Out-of-Stocks Cost Retailers $93 Billion

Discussion
Jan 16, 2008
George Anderson

By George Anderson

A new study from RIS News and IHL Group concludes retailers are losing $93 billion in sales annually as a result of being out-of-stock on the products consumers are looking to buy in their stores.

According to the companies, retailer could increase store sales by an average of 3.7 percent if they could manage to keep in-stock.

RIS News and IHL came up with their figures after surveying 124 retailers who operate more than 85,000 stores and generate $460 billion in annual sales.

The two biggest reasons given by respondents as to why stores run out-of-stock are buyers making planning mistakes and store management failing to execute.

All channels have a large upside opportunity if they can maintain stock levels. The vertical with the biggest upside is specialty retail, which could increase same-store sales performance by 7.1 percent if it could optimize assortments and keep product on the floor.

Discussion Question: Why have out-of-stocks remained such a big issue in retailing for so many years with so little apparent progress? What has to happen to finally make this a minor if not a total non-issue?

[Author’s commentary]
For nearly 35 years working in and around the retailing business, we’ve always heard about the frequency of out-of-stocks and how they damage merchants’ top and bottom lines. The story hasn’t changed. Why is that?

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16 Comments on "Out-of-Stocks Cost Retailers $93 Billion"


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Mark Lilien
Guest
11 years 8 months ago
Although out of stock complaints have been a hit song since forever, rising expectations will keep this song on the Top 40. But every retailer has to measure the tradeoff between fewer out of stocks and higher inventories, more expensive technology, and increased labor cost. For some businesses, the difference between 98% in-stock and 99% in-stock can raise their inventory and labor costs by double-digit percentages. And many merchandise categories are quite seasonal, so being in-stock until the very end of the season would launch their markdowns into the stratosphere. Should a retailer have a complete Halloween assortment on October 29th? Should a New England department store have all colors and sizes of winter coats on March 1? Many items, when out of stock, still have excellent substitutes. Many customers will buy one brand of butter if another brand is out of stock. It’s not a great idea to disappoint the grocery customer every week, but occasionally it doesn’t really matter to most folks. The most peculiar mistake: online retailers who don’t remove out of… Read more »
Dave Wendland
Guest
11 years 8 months ago

The old adage, “You can’t sell what you don’t have,” is still at the heart of the issue. And, retailers exhibiting denial about the problem are simply avoiding the awful truth. Products may theoretically be in the store or on the shelf, but if they haven’t found the correct location on the shelf where consumers expect to find the item, plain and simple, it’s out of stock!

Planogram departments that don’t consider the OOS issue may be missing a huge opportunity. Truly managing the category requires looking at every aspect (profit, retail price, adjacencies, new items, and, yes, stocking levels).

This problem will always exist. But denying it is an issue is no way to work toward resolving it.

Ted Hurlbut
Guest
Ted Hurlbut
11 years 8 months ago

I agree with many of the points Jamie Tenser made above. Adding additional layers of inventory can be very expensive, without any guarantees that out-of-stocks will decline. The way to move from 98% in-stock to 99% is in the coordinated execution throughout the organization, from the buyer right through to store ops.

There are many models out there for improving execution and organizational effectiveness, but it generally comes down to core values. Those retailers who have made execution a core value, and central to the whole culture of the organization, are the retailers best positioned to minimize out-of-stocks. As Jamie pointed out at the end of his comment, it’s not about another software package. It’s about an unwavering attention to detail, accompanied by an acute sense of urgency.

Dr. Stephen Needel
Guest
11 years 8 months ago

I’m not sure how much space planning is really done with OOS in mind. More often, we’re looking at assortment mix and layouts rather than a planogram designed to keep key items in stock at all times.

M. Jericho Banks PhD
Guest
M. Jericho Banks PhD
11 years 8 months ago

At Fleming we called out-of-stocks “missed sales,” and I suspect many other retailers did and do the same. We found that OOS items were usually sale or featured items, and we had the back rooms to accommodate sufficient backup stock. Back rooms are smaller or even non-existent today. “Densing up,” the practice of storing backstock on racks above the display shelves, also has become somewhat popular, but sometimes needs the wider aisles and stronger floors necessary to handle forklift traffic.

