Seven ways to cut out-of-stocks
Through a special arrangement, presented here for discussion is a summary of a current article from Frozen & Refrigerated Buyer magazine. A long-time Harris Teeter executive, Mr. Harris is a former chairman of the National Frozen & Refrigerated Foods Association and a member of the Refrigerated Foods Hall of Fame.
Even if a vendor shorts you on an order, management doesn’t want to hear that — out-of-stocks are always your fault.
No matter what, you’re going to have a little heartburn every Monday morning when you look at the out-of-stock reports from the weekend. But here are a few ideas that might help you.
- Keep good records. Know how much you sold the last time an item went on deal, and whether there were other factors to consider, like a snowstorm or a competitor opening or closing. While computer-assisted ordering is all the rage now, it doesn’t take everything into consideration.
- Set some benchmarks. What worked for me was forecasting a 10-week supply for a one-week BOGO. For a temporary price reduction, it was five weeks.
- Don’t hide out-of-stocks on the shelf by facing up the holes with adjacent items. Maybe the district managers won’t notice the problem when they go through your stores, but you leave yourself open to the out-of-stock being missed during the next ordering cycle. Then your problem will be far worse.
- Be especially vigilant of your private label. Big brands may have inventory in their warehouse to help you out quickly, but private label vendors most often pack based on your order. You might wait for a week before a truck can show up.
- Scorecard your stores and your vendors on service levels. I always told my dairy buyer I wanted at least a 95 percent service level on the shelf across the department. That’s not always possible, say, on yogurt in January. That’s when shoppers are going on New Year’s diets at just the time vendors are discontinuing some items and adding a bunch of new ones. You don’t know what to order and the manufacturer doesn’t know what to produce. It’s always a mess.
- Ask vendors to be honest about their capacity and potential shorts, so you both can plan better. Close communication is especially important when there’s a problem upstream, such as raw materials shortages or production problems. In some cases, you may want to ask vendors not to focus production entirely on the top sellers so you can keep a few of the No. 4s and No. 5s in stock.
- Don’t minimize the potential bump in sales when FSIs drop in your market. This is especially true when you and/or your competitors run ads on the products at the same time.
Discussion Questions
What are the most common mistakes category managers make that lead to out-of-stocks? Can you add any tips for limiting out-of-stocks to those mentioned in the article?
There are two kinds of out-of-stocks — real, not in the store out-of-stocks, and perceived, customer-can’t-find-it out-of-stocks. I’m convinced that we’re going to be hearing more about item-level RFID over time; it not only addresses the latter kind of OOS but it also deters theft by sales associates. RFID is one reason why Macy’s has been so healthy….
Managing inventory is like Goldilocks’ three bears. Too much inventory and you kill inventory turns and GMROII (Gross Margin Return on Inventory Investment). Too little inventory and you’ve lost sales opportunity and the little bear.
This is one of the best summaries I have seen on how to cut out-of-stocks. Computer algorithms only go so far. Johnny Harris absolutely nails it when he calls out the importance of record keeping … especially the impact of FSIs and promotion on sales rates.
Walmart, for all of their systems and data, estimates that out-of-stocks are costing them over $3 billion a year. They are not only losing revenue, but the trust of many core consumers. Maybe they need Johnny Harris as a consultant!
Always compare the demand forecast to what was actually sold along with any variables that could have impacted sales. Aligning demand and supply is always a challenge, but the better you understand your historical performance the more finely you can tune demand planning going forward.
Frequency of inventory counts, and accuracy of inventory counts are some of the key issues where OOSs are not managed well. This means that ordering and forecasting solely on register sales is approximate at best. Register sales don’t account for shrink, and in some cases, shrink is a large percentage of the reason an item is OOS….
As a category manager you need to take the responsibility to check with your vendor, your vendor’s business development manager, your store manager, and your corporate category manager to determine when promotions are being scheduled. Often the computer ordering software does not take that into account and out-of-stocks are especially high during those times.
Likewise, if there are any local events such as weather conditions, community events, or local celebrations that might create an increased demand for products in your category, you need to change the quantity in the computer-aided ordering software. Computer assisted does not mean the software has artificial intelligence or that everyone has programmed promotions or local events into the system.
The suggestions in the article should become part of a category manger’s checking process.
Some stores abhor a “vacuum” and won’t allow empty space on a shelf. Too often, out-of-stock slots are faced over with other products. Then, the night crew pulls the tags if they can’t fill the slot with the designated product. Unless the store has a very sharp scan coordinator or POS manager, these items will disappear from the shelf until a vendor rep does an audit. It’s a vicious cycle.
Another problem can be the regional category purchaser who never seems to get a handle on how much product is needed throughout the region which leaves some stores being consistently shorted, especially during promotional events. Again, something that is usually reported upstream by a vendor rep, though not always acted upon.
Yet another problem is too much reliance on computer assisted ordering. Yet another problem that is usually flagged by a vendor rep during an audit.
Finally, there’s the shortage of product availability from vendors due to a shortage of supplies, weather, strikes or other factors. It’s important for the vendor to be transparent when these events occur and coordinate with their customers, even postponing promotions until the product is readily available.
Those are the most common scenarios for out-of-stocks that I’ve encountered. Most can be prevented with diligent oversight and record keeping.
Take care of your vendors. You want to make sure the vendor gives you priority over your competitors. Dad would always use store labor to unload a vendor’s truck so the vendor could kick back and have a beer with dad, go have lunch at our house, or he’d take them for an airplane ride. We never got shorted.
I would add one additional thing to Mr. Harris’ list (as it relates to day in day out out-of-stocks): Re-order frequently. A sales forecast, by definition, is rarely perfectly accurate. Sales will almost always be a little above or a little below even the best forecast. The best way to minimize out-of-stocks, as well as over-stocks, is to ship as frequently as possible in as small quantities as possible. This will assure that there’s always something in the pipeline, and if something should go out-of-stock it will be replenished rapidly.
Mr Harris’ principles are good ones. At first, I thought a little dated, but given the OOS problem still exists in most grocery/discount retailers, there is constant rigor needed for continuous improvement.
Two adds:
Full Disclosure: I am head of communications for a pricing and assortment intelligence company. Tips for working with stocks and prices: The best support system for these points would be to have a sound pricing and assortment intelligence program in place, e.g.:
1. Pricing Intelligence: Track, compare and analyze competitive insights.
2. Assortment Intelligence: Find opportunities to continuously enhance your assortment and optimize your product mix. Find out when your competitor is out of stock, and can adjust your prices accordingly.
3. Lifecycle intelligence: Leverage historical competitive information.
4. Benchmarking.
5. Private label identification and matching.
6. Dynamic Pricing: Can know and adjust your prices automatically (by rules you set) to your competitors’ in real time.
7. Business scenario management: Can test out your “what if” i.e. “what might happen if I do this or do that with my prices?”