Retailers suffer the high cost of overstocks and out-of-stocks

Discussion
May 15, 2015

Overstocks and out-of-stocks cost retailers $1.1 trillion globally in lost revenue, according to a new study from IHL Group, commissioned by OrderDynamics.

Overstocks are responsible for 3.2 percent in lost revenue for the average retailer, and out-of-stocks, 4.1 percent.

In North America, the loss from overstocks in the region is estimated to cost retailers $123.4 billion annually and out-of-stocks $129.5 billion although better forecasting tools have resulted in improvements to both metrics in recent years.

The blame for the $1.1 trillion in overstocks and out-of-stocks losses was placed on five areas:

Bad Processes ($284.9 billion in losses): Issues include inadequate refrigeration, improper training, inadequate relationships with intermediaries or disconnects between departments. Technology overhauls often complicate processes. Wrote IHL, "The vast majority of these issues are processes that made sense at one time, but either the business outgrew it or changed making the process a bottleneck."

People Problems ($259.1 billion): This "broad category" covers everything from employee mistakes to laziness, lack of training or outright fraud by offering discounts below what they should be. Improving training and skillsets, adding labor scheduling technologies and simply providing enough people to adequately serve customers were identified as some of the solutions.

Inventory distortion

Source: “Retailers and the Ghost Economy: $1.75 Trillion Reasons to be Afraid,” IHL Group

Data Disconnect/Systems ($222.7 billion): Approximately 60 percent of these issues are due to retailers not systematically measuring the impact of overstocks and out-of-stocks. Another quarter relate to tracking but not sharing the information across the enterprise. The remaining 15 percent are because systems can’t talk to each other. A single system to track underlying issues was offered as a way to reduce these issues.

Supplier Issues ($158.5 billion): Challenges include suppliers providing too much product against forecast, delivering at the wrong time or not being able to fill orders. Offshore manufacturing has intensified the challenges with out-of-stocks. Better integration of systems and data sharing between retailers and suppliers are expected to reduce these problems.

Theft ($161.6 billion): Globally, employee involvement is considerably higher than customer theft.

"These problems are within retailers’ grasp to solve, but it requires more than data, more than business intelligence," said Greg Buzek, president of IHL, in a statement. "It requires understanding the root causes of inventory and data disconnects and implementing the technology solutions and operational changes to address these revenue-limiting issues."

Which emerging technologies, organizational realignments or other changes will drive the next leap in reducing losses from overstocks and out-of-stocks? Are technological or non-technological issues the bigger hurdle?

Braintrust
"Technology did not create the problem. Technology will not solve the problem. Business processes need to be created to get the right information to the right people at the right time. Once those processes have been identified for your organization and partners, then the right technology can be chosen and implemented to facilitate those processes."
"The "People Question" is the final frontier of inventory management and the piece that’s not so easily solved. Wait! Before I hear the Greek chorus of folk advocating more/better/different/more humane/less humane/etc., training, let me return to old theme of mine. Does training help? Of course!"

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14 Comments on "Retailers suffer the high cost of overstocks and out-of-stocks"

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Gib Bassett
BrainTrust

As the article points out this is a problem wide in scope with multiple causes. Change has to start at a leadership or organizational level. I think similar problems could be identified around marketing or store execution too. In general, it seems that “business as usual” can no longer be tolerated and most retailers need to get much more serious about looking at things from the consumer’s perspective, then work back from there to prioritize how they change for the better.

Camille P. Schuster, PhD.
BrainTrust

Technology did not create the problem. Technology will not solve the problem. Business processes need to be created to get the right information to the right people at the right time. Once those processes have been identified for your organization and partners, then the right technology can be chosen and implemented to facilitate those processes. This is much more difficult than identifying the technology that causes or solves the problem.

