Stockouts – An Insidious Threat to Your Bottom Line
Retail product stockouts are said to occur about 8% of the time. Almost an insignificant occurrence yet what if only a few stockouts turn your customers off?
Evidence suggests that retailers may not be managing their shelves optimally and customer resentments could add up. You’ll be surprised by the research that’s been done on the matter of retail stockouts.
Never a Good Time to Happen
At a time when consumers are less loyal than ever, any disruption in product availability or quality can affect manufacturer’s and retailer’s bottom line. Product stockouts (wiki) can happen anytime, but most often occur around Xmas. Companies that don’t take stockouts seriously pay the price.
Research shows that Best-in-Class companies are in tune with their customers at point of purchase and they’re reaping the rewards for doing so. Others are suffering significant losses.
The fallout over stockouts is far deeper than many manufacturers and retailers realize. There’s a dollar cost and brand damage loss. The culprit is not just supply chain management either. Research shows retailers are the most frequent offender with poor shelf management practices. Some are not taking care of their important POP needs.
Retail Practices at Fault
Retailers are doing on-demand or as needed stock orders to avoid large inventory and expensive space requirements. Stockouts will happen more frequently and they rely on quick replenishment from manufacturers. But how many manufacturers offer the speed of a packaging fulfillment provider? And that’s if the retailer is even aware there is a stock out. Recent stories with pictures of empty shelves bar shelves at Walmart seem to bear that out, although Walmart says there isn’t an issue.
Retailers have fewer staff to manage inventory and are relying on electronic inventory controls which sometimes are defective. When retailers typically order in batches from manufacturers, they may not reorder product for some time. So even if retailers are aware that your product has been out of stock for some time, they may not reorder, especially if they’re looking for price deals and other discounts.
Discovering stockouts and preventing them should be one of your priorities. Perhaps your sales team does that very thing? Otherwise, it’s money down the drain and future sales are impacted. Research stats show stockouts hurt everyone, including the consumer. Retailers may not appreciate the harm it does to their brand image. Once a retailer lets down a consumer on multiple product stockouts, a new brand image begins to form of that retail brand.
What the Shopper Does When Their Preferred Choice is Missing
- When consumers find their preferred product missing, one of 5 things happen:
- They buy a substitute from the same brand
- They buy a substitute from a different brand
- They delay their purchase
- They don’t buy at all
- They shop at a competitor
If up to 42% of shoppers shop elsewhere (as reported), it’s like sending customers to your competitors. You lose the sale, and they win marketshare. Clearly, stockouts are an underappreciated problem.
Retailers overall, may be managing their stock better today, and they may be squeezing out better deals from manufacturers, but how many customers are they losing in the process?
Restocking Practices for Best in Class Companies
A benchmark study by the Aberdeen Group concluded that “best-in-class companies are twice as likely to segment and prioritize inventory based on store-level customer service requirements.” The top challenge they faced was to address service level problems at the retail shelf and meeting short term product category demand.
The chart below shows the 4 key performance criteria for best in class performers. The best and worst are contrasted:
|Best-in-Class Performers Achieved:||Worst-in-Class Performers Suffered:|
|18% increase in inventory turn rate||2% increase in inventory turn rate|
|11% decrease in out-of-stock costs||14% increase in out-of-stock costs|
|11% decrease in inventory carrying costs||9% increase in inventory carrying costs|
|7% decrease in cost of goods sold||10% increase in cost of goods sold|
From the above, you can see a 25% difference in out-of-stock costs and 8% increase in cost of goods sold. Some significant bottom line costs and then factor in long term brand damage and you get the picture.
They found that best in class companies are almost three times more likely to garner 96% service level quality. And they are twice as likely to take stock out exception management remedial measures. They were also 1.5 times more likely to use SKU level minimum and maximum quantity thresholds in forecasting reorders.
Clearly, top companies take stockouts seriously. They’re not focusing on retailer’s demands for deals or fully automated order processes. Customer service level response means they’re in tune with their customer at point of sale. You can read the Aberdeen study and see for yourself.
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