Shoppers don’t like to substitute, even though retailers may think it’s a wonderful alternative. It isn’t. Rainchecks aren’t a wonderful alternative, either. Many of my independent retailers at both Fleming and SuperValu used a “walk the ad” program. Periodically throughout the day, an assistant manager would personally inspect the shelf condition of every ad item, which are the biggest OOS offenders. This accomplished two objectives: It identified and solved OOS, and it got the manager out of the checkstand where many of them love to “hide.”

Marie Gauthier
Guest
Marie Gauthier
11 years 8 months ago

Even with the best buying practices, the most complex of automated algorithms, space planning, perfected shipping and receiving processes and ongoing in-store training, we have found that we will never be able to accurately anticipate the human element to key in errors, put the product on the shelf in the wrong place, steal the product from the shelf, or the traffic accident that prevented the truck from getting to the store on time.

Additionally, all of the algorithms in the world can not continually accurately forecast the complexities of historical product sales data due to ever changing demographics and psychological shopping habits of individuals within store regions.

Unfortunately, stock outs are simply a reality.

It would seem that the trick is to tweak the processes within the supply chain area by area to strike a balance that will diminish the out of stock percentage to a number that is acceptable to each retailer.

James Tenser
Guest
11 years 8 months ago
Some very good observations by Bill and Dan above that underscore a point I want to make more clear: Attempts to fix out-of-stocks without addressing underlying implementation gaps and self-destructive practices are the equivalent of putting a band-aid over a bleeding artery. Out of stocks are a symptom of a much more pervasive ailment that plagues most of our industry. Merchandising plans assume accurate compliance at store level, but this rarely happens because there is no implementation plan whatsoever. Furthermore, there is no visibility of the shelves or selling floor that could provide a tool for managers to plan or measure implementation. As a result, the demand signals used to drive replenishment are unreliable, causing endemic over- and under-stock conditions. Case packs are often too large for slow moving items with few facings, resulting in double handling of merchandise and idle cash. Meanwhile, fast movers run out of stock by Saturday afternoon and nobody detects the problem until the data are analyzed at the end of the month. As I have previously harped–RFID may indeed… Read more »
Bonny Baldwin
Guest
Bonny Baldwin
11 years 8 months ago

I’m coming at this from the apparel sales floor. I get customers who’d like a particular size or color my location is out of, and I know another of our stores must have it, yet getting a fellow employee who will not only pick up the phone but follow through is a tremendous effort sometimes.

I understand why there’s resistance–doing a send truly can take about a half hour from the time we find the item, fill out all of the paperwork in triplicate, pack it, call the customer for confirmation, get credit card approval, and take the item two floors away to the shipping area. This inefficiency loses us money, service quality, and customer loyalty every day; meanwhile, management focuses on gimmicky markdowns and promotions to get some sales happening….

Li McClelland
Guest
Li McClelland
11 years 8 months ago
I am glad that someone above prominently mentioned shelf Out-of-Stocks to differentiate them from complete Out-of-Stocks. To the customer they look the same but to the store management, they should disclose two very separate problems that need to be addressed for profitability sake. After being assured a while back by the grocery store manager at a large chain that it is nearly impossible for a regular (not seasonal) item to be Out-of-Stock in this day and age I have discovered he was right. The item that’s gone from the shelf is quite often available in the back or stockroom if the customer is willing to make an issue of it, look for a store person who can assist, and then wait around for the search mission to occur in the back. Within the past week alone, this has happened to me twice in two different stores. One time it concerned a type of orange juice and in the other instance a type of coffee. In both cases the item was available and the clerk came… Read more »
Dan Desmarais
Guest
Dan Desmarais
11 years 8 months ago
Virtual inventories are one of the key solutions to reducing Out-of-Stocks. This means that your forecasting and replenishment systems need to know an original unit count, maximum capacity of the position(s), and a movement forecast. The plan is that the case arrives at the shelf just before the Out-of-Stock occurs. The system breaks down like this: – the maximum capacity was entered once when the item was setup in replenishment and is not dynamically updated; – the minimum presentation stock (the level below which you do not want to drop) was entered once when the item was setup in replenishment and is not dynamically updated; – MIX and MAX data may be generic and not store-specific; – the maximum capacity may not be enough to support the casepack plus the minimum presentation stock; – the result is that units from a full case that don’t fit on the shelf with their peers get placed somewhere else and the system starts to fall apart…. The above tasks, when executed well, only get the goods to the… Read more »
Frank Eich
Guest
Frank Eich
11 years 8 months ago

