Picture this: you have a clogged drain and you’ve spent all week looking for a solution. After doing extensive research you finally find the one product that seems to be the answer to all of your problems. Eagerly, you drop everything you’re doing and rush out to your local Home Depot, only to find that the product you wanted isn’t in stock. Is there anything more frustrating?

For consumers, out-of-stocks (OOS) are just an inconvenience. But for companies, they’re a serious issue that can lead to lost revenue due to unfulfilled demand. That’s why it’s quite surprising that OOS have continued to be a problem for so long – mainly due to the lack of a reliable solution. But the changing landscape of retail and the evolution of technology has opened the door for retail analytics to be the solution to out-of-stocks that we’ve all been waiting for.

The Prevalence of Out-of-Stocks

If you’ve ever found yourself in a situation like the one described earlier, you may have begrudgingly asked “why me?”. But out-of-stocks don’t just happen to you. In fact, they’re a very widespread issue. Across the entire retail industry, there is an 8.3% incidence rate of OOS. This number varies between industries, with Fast Moving Consumer Goods having an OOS rate of over 10%. For promoted items, the rate rises dramatically to 15%.

Out-of-stocks during promotions can have even larger consequences than normal. Just think about a time you went to a store specifically because you knew there was a sale going on. Consumers will go out of their way to purchase products during promotions, and not being able to find those products could have a negative impact on their relationship with the brand. But just how often do consumers encounter OOS? About 40% of shoppers encounter at least one OOS when shopping for 10+ items, and a study on chain drug stores found that about 7.4% of the time, shoppers are unable to find the item they want.

Though they begin as a simple nuisance, out-of-stocks have the potential to be damaging to companies depending on how consumers react. You probably know how you react when it happens. Maybe you groan in frustration and decide that you’ll have to check again in a couple of days, or maybe you settle for a similar product from a different brand. Research has found that encountering an OOS will lead to a lost sale 50% of the time: 26% of the time consumers will substitute the missing product with a different brand, 15% of the time consumers will delay the purchase, and 9% of the time consumers will just not make the purchase at all.

What’s Wrong and How Do We Fix It?

It’s not very useful just knowing how often out-of-stocks occur – we need to know how we can stop them from occurring. But OOS are a complex issue with several different underlying causes. That’s why we’re going to split the problem up into a few root causes and target those independently. But all of the solutions will have one common factor: the use of POS data. Why? Well according to a study done by P&G, using POS data is 85-90% effective in identifying out-of-stocks. So here are the 3 major root causes of OOS, and some data-driven measures you can take to minimize these problems and recover lost revenue.

Store Ordering and Forecasting 

Problem:

Stores not being fulfilled or orders are not being properly placed.

Solutions:

1. You can solve this problem by reviewing your store-level metrics on a weekly basis in order to pinpoint stores that are likely to have inventory shortages in the near future. Make sure to closely monitor the change week-over-week in your number of units on-hand. When there is a 40-50% drop in on-hand inventory, you can be sure that there’s an inventory problem occurring.

2. If you want to be a bit more proactive, you can identify stores that continue to have stockouts and suggest an auto-replenishment plan to your buyer/retailer. This way, not only will you be able to prevent future inventory problems – you’ll also be able to impress your buyer with your knowledge. Just be sure to back up your idea using data to prove that your suggestion is based on facts, and not just assumptions.

Phantom Inventory

Problem:

Products are in stores but are improperly merchandised or not on shelves

Solutions:

1. You can manage phantom inventory by investing in an in-store merchandising team to ensure that your products are on shelves and not hidden in the darkest corners of the store. However, assembling an entire team just to deal with phantom inventory may not be a viable solution for everyone. Thankfully, there is a simpler solution to this problem that just require using your point of sale (POS) data.

2. One of the most effective methods of identifying phantom inventory is a zero-sales report. A zero-sales report uses your POS data in order to identify products that have no sales, when historically you would be expecting to see sales in any given week. This is a clear indication that the product is not being properly merchandised. Armed with this information, you can go out and make the changes necessary to ensure that your products start selling again. A zero-sales report isn’t just extremely effective – with the right tools, it can also be extremely simple to build. Retail analytics platforms can make running a zero-sales report as simple as the click of a button.

Total Upstream Causes 

Problem:

Supply chain and inventory management issues

Solutions:

1. In order to deal with the problems associated with supply chain and logistics, you can use your POS data to calculate your sell-through velocity (how quickly you sell-through inventory in any given week) and then use this information to ensure that your manufacturing output is accurately aligned with consumer demand. You can do this the old fashioned way of calculating the average sell-through rate of all your products, but this method overlooks the fact that some products sell-through faster than others. It’s far more effective to look at your data on a more granular, SKU-by-SKU level.

2. As previously mentioned, OOS are both more prevalent during promotions, and of a greater concern. That’s why it’s crucial to ensure that stock levels are adequate ahead of any major promotions. By analyzing your data and watching inventory levels leading up to promotions, you can identify any potential issues ahead of time and solve them before they have a serious impact on your sales.

If you want some real-world examples on how companies are using POS data to deal with OOS, here’s a quick look at 3 retailers and their data-based solutions:

Sources: HEB, Sainsbury’s, Giant Eagle & Anheuser-Busch

 

Out-of-stocks have become so ingrained in the world of retail that many have chosen to accept that they are an inevitability, rather than actively searching for a solution. Fortunately, as the landscape of retail continues to change with the advancement of technology and the prominent use of data, out-of-stocks may finally become a problem of the past.

 



If you’d like to learn more about out-of-stocks and how to solve them, be sure to check out our webinar which also includes a quick demo on how you can use Askuity to deal with your out-of-stocks.