Chris Petersen, PhD.
BrainTrust
One of the great hidden costs of retail is “slop in the supply chain.” If you believe the stats in the article (and they seem reasonable), the process that was supposed to fix all of this is not working so well. CPFR (Collaborative Planning Forecasting and Replenishment) was a process originating in the package goods category as a way of getting vendors/suppliers in sync with retailer selling through demand. The key to CPFR is one, and only one, forecast shared by both partners. Sounds great, but good luck on that! CPFR sort of works in packaged goods categories where demand is predictable and stable. Not much at all in fashion or highly seasonal categories. Some of the greatest strides in reducing overstocks and out-of-stocks are coming from countries where the majority of retailers buy from distributors. If there are rapid replenishment capabilities, distributors become the buffer to spikes in consumer demand. Omnichannel is having a pronounced effect on consumer expectations. Most consumers will readily wait two days for free shipping from online retailers. If they make a purchase in a store, will they also wait two days to receive the goods at home? If so, that could take a tremendous… Read more »
Ryan Mathews
BrainTrust

To me, this issue is less about technology — although technology should be continuously upgraded and reevaluated — and more about business processes and people.

Business processes can be re-designed. In fact, when it comes to inventory management at least, they should be reviewed on an annual basis as well as being adjusted on the fly.

The “People Question” is the final frontier of inventory management and the piece that’s not so easily solved.

Wait! Before I hear the Greek chorus of folk advocating more/better/different/more humane/less humane/etc., training, let me return to old theme of mine.

Does training help? Of course! Is it a cure for the critical woes facing retailing today? Not hardly.

The issues aren’t technological. They are labor availability, compensation models, scheduling, promotion paths, etc. Until those issues are addressed stores will continue to sub-optimize on every metric including stocking.

Mark Heckman
BrainTrust
I mentioned the topic of out-of-stocks in response to yesterday’s article on merchandising technical priorities. If I were back behind my desk at retail today, I would subordinate all other initiatives to the mitigation of out-of-stocks and (over-stocks to a lesser degree). While there are several really good technology solutions in use, none are worth the investment unless the retailer has a strong supportive operational plan in place to use the information, alerts and reports in a very timely way to correct the situation at the shelf. As one example of easier fixes, extremely high volume grocery operators like Walmart, that allocate only two or three facings to a reasonably selling item, should already be looking at that information to proactively deal with the potential loss of sales and, worse yet, resulting customer dissatisfaction. Either expand the facings and shelf capacity, have neighboring displays of the product or have this item on the “watch list” for replenishment at certain hours of the day. One final thought. Any technical solution to monitor out-of-stocks should be built around average movement and norms. When unit movement falls below a norm for that day, time and season, then an alert is sounded to check… Read more »
Ed Rosenbaum
BrainTrust

Technology is not the issue. Technology will not immediately solve the issue. It will assist. The issue is people. Whether it is the employees who have been poorly trained or the customers slipping items in their bags and walking out. Better qualified people making some of the decisions will help reduce but not end the problem. This is an ongoing process that will take years to get to an acceptable level of loss. Loss can be prevented but not eliminated.

Paula Rosenblum
BrainTrust

I have a phrase I use a lot: “The tyranny of turn.” Merchants are partially compensated based on turn. Turn is an average number. A combination of overstocks and out-of-stocks simply don’t show up in the turn calculation if it is within the same category.

Hence we incent our merchants to starve some product, because they’ve overstuffed others.

So rather than blame stores (which this report seems to do), I blame corporate compensation strategies and processes. The easiest solution is to a) calculate turn at lower levels of the merchandise hierarchy, and b) compensate buyers and re-buyers on a combination of GMROII and service levels rather than turn.

That’s the only way to capture both sides of the equation and actually solve the problem. It’s not a technology issue at all.

gordon arnold
Guest

The five categories in this discussion are ultimately created and perpetuated by employees. Even vendor and theft issues are the responsibilities of the retailer’s employees. Perhaps the largest contributor of this $1.1 trillion mess is the executive that is not on top of it for a myriad of unsustainable reasons.

In the age of thin margins and thinner staffing the controls for success are measured with predetermined measures of acceptable losses. These numbers are contrived as a percentage of lost sales. They are considered acceptable because the projected costs of lowering the numbers of loss would cost more than the margin gains, therefore reducing profits with no hope for recovery. When the retailer studies these issues as standalone, the fixes are easier to find and usually not so costly. Out-of-stocks and employee theft are many times attributable to poor execution of existing safeguards. Overstock and markdowns are always a signal that purchasing, allocation and vendor relations are in need of repair and many times the IT system being up to date in terms of data parameters will provide significant improvements. $1.1 trillion sounds like a lot of money and it truly is from these problems alone.