Frankly, having visited some grocer backrooms of late, I think that we have a problem today w/BOTH high Out-Of-Stocks and high inventory…unfortunately, we often talk about these as ‘independent’ metrics but isn’t an out of stock really just a ‘negative’ inventory position? Clearly there are opportunities for improvement in store execution, ordering, planning, supplier product availability, etc. However, high OOS and high inventory are simply indicators that the entire ‘supply chain’ through to the retail shelf does not yet work very well.

Why? I attribute much of it to the lack of ‘total system’ alignment of rewards and costs.

Manufacturers and retailers choose to minimize their costs, often negatively impacting the other and within both the manufacturer and retailer silos, various functions strive to minimize their own costs, always at the expense of other ‘silo’s’. The fact that we have talked about out of stocks and excessive inventories for years is indicative of the monumental challenge that needs to be solved.

Art Williams
Guest
Art Williams
11 years 8 months ago

It’s a balancing act between low out-of-stocks and high inventory. Most would agree that zero out-of-stocks is not practical or affordable. Each retailer must decide what level they can afford to provide to their customers and how that will compare to their competitors. The retailers that guess right will be the most successful and the ones that don’t will disappear.

Customers will probably tolerate higher OOS if they are paying lower prices or have some other tangible benefit to offset it somewhat. Having a large assortment with replacements for the OOS items will also help.

Ben Ball
Guest
11 years 8 months ago

Because “managing” out of stocks implies “controlling their impact.” It’s a microcosm of the macro TQM philosophies. In our traditional business system, we target and report “99% Complete and On Time.” We do not target “Zero Defects.” We still do not believe that “Quality is Free”….

Doron Levy
Guest
Doron Levy
11 years 8 months ago

Allocation has always been an issue. Let’s say that hot and trendy out of stocks (Wii’s PS3’s iPods etc) are the fault of the manufacturer and there is really nothing that can be done from a manager’s point of view.

But stores should implement a ‘never-outs’ program that managers must maintain through out the business day. Depending on what the retailer sells would determine what is on the ‘never-outs’ list. When there is a structured procedure for dealing with stock levels, the manager can deploy resources as necessary to make sure the shelves are full.

Obviously, if it’s a distribution issue, that must be addressed corporately. On a store level, the ‘never-outs’ program is the best way for managers and section captains to fill those holes and maintain service levels.

Bill Bittner
Guest
Bill Bittner
11 years 8 months ago
I attended the same session; sorry I missed you George, but I asked the following question during the session and then expanded upon it as I thought about it later. Are there any technologies that would help make operators aware of shelf edge Out-Of-Stocks? The answer was RFID. Out-of-Stocks at the shelf are one the operational statistics that no one has figured out how to economically measure. The other one is when the checkout lines have gotten too long. It is precisely this “invisibility” that makes both so difficult to correct. Shelf Out-Of-Stocks begin with the shelf allocation decision and work back from there. If the forecast movement is more than is allocated for the shelf, then arrangements have to be made to replenish the shelf. It is as simple as that. When to do the replenishment is still the big question and can still only be best accomplished by walking down the aisle and looking at the shelf. Long checkout lines are kind of the same issue. You may think you got a great… Read more »
R Seaman
Guest
R Seaman
11 years 8 months ago

Centralized buying and variable trade area demographics contribute to out of stock conditions. Local store management, who are most familiar with the demographics of their trade area, have not been included in the buying process. Fix this and a large part of the in-stock problems will be reduced.

There is no system or individual that can centrally manage all of the variables that exist within any city, state or across the USA without input from the management of an individual retail store.

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