We have probably all experienced it: You are in a store shopping for groceries and are almost done with your list, when you arrive at the shelf where the canned tomatoes are supposed to be, and it’s empty.
And this situation does by far not only happen in supermarkets and with canned tomatoes but can and, very likely, does occur in basically every store and with any product at times.
Viewing this from the perspective of a retailer or manufacturer, however, it is much more than that. These so-called Out of Stock (OOS) or Stock Out situations cost them millions, if not, billions of dollars annually. If this is the case, then why does it still happen so often? What needs to be done to solve the issue and can it really be solved once and for all in the future?
This article aims at answering these questions and, thereby, help retailers and manufacturers better manage the OOS problem.
How To Define Out of Stock
Let’s start basic and first establish an overall definition of OOS situations.
While retailers and manufacturers may use varying definitions for the term, we are going to keep it simple and apply the following interpretation:
OOS occurs every time an item is not available when a customer would actually be ready to buy it. Previous studies show that the average Out of Stock rate is about 8%. That means that one out of 13 products is not purchasable in the exact moment the customer wants to get it in the store. This rate rises to 10% or even more with regard to promoted or discounted products.
The Consequences of Out of Stock
Now thinking about consequences of OOS situations on a retailer or manufacturer, one might assume that it is not that big of a deal. The customer will just come back another time, ideally find all products they desire, and everything is fine.
Sounds almost too good to be true, right?
Well, and it isn’t!
OOS has been found one of the top influencing factors regarding customer (dis)satisfaction. That means that any OOS experience leads to customer frustration and may ultimately drive them to do their shopping at another store. In fact, studies have discovered that 91% of customers don’t want to engage with a business anymore once they’ve had a bad experience with it. And it doesn’t matter whether this business was a particular brand or a store, etc.
of customers don't want to engage with a business anymore once they've had a bad experience with it
Further research has also identified a three-strikes-and-you’re-out pattern. Now, what does that mean?
70% of customers facing an OOS situation for the first time in the store will decide to substitute the desired item with another similar one. The second time it happens in the same store, the probability is equal for the shopper to either substitute again, to not buy anything, or to go to another store. If this customer has to experience a third OOS in the same store, chances are 70% that they will go to another store and may not return for any more purchases in the future.
And in today’s world, where there are plenty of possibilities to shop online without ever having to face empty shelves, this can mean enormous losses for retailers.
But it is not only money that is lost due to OOS situations.
- Customer loyalty towards a brand or a store can be severly damaged.
- Carefully planned promotions lose impact when the product isn’t available for purchase.
- Extra time and resources become necessary for additional ordering and intensified auditing.
So, you see the cost of OOS is a lot higher than just this one purchase which could not take place it may appear to be.
Why Do Out of Stock Situations Occur?
If the cost of OOS is so high, then why do we see empty shelves ever so often throughout all kinds of different stores? With all the technology and data available nowadays, shouldn’t it be rather easy to eliminate this problem from retail for good?
In order to really solve the issue, it is essential to understand the factors causing it; not merely trying to deal with the problem itself when it’s there.
A first reason for repeated out of stock situations, especially regarding promoted or discounted products is, at least in part, the insufficient coordination between retailers and manufacturers. Often retailers make plans for promotions without giving manufacturers enough time to adjust their production to keep up with the potentially higher demand. As a result, retailers tend to run out of the item long before the promotion ends; leaving both themselves and the manufacturer with unhappy clients.
On a similar note, retailers and manufacturers do not seem to cooperate well with regard to sales forecasts. 78% of manufacturers state that retailer forecasts do not influence their capacity or production planning. They rather use their own estimations based on data from their distribution centers. Partly, this may be due to a time lag between when data from retailers is available to the manufacturers and when they would actually need it. However, the large amounts of data also just take up too much time to analyze it all. Falling back on data that oneself generated is easier and simply more convenient.
