Editor's Note: The following is a guest post co-written by A.T. Kearney's Sameer Anand, a partner in the operations practice, and Sumit Chadha, a principal in the operations & performance transformation practice.
It should come as no surprise to anyone that out-of-stocks (OOS) are a critical problem for every retailer. But what continues to surprise is the lack of progress some retailers have made in controlling a problem that, while it may never be completely eliminated, can be successfully mitigated.
Stock-outs are the result of many factors from arbitraging labor costs and customer satisfaction to poor communication between vendors and retailers. But regardless of their cause, the fact remains that in-stock performance is both top of mind for most retailers and agnostic to trade channel or class.
For brick-and-mortar retailers, in-stock performance — most commonly calculated as share of assortment that has at-least one unit in store — is a critical litmus test for supply chains dependent on year-round assortments.
It’s logical to link assortment out-of-stocks to potential lost sales and subsequently margin loss. But the problem carries longer costs, too. Customer dissatisfaction, shopper defection and lost retail brand reputation are but a few.
Frequently, retailers overcorrect by holding higher inventory or spending hard fought gross margin dollars on expediting movement of goods. But preventing out-of-stocks today is possible, once the causes and effects are properly identified.
4 critical impact areas
A.T. Kearney sees out-of-stocks impacting four key areas: loss of sales, customer loyalty, online order fulfillment from the store and shipping costs that eventually lead to margin erosion.
The impact of OOS is nuanced. It affects planned purchases differently than impulse buys; core basket items separately from brand items; and digital retailers differently from online merchants. But the event’s consequences remain negative and avoidable.
How out-of-stocks impact retail margins
|OOS Impact Area||Effect 1||Effect 2|
|Sales Loss||Impulse purchases are limited for brick-and-mortar retailers.||Online retailers may suffer brand loyalty, as shoppers instantly look elsewhere for available products.|
|Customer Loyalty||Repeated stock-outs can reduce foot and digital traffic.||Shoppers may choose to switch brands.|
|Order Fulfillment||Products replenished on an on-time, in-full basis may be substituted at a higher rate during stock-outs.||Substitutions are not always viewed favorably, and may cause customers to buy no items at all.|
|Shipping Costs||The need for quick replenishment may hurt margins through the cost of expedited inventory, cross-node transfers, or higher overall storage costs.||Retailers move away from active planning, and become more reactive.|
So, what should retailers do?
Start with accurate measurements
Measurement and out-of-stock reduction go hand-in-hand.
Out of stock is measured against store inventory, and the accuracy of that inventory is a leading contributor to OOS. What makes reducing OOS particularly challenging is that visible out of stock performance — easily captured by a store walk through — often tells a different story than system measurements do.
Getting an accurate OOS measurement is a starting point for the solution, and better in-stock position starts with in-store inventory management and replenishment.
While the root causes of OOS are spread across all functional areas — store operations, supply chain, planning and vendors — retailers are quickly realizing that excellence in in-store execution is the baseline when it comes to out of stock improvement.
Then control your processes
Store compliance and dedication to maintaining physical inventory hygiene and accuracy is paramount to in-stock performance. Process control is the only effective way to eliminate the gap between physical inventory and system inventory.
Too often backroom inventory may indicate high in-stock performance, when shelf in-stocks are lower. When it comes to moving product from the back room to the shelf, embedding rapid shelf replenishment cadence and discipline — enabled by the system as well as in-store manual scans — is mandatory.
Retailers should institute inventory audits – or OOS scans, to update items with no on-shelf inventory. Scheduled walks in the store allow associates to visually scan planograms and check system inventory for backroom stock or to trigger new orders.
Given the importance of in-store inventory, many retailers are also moving towards centralized ordering.
In certain retail sub-sectors and categories, specifically fresh grocery, store ordering historically allowed for better inventory control and flexibility. But the benefits of centralized ordering — specifically process consistency and ability to refocus associate (store labor) times to inventory control and customer facing roles — outweigh these traditional considerations.
Centralized ordering requires trust in analytics-based order recommendations and store- or item-specific replenishment parameters. Emerging ordering and replenishment systems allow headquarters to determine store orders, while giving store personnel an option to review and edit the order.
This leads us to the opportunity for automated replenishment. Most retailers have or are transitioning to automated store replenishment that allows the system to account for all elements of supply and demand — store sales trend, forecast, minimum stock requirements, delivery frequencies and case pack sizes.
The key hurdle to the effectiveness of these systems is really a change management issue — driving adherence to system recommended orders at the store level.
Don’t forget technological innovation
Almost no retail discussion today is complete without touching on technological innovation. Some retailers are already actively experimenting with Internet of Things (IoT) and robotic applications that scan planograms and capture inventory position that then impact ordering and replenishment.
Historically, there has been limited in-store visibility to what is in the backroom and what is on the shelf. Retailers are adopting or developing applications that provide visibility to backroom inventory and triggering pick lists for shelf replenishment. Additionally, retailers are testing sensor technology, visual, temperature based, weight based, to identify out of stock in real-time.
Successful use cases are also emerging where retailers are bringing machine learning-based demand forecasting and no-touch store ordering and replenishment systems online that needs little or no reviewing by store associates.
Not so long ago, industry watchers predicted that RFID tagging would trigger nothing short of a retail revolution. Today, retailers, especially in sub-sectors with high value merchandise such as apparel, are revisiting the business case for item level RFID tagging to increase visibility to in-store inventory and identify misplaced inventory.
Or the importance of upstream collaboration
The drive to reduce, or perhaps one day eliminate, OOS also encourages efforts to promote upstream collaboration and visibility. Consider forecast issues and promotional event planning.
Stock-outs are common during and immediately following key promotional events. Upstream vendor-retailer collaboration on forecasts and promotional events is mandatory in key categories to drive timely deployment of inventory.
Major retailers are implementing strong compliance policies and penalize shipping that isn’t executed on time, as agreed. Though some of these efforts have been helpful for retailers that have scale, A.T. Kearney advises retailers to start by tracking vendor performance, increasing collaboration where possible, and then finally moving toward a penalty-based model when all else fails.
We also advocate thinking about adopting a, "Never Out," policy — maintain higher safety stocks and oversight for a handful of high volume and core basket SKUs — where the impact of OOS is the greatest.
To optimize inventory, trust data and set parameters
There may be as many causes of OOS as there are retailers and vendors. But it is possible to optimize replenishment and planogram design. What does this look like?
Some retailers have tried to build an improved, "track-review-act cadence" — in effect an organizational culture focused on continuous tracking of in-stock performance that promotes joint ownership between the merchants, replenishment planners and store operations around assortment, vendor issues and in-store constraints.
For high volume stores, retailers have chosen to increase frequency of deliveries to allow stores to adjust quickly for peaks within the week and OOS situations, especially stores that have limited back room storage space.
Merchants and store space management teams are also evaluating planogram space based on item rate of sales and case back sizes. Often, planograms are designed around visual needs and case pack sizes. Item rate of sale, presentation minimums and shelf holding power — the number of units a shelf can hold — have a considerable impact on out of stock for high volume stores and SKUs.
But nothing happens without data integrity. Headquarters teams need good discipline on managing item status. Otherwise, items may appear in-stock when truly they are not.
Maintaining full in-stock positions on every SKU in a store may not be possible — or even, at least today, plausible. Still, it is important that retailers do everything they can to begin reducing the problem.
After all, in addition to OOS, the one thing all retailers share are customers who will no longer tolerate not finding exactly what they want when they want it.
This story was first published in our weekly newsletter, Supply Chain Dive: Operations. Sign up here.