The history of mankind is generally divided into different eras based on significant events and changes in human civilization. The exact number and names of these eras can vary depending on the source, but some commonly recognized eras are:
Paleolithic Era, Neolithic Era, Bronze Age, Iron Age, Middle Ages, Renaissance, Industrial Revolution and the Information Age. It’s hard to say which ‘age’ has led to the most dramatic effect on humankind, but experts agree that the new age of Artificial Intelligence (AI) could be the most significant to affect the survival of the human race in the history of the world.
Cognitive Challenges of Critical Thinking
The Intelligence Quotient (IQ) of the human species ranges from around 70, being the least intelligent, to the smartest being around 208.
Einstein’s IQ is said to have been 167. If you are curious about your level of intelligence, just remember the average IQ of a person living in the U.S. today is 98, with the majority between 85 and 115. Of those attending a seminar on Einstein’s Theory of Relativity, only 1% would be able to understand what they heard, but even less capable of coming up with the theory on their own.
However, what if an entity were created that possessed an IQ 10 times that of Einstein’s? Let’s say, an IQ of 1,670. It’s safe to assume that there would be no human being on Earth with the intelligence to make heads or tails of anything it was to tell us. Current projections indicate that will happen within the coming four years or less. It’s too late to stop it, and that suggests an emergency of monumental proportions.
Could this signal the end of human civilization? It seems ‘a bridge too far’ to even fantasize on how this transition may affect retail business during the next two to four years. But we are experiencing a glimpse into some of these effects already, and it’s only reasonable to assume we are in for an interesting ride.
There is a thin, almost imperceptible line between creating computer programs to interpret interesting patterns in data, to observing computers discover patterns that hadn’t even been considered. Computers have introduced questions that I was compelled to research and answer.
While working with my convenience store customers early in the 1980s, I became aware of relationships involving products. I believe that products must be valued based upon the groups they are associated with. These “groups” may transcend departments or categories and include clientele, cultures, geographical locations, neighborhoods and other environments. I see groups of products as “families” rather than departments. Rather than studying how products perform within departments such as candy or chips, I found myself more interested in the relationship between unrelated items without regard to categories.
Consider the obvious relationship between wieners in the meat department and buns in the baked goods area, or chips and drinks, motor oils and beer. We didn’t buy bread because we wanted bread. We bought bread so we could make a sandwich. We might be satisfied to lose money on the bread, as long as we made it up on the meat, but only if the conditions were right. Honey buns didn’t sell in the afternoon, so why not use that space for something that produced profit during that time? Why not let computers use large screen TVs to announce impromptu sales and automatically change the prices on the point of sale (POS)?
Computers allowed me to go much deeper than writing programs. After teaching myself how to write programs to manage inventory, I began to notice specific relationships in multiple products spanning a wide range of categories until I reached a conclusion. A relationship of some kind exists between every product in the store with every other product, if you have the time to seek it out. Wieners led to bread, which led to mustard, pickles, napkins.
I also discovered that these relationships could be created, if you were willing to take the time and effort to take on the job, but oftentimes the time needed to do so would not justify the value received from the effort. What’s time to a computer?
Retailers spend too much time managing products that produce the most profits, when the greatest gains can come from products that aren’t producing profits but should be.
Currently, the profit or loss produced by 60% of the items in your store is ambiguous. Retailers spend all of their time trying to get an extra penny out of the 30% that is selling well, when the greatest potential lies in the 60% you are not paying attention to. This leads to overstock of the best performers and complete disregard for items that should either produce profits or be taken to the burn pile to make room for more profitable stock.
This is where pricing, presentation and brand selection comes into play. Just as the presence of some items can cause you to make more profit on other items, the opposite can also be true. For example, a sale or a promotion can kill the sales of far more profitable items not included in the sale and create a net loss for your efforts.
The Collateral Damage Caused By Promotions
Let’s say Vendor A announces a promotion on a particular soft drink and the purpose of the sale is in the vendor’s best interest to move more product out of his warehouse to make room for future purchases. He drops the price and takes the excess inventory to his retailers claiming to benefit the retailer by increasing his foot traffic.
The sale is a roaring success and customers flood the store to take advantage of the event. The profit made by the retailer on each sale is often less than he would normally make.
In addition, the success of the sale created by Vendor A cannibalizes the sale of Vendor B’s products that were generating higher profit before the sale but now are creating much less.