Another reason is the lacking allocation of responsibility for inventory and, hence, for making products available on the shelves at all times. A survey has shown that people working in retail have differing perceptions of it, even when working in the same company. While some believe Supply Chain Management is in charge, others claim it is Category Management, and yet others state that Merchandising is responsible. As a consequence, no unit actually feels accountable and the problem remains unsolved.
Interestingly enough, however, it has also been found that the larger the backroom inventory, the higher the OOS rate. So, an empty shelf doesn’t necessarily have to mean that the product doesn’t exist in the store at all anymore. The present staff might simply have missed restocking the shelf once it was empty.
These are just some reasons that can cause OOS. Underestimating the demand for a product and, thus, under ordering it, is probably the number one reason for empty shelves, but there are also other unexpected incidents which can lead to the same result.
- Late delivery: The order you made was actually big enough but the manufacturer or supplier didn’t manage to deliver everything on time.
- Delivery refusal: You (accidentally or not) didn’t pay a bill in time and the manufacturer or supplier won’t deliver new products until you settle the invoice.
Knowing about all those different causes for OOS situations, provides retailers and manufacturers with a basis to get back into their own processes and find their own potential stumbling blocks.
What Needs To Be Done To Solve/Decrease Out of Stock?
Being faced with all the challenges mentioned above, there are a number of steps that need to be taken in order to solve or at least decrease the OOS issue.
As can be read between the lines in the paragraph above, it is pretty much inevitable for retailers and manufacturers to figure out a way to synchronize their procedures and consequently work better together. This can ensure make sure, for instance, that manufacturers are informed about plans for promotional campaigns early enough and can, therefore, better prepare and adapt their production cycles, if necessary.
Information has to flow in both directions to ensure there is always enough of the product in the stores; and not only in times of promotion. The best solution would be to find an integrated software where both parties have access to the same data. In that way, both manufacturers and retailers can make their demand estimations on the same basis and don’t have to work in separation from each other.
This also entails that retailers make sure their information is accurate. Professional tools and software (ideally integrated with that of manufacturers, see above) are essential when seriously trying to avoid OOS as much as possible. Inventory mustn’t get lost in some backroom but brought out to the shelves whenever replenishment is needed. In fact, it has been found that the most efficient way to decrease OOS would be to have suppliers directly deliver to the shelf and not store large quantities somewhere in the back of the store. In order to do that successfully, however, again close collaboration between manufacturers and retailers is absolutely crucial.
Additionally, the question of who is responsible for inventory management and making sure shelves are filled must be clarified. Once there is one person who knows that they are accountable for any arising problems in the process, there should naturally be less of them after only a short period of time.
This allocation of responsibility becomes even more important when suppliers and retailers decide to cooperate more closely. People from both parties need to know exactly what person is in charge of the process and who to contact should there be any issues. Proper communication is key to really get value out of the cooperation and make it a success. If there are too many people involved with no clear responsibilities chances are everything is just going to end in chaos.
Out of Stock is a phenomenon we probably all have experienced sometime in the course of our lives and it is never a pleasant incident; it is even less so for those responsible for it.
Retailers and manufacturers suffer huge losses every year because of empty shelves and disappointed customers. Damaged reputation and customer loyalty, decreased impact of promotions, and higher costs for re-ordering all multiply to millions, if not billions, of dollars lost.
The reasons for OOS situations can be manifold. A main issue in this regard is the insufficient coordination and lacking synchronization of data and processes between retailers and manufacturers or suppliers. But also late deliveries, under ordering, and not having clear responsibilities for inventory lead to empty shelves fairly quickly.
In order to really tackle the problem it is, therefore, essential for retailers and suppliers to coordinate their procedures and information sharing. Professional tools and software should be used to facilitate the process and ensure that data is accurate. Once this is established avoiding Out of Stock situations should be easier than ever.
FMI/GMA Trading Partner Alliance Report (2015), Solving the Out-of-Stock Problem