High RSO Ratio Killing Your Retail Efficiency?
Thursday, June 28, 2018

Categories: Thought Leadership

High RSO Ratio Killing Your Retail Efficiency?

Two years ago a retailer asked us about their SO (Ship:Order) ratio. It was 2.17. At the time, I did not realize the immense impact this simple ratio can have on a retailer. Truth is that I should have been completely floored. Something was desperately wrong with their operation. I believe and hope this retailer to be an outlier. However, it is important to know your own Retail SO ratio (RSO), to gauge your retail efficiency.

Retail SO Ratio It is important to know your own Retail SO ratio, to gauge your retail efficiency

What is the Retail SO ratio? RSO stands for Retail Shipment:Order ratio. It might also be called the Retail Ship:Order ratio. Exactly as it sounds, it expresses the number of package shipments compared against the number of ship-to-home orders received (or ship-to-location).

Why RSO is Important?

As an omni-channel merchant, customers will come into your physical stores to shop. Yet others will shop online, or digitally on their smart phone, tablet, on voice commerce, through social media purchasing, or IOT (dash buttons…). As digital shopping grows, an increasing number of orders will be fulfilled as a shipment. This means that efficiently operating retailers try to ship as few packages as possible to fulfill the order. This approach saves on the expensive last-mile delivery charges. In fact, the ultimate in retail efficiency is for one customer order to result in only processing a single shipment.

 

Read More: What to do About Retail Stockouts

 

What Affects Your RSO? Need to Improve Your Order Accuracy? Here's How Browns Shoes Did It. Get the Case Study.

Retail is a highly complex business. As such, there are many variables that can affect your RSO. These include:

  • OOS (Out Of Stock) ratio,
  • Size of your store,
  • Efficiency of in-store/DC pick-pack process,
  • Accuracy of your demand planning/forecasting, and
  • Business rule priorities.

OOS is the key figure that directly affects your RSO ratio. Whether you ship-from-store or fulfill orders from you distribution centers, most retailers track OOS figures. The more stock you have at any given fulfillment location (lower OOS), the more likely you will ship an order all in one box.

Yes, size matters. Larger stores contain more inventory. Naturally this balances out with the number of SKUs in any given location. Get the balance right, and a big box store can have a very low OOS. Added to that, if you are running a ship-from-store model, then you stand a good chance of having a very low RSO.

If you set your OMS business rules to prioritize speed, and allow split-orders - then RSO climbsPick-Pack efficiency can affect RSO, too. Are your store runners timed per order (TPO)? If so, are you sure you aren’t encouraging collecting half the goods for an order and doing partial shipments? You will lower your TPO, but skyrocket your RSO, not to mention bombing your customer satisfaction scores.

Accurate demand planning helps in many ways. It makes sure you have the goods that your customers are going to want. Yes, forecasting future demand is difficult. For the greater part of a decade, I tried as a category manager with thousands of SKUs. Not an easy task, by any means. However, advanced forecasting systems from companies like JDA, can definitely help.

Finally, your business rule priorities impact RSO. If you set your OMS business rules to prioritize speed, and allow split-orders – then RSO climbs. It may be a strategic decision, but also be aware of the impact.

 

Related: Store Fulfillment

 

How OOS affect RSO

All things being equal, the biggest impact on your Retail SO ratio is a retailer’s OOS indicator. Specifically, if you are running an omni-channel strategy with ship-from-store, reducing OOS will have a major impact. In fact, a low enough OOS can bring a retailer to an RSO nearing 1.00.

The chart shows how OOS affect RSO. This curve is interesting, because if you know your current RSO, you can assess your OOS ratio, and vice versa. OOS is a good figure to know and monitor for your business. However, knowing your RSO is more than an interesting stat. A lower RSO means lower costs incurred by the business, and a general increase in retail efficiency. Reducing RSO should be a priority for every retailer. Remember that cost savings like shipping costs, have a direct bottom line impact.

 

RSO vs OOS Ratio

 

As a reference point retailers in North America have an average OOS of 8%. This pegs them at an RSO = 1.33. European retailers have a range of OOS, from 4% to 12%. This provides a RSO range of 1.16 – 1.51.

Is this good or bad? That depends on what you are paying for packaging, filler, and last-mile shipping fees. The ideal state is bringing the OOS down to 0%. This results in an RSO perfect score of 1.00. This also means that you MUST have enough inventory at every location such that you never have an out-of-stock situation.

RSO = 1.00 … Is it Possible? Having exactly the right SKU's at the right place, at the right time is nirvana

Even with advanced AI assisted demand planning, having exactly the right SKUs at the right place, at the right time – is nirvana. This is ideal, but extremely difficult to achieve while balancing reasonable inventory levels. You have to do your best here, but also find other options.

Good demand planning practices, including a sophisticated system like that of JDA, will help bring down your OOS. This is a good thing for the business, and has a direct impact on your Retail SO ratio. It saves you money.

Besides solid forecasting practices, retailers need an advanced order management system with order consolidation capabilities. Order consolidation lets a retailer using ship-from-store fulfillment, to bring in missing inventory to central locations. This before shipping the package. Order consolidation let’s you cheat the system. It lets you force the RSO to the level you want for your business.

How it works is that a retailer uses inexpensive internal transportation systems to bring full order stock to a single location. Hence, the retailer ships only one package to fulfill the full multi-product order. It incurs only one expensive last-mile shipping charge. Problem solved.

Truthfully, it might take longer to get orders out the door when full consolidation is on. However, most customers are willing to get their order a little later, if the entire order is shipped as one. Not only does this reduce your RSO, and shipping costs, but it also improves your customer satisfaction scores. Customers prefer getting their full order at once. If that were not enough, it also reduces your retail carbon footprint, with fewer diesel truck deliveries, and less wasteful packaging. All in all, the impact is higher retail efficiency.

 

Read More: 7 Ways to Reduce Retail Costs with a DOM

 

Is Your Retail SO Important?

The lower a retailer's RSO, the more efficient the retail fulfillment systemRSO is directly affected by a retailer’s out of stock (OOS) levels. The lower a retailer’s RSO, the more efficient the retail fulfillment system. It means you spend less on expensive last-mile delivery charges. That means cost savings going straight to the bottom line of the business. With good demand planning, the OOS levels can be improved. However, if you are planning or already running a ship-from-store operation, then you need an advanced OMS with order consolidation capabilities.

As for the retailer with an RSO of 2.17. Wow, that represents a 25.5% OOS level. This means that every time a customer orders an item online, that retailer might have had it in their inventory, somewhere. But, one in four times it was out of stock at any given location. How many unnecessary shipments have then engaged? At what additional cost? Imagine what an effective order consolidation system could do for their bottom line.

 

Wish you had Retail Order Consolidation when...

 

 

Author:

Charles Dimov - Director Marketing OrderDynamicsCharles Dimov is Vice President of Marketing at OrderDynamics. Charles has 21+ years experience in Marketing, Sales and Management across various IT and Technology businesses. Previous roles include Chief of Staff, Director Product Marketing, and Director Sales. Charles has held roles in brand name firms like IBM, Ericsson, HP, ADP, and OrderDynamics