Cathy Hotka
BrainTrust

IHL’s reports on this issue are a collective wake-up call for the industry. Imagine the impact if retailers could reduce even 5 percent of this.

I manage dinners all over the country, and everywhere I go retailers are talking about process issues. Let’s figure out a way to share some learnings.

Ralph Jacobson
BrainTrust

“Retailers suffer the high cost of overstocks and out-of-stocks.” First off, is this really news? I know I dealt with it on a daily basis when I ran stores in the ’80s. Also, CPG brands suffer along with retailers. Let’s not forget these critical business partners. Personally I still believe good, old-fashioned business process improvements can and do help this inventory optimization challenge. Trust me, I have worked with retailers around the globe and have implemented process improvements exclusively to reap tangible ROI with zero technology investments. However, can apps provide additional benefits? Absolutely! Supply chain optimization, WMS, retail execution, promotional inventory alignment technologies and many more all can add incremental savings as well as revenue growth. From my perspective, though, I see the culture of business processes still being the greatest challenge to overall improvement.

Gajendra Ratnavel
BrainTrust

Non technical issues are the bigger hurdle, but technology can help. The quickest path to improving out-of-stock and overstock is to fix the non-technical issues.

However, as we’ve discussed this to death now, improvements in supply chain management, tracking and forecasting can be achieved with better applications of current technology.

It is really hard to discuss any one technology here because the topic “retail” is so broad. What a grocery chain needs is different from a clothing retailer. Having said that, big data will help across the board in understanding and forecasting better.

Arie Shpanya
Guest

There are a number of hurdles at play here. Retailers will need to forecast more accurately and improve communication between departments to start. I think that big data is poised to make a big impact on inventory management. Making inventory decisions based on historical sales data, current market conditions, and projected sales have the ability to cut down on under/over stocking.

Shep Hyken
BrainTrust

The best retailers have a handle on their inventory. There is a balance between out-of-stock and overstocked. Both cost money. Carrying the cost of surplus inventory can drive a company into bankruptcy or even out of business. And, customers will lose confidence if every time they want an item it is out-of-stock. Technology can help. Watching trends can help. Analytics can help you control inventory. Then you have external influences, such as weather and economic issues, which can impact sales, delivery of product, etc.

Michael Day
BrainTrust
Today’s consumers interact with retailers using a growing variety of channels and devices. Whether a shopper is at a store, on the web, at a kiosk or on her mobile device, she expects her favorite companies to fulfill her product demand—quickly, consistently, and conveniently. Retail supply chains are filled with excess and obsolete inventory, and the complexity of the challenge is increasing with multi-channel growth. Consumers say “in-stock” is the first priority, their most important requirement. Especially in today’s retail environment, maintaining and growing customer satisfaction is a key component to success. Retailers who fail to meet these needs will lose the customer’s business to the competitor. To meet these dynamic customer needs in real time, retailers must be able to accurately forecast dynamic consumer demand at a granular level and across the enterprise. Companies must be able to visualize inventory across all channels and touch points, including distribution centers. And they must have inventory precisely where the customer wants it, when she wants it there. Retailers who want to anticipate and respond to dynamic “connected-customer” demand require a new approach to merchandising and fulfillment. Instead of discrete tools that address individual touch points and channels, retailers need comprehensive solutions… Read more »
wpDiscuz
Braintrust
"Technology did not create the problem. Technology will not solve the problem. Business processes need to be created to get the right information to the right people at the right time. Once those processes have been identified for your organization and partners, then the right technology can be chosen and implemented to facilitate those processes."
"The "People Question" is the final frontier of inventory management and the piece that’s not so easily solved. Wait! Before I hear the Greek chorus of folk advocating more/better/different/more humane/less humane/etc., training, let me return to old theme of mine. Does training help? Of course!"

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