at 1 a.m.) than one in a city’s financial district (where traders might come up for air at 11:30 a.m. for egg salad sandwiches). Other inventory management factors that grocers should consider include optimal delivery times, packaging requirements, and safety stock levels.

Keep seasonality and unpredictable demand in mind

Effective inventory management also involves considering events of an unpredictable nature, such as a celebrity endorsement, requiring a level of safety stocks. Predictable events, such as higher demand for salads and beverages during summer months and more demand for soups and spicy foods in the winter, are easier to plan for.

Grocery Inventory Management Software

Given the complexity of grocery store inventory management, it’s no surprise that most grocers use inventory management software, usually in conjunction with systems for POS, merchandising, marketing, and other business functions, to ensure that they have sufficient goods to meet demand while minimizing spoilage and write-offs.

Used in conjunction with those other systems, inventory management applications help grocers forecast demand, set prices and promotions, create more personalized marketing programs, place their goods in ways that are more likely to generate incremental sales, establish simpler and more environmentally friendly returns processes, and coordinate deliveries to minimize their impact on store traffic flow.

Monitor and Track Inventory with Oracle

Oracle Retail inventory planning and management products work in concert with other retail management applications, including those for merchandising, POS, and marketing, to help grocers make better inventory buying decisions. Those decisions, in turn, often result in higher profit margins, customer satisfaction, and sell-through rates. The Oracle products also help grocers free up cash for other priorities, such as hiring, advertising, and marketing.

More broadly, grocers use Oracle Fusion Cloud ERP to run their financials and Oracle Retail Brand Compliance Management to manage their private-label product portfolios, comply with regulations, and address a host of other functions.

Grocery Inventory Management FAQs

Why should grocery stores count inventory?

Grocers count inventory to ensure that they have enough goods on hand to meet demand, as well as to identify whether they’re carrying too many items that they won’t be able to sell at a profit.

What are SKUs in supermarkets?

SKU, an acronym for stock-keeping unit, is a unique identifier for every item in a store. It consists of letters and numbers, usually eight characters long, that are codes for the supplier, type, and variation of a given item.

What inventory method do grocery stores use?

Grocery stores use the first-in, first-out (FIFO) inventory method, which entails stocking older foods and other items for sale toward the front of shelves to sell them first.

See how Oracle Retail’s grocery solutions deliver a more efficient shopping experience.

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