Text/ Professor Li Qing
When consumers go shopping in supermarkets and see that the "best before" dates of boxed milk drinks are two days and four days, they usually choose the latter. This choice will eventually cause the products on the shelves to be thrown into the trash can, either at a reduced price or on clearance, resulting in a lot of waste, especially perishable items that have a use or expiry date and are wasted. The situation can easily happen. How to solve the problem of "a lot of waste in the retail industry" has attracted more and more attention from enterprises.
Four major supermarkets in Hong Kong are accused of throwing away 87 tons of food every day
Studies have pointed out that the sales of perishable goods account for more than 50% of the grocery retail business. As consumers become increasingly health-conscious, the importance of the best-before or use-by date of perishable goods is growing. In addition, retailers rely on the sale of perishable goods to increase store traffic and gain a competitive advantage. However, managing the inventory of perishable products is challenging, and retailers remove items from shelves when they are approaching or exceeding their shelf life.
In the United States, about 40% of food is wasted, and much of it is wasted in the retail industry. In fact, retail waste is a problem in many other places. According to a recent study by Friends of the Earth, the top 4 supermarkets in Hong Kong throw away food every day. 87 tons of food, most of which ends up in landfills.
Faced with this huge waste problem, many retailers have plans to solve this problem, such as the Food Waste Reduction Alliance in the United States and the Waste and Resources Action Plan in the United Kingdom. Action Programme, Europe's Retailers' Environmental Action Programme, etc. These organizations were established with the primary goal of reducing waste.
3 challenges in managing perishable product inventory
The major challenges for offline grocery retailers in managing perishable products are well known. First, the demand is uncertain and it is difficult to match supply and demand; second, the product life of perishable items is usually very short, so they need to be sold in a short time; third, customers follow the "last-in-first" (last-in-first-out) -out, LIFO) principles to select products, that is, customers will choose the freshest products that are newly released from the warehouse. When retailers need to regularly replenish their shelves, items with a shorter lifespan remaining on the shelves will be one step closer to the trash as soon as new goods arrive.
Various ideas for managing perishable products have been used in practice over the years and are discussed in the academic literature. Admittedly, this is indeed a problem worth discussing, and it is even more worthy of trying to find a solution. The author conducted a study on this problem.
Retailers are trying their own methods to stop "last in, first out"
Before describing the author's research, let's take a look at some of the countermeasures that retailers have taken to try to solve this waste problem. In order to induce more customers to choose older items first, thereby keeping fresher items on the shelves, retailers can put fresher items in a harder-to-reach location on the shelf, but this approach can only Make it harder for customers to get the freshest products, not stop them from doing so.
For retailers with back-end storage, their staff can stock shelves more frequently and in smaller quantities, effectively hiding fresher items from customers until older items are (almost) sold out. This strategy requires back-end refrigeration, constant monitoring of stock levels on shelves, and frequent restocking, which obviously comes at a cost.
The author's research points out that "transshipment" can be an effective "weapon" to solve the waste of perishable products. Transshipment in the retail industry is a common practice, in which one store transports excess inventory to another store with a shortage of inventory. It is worth pointing out that previous academic literature has not yet examined the "last in, first out" rule. To study the retail sales of perishable products, the author's research attempts to fill the academic gap in this area.
The author conducted a study on an offline retailer with two stores. The retailer replenished perishable goods in each period. At the end of each cycle, retailers can put unexpired products on clearance sales; they can also carry them over to the next cycle. Since these products have a fixed and limited life, retailers can also transfer them from one store to another for inventory balancing; they can also perform inventory separation. In other words, transloading allows retailers to put newer inventory into one store and older inventory into another, making it easier to sell older inventory, thereby reducing waste.
To understand how precisely inventories should be segregated and how much benefit transshipment can generate, we consider a class of heuristic strategies. Under this strategy, the calculation of the optimal action relies on only two pieces of information: the number of goods expiring in a period (old goods), and the number of remaining goods (new goods).
Research results show that the optimal strategy can be characterized by two increasing switching curves, which divide the entire state space into three regions. In the first area, only one store sells old items and both stores sell new items; in the second area, one store sells old items and the other new items; in the third case, Only one store sells new items, while both stores sell used items.
Implementing unmanned stores to overcome transshipment challenges
The relevant research details are not detailed in this article, but the research results will be focused on (interested readers can refer to the author's paper "Separation of Perishable Inventories in Offline Retailing Through Transshipment").
When there is a "linear transshipment cost" (linear transshipment cost), we expect that the lower the transshipment cost, the greater the possibility of inventory segregation; on the other hand, a possible challenge in implementing transshipment stems from inconsistent incentives among store managers.
For convenience store chains, this is not a major problem, as one owner often owns multiple stores nearby and replenishment is completely centralized; in extreme cases, if the store is no longer managed by a human, the incentive problem disappears, e.g. Unmanned stores such as Amazon Go in Seattle and BingoBox in Shanghai can solve this problem.
Must first change business processes and train employees
Overall, whether transshipment is worth implementing depends on its benefits and costs. The study found that this practice can increase profits by several percentage points and identified the conditions under which it can bring the greatest benefits; and as long as transshipments can be effectively integrated into the regular replenishment process, the additional variable costs should be small. Small. However, the implementation of transshipment may require upfront changes in business processes, information technology systems and employee training, which are fixed costs and do not affect our analysis and conclusions.
Research shows that transshipment is most valuable when the ordering cost of the product is high, the outdating cost is high, clearance prices are low, or demand changes significantly. Since perishable items are generally of lower value, Transshipment is only feasible if the scale is large and the logistics are extremely efficient.
It is indeed a challenge to strike the right balance between reducing waste and the interests of businesses and consumers; however, helping retailers improve their operations and increase their operating profits can also reduce waste at the same time. The author's research results , hoping to help retailers achieve these two important goals.
*Reprinted from an article in Hong Kong Economic Daily
Introduction to Professor Li Qing
Professor Li Qing is a professor in the Department of Information, Business Statistics and Operations at the Hong Kong University of Science and Technology Business School, and the academic director of the Master of Science in Global Operations Management at the Hong Kong University of Science and Technology. His research interests include supply chain management, behavioral operations management, and business analysis.
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