And finally, sooner than later, Vendor B must retaliate against Vendor A, and the opposite effects occur with the retailer holding the short end of the stick.
In scenarios such as the above, even today’s computers, with their limitations, can prevent vendors from using retailers’ stores as battlegrounds for sales that merely benefit themselves.
AI will recognize conditions such as this and end the sale to curb the losses, or better still, not allow the promotion to occur in the first place.
We Have Come To A Critical Crossroads
In the past, many industries have been led and guided by the industries they serve. In the convenience store industry that has been their suppliers and major brands. The c-store industry serves their manufacturers and suppliers by providing them with a place to market their goods. And it provides this service according to their supplier’s rules. This kind of relationship was made possible when less capable store owners went to suppliers and pleaded with them to manage their inventories.
The evidence of this is apparent in the way their inventory arrives in their stores. Stores rarely order items, but rather suppliers send them more product than needed so their store doesn’t run out, mixed with new items, 82% of which do not sell.
Barely capable store managers are left with paper invoices of which 65% are riddled with errors; however, our research shows that the majority of errors favor the retailers. In other words, retailers receive inventory they are never billed for instead of the other way around. But when you thrash it all out, this is terrible for the retailers because the store is cluttered with unsalable stock, and both the retailer and the supplier lose money.
I’m not suggesting putting control into the hands of the supplier was necessarily a bad idea, at least in the beginning when the retailer in question was lacking his own knowledge and experience to manage his business. However, now that retailers have become more capable, suppliers inundated with more paperwork, and mom-and-pop stores have flourished, retailers will need to develop their own strategies to compete in a shrinking market due to competitors like Walmart and Amazon.
For over 100 years, the retail industry has been shaped and molded in ways that seem convenient to suppliers and manufacturers of goods. This relationship has become so pervasive, in its present state, new technology poses a threat as it suggests retailers will be required to change to focus their primary efforts on themselves.
How Will Inventories Be Managed In the Future?
Someday, RFID (Radio Frequency Identification) will be placed on every item bought and sold, eliminating the need for barcodes and thereby eliminating scanning at the POS altogether. The customer will roll their cart through the front door, the total charges will be calculated and charged to her account with 100% accuracy, before she can get to her car. Audits will be unnecessary as the store computer will keep constant count of the inventory in the store, on the shelves, rolling through the front door, or in somebody’s pocket. That’s coming sooner than you might think.
Some software developers are already working on or have perfected solutions to track items in stores and forecasting with 97% accuracy the probability of sales occurring within a delivery cycle, to the point the term ‘delivery cycle’ becomes irrelevant. There is no reason why inventory cannot arrive in stores daily in small panel trucks, instead of shutting off access to pumps while 18-wheeler trucks sit in your driveway and shove a week’s worth of inventory into shopping aisles of stores, while personnel cut open the boxes and disburse inventory as fast as they can.
Item-Level Inventory Control and Analysis
We can’t do any of the above unless we embrace item-level inventory management. Certainly, there should be some consistency in departments, and category management should play some part in ordering initial stock, but on a day-to-day basis, the tools provided with item-level inventory analysis will provide the retailer with a complete picture of the inventory needed to be included in categories.
AI is going to be hard on those of us that are not prepared to deal with it. Before we began putting computers into cars, a shade tree mechanic could perform maintenance on his own vehicle. Now, you have to take it to a dealer or professional repair shop and hook it up to a computer just to find out what is wrong with it, and without expensive equipment to diagnose the issues, the chances of fixing it yourself drop significantly.
If history tells us anything, we know the majority of us will try to ignore the effects of AI and attempt to go about our lives as if AI isn’t new and useful. Some of us think we understand a little about AI, and that’s all we want to know. But, I think AI will do more to level the playing field than it will to divide us. Retailers who learn to use AI to improve sales and increase profits can make themselves far more competitive without investing in a lot of expensive technology. AI services like ChatGPT and even Google are available and, in most cas es, inexpensive to acquire.
All of us have been using AI in one form or another for a long time and not being aware of it. For example, the World’s record for the most books read is 74 hours, 49 minutes and 37 seconds. I don’t even know what that means, but I found it using Google.
Bill Scott speaker, entrepreneur and the president of StoreReport LLC for 45 years can be reached at [email protected] with the subject line StoreReport.ai. StoreReport LLC and StoreReport.ai are dedicated to ensuring that convenience stores get the full benefits of AI.