CHICAGO — Retailers can reduce costly out-of-stock events by accurately measuring the conditions in their stores and then focusing on the fastest-moving categories.
That is a central message of a forthcoming study on out-of-stocks previewed at the Food Marketing Institute Show last week by J.P. Brackman, retail global presence manager, Procter & Gamble, and Thomas W. Gruen, an associate professor of marketing at the University of Colorado. Their study, done in conjunction with FMI, is due to be published in September and expands on a 2002 study that focused on defining the out-of-stock problem and how shoppers reacted to it, the speakers said.
Out-of-stocks are costly for retailers, manufacturers and shoppers, said Brackman. The new study revealed, for instance, that consumers can waste up to 20% of their time during a shopping trip searching for products that are not on a store shelf; about one in 13 items on a consumer's shopping list typically won't be available, Brackman noted. The same problem costs a typical retailer about $800 a week in lost labor productivity and about 4% in total sales; reduces the effectiveness of promotions; and sparks customers to defect to different brands or, in many cases, different shopping channels.
“Out-of-stocks continue to be a big issue for the industry,” said Brackman.
Overall, out-of-stock conditions stand at around 8% worldwide — a figure that has not improved in the five years since the 2002 study, noted Gruen, despite improvements in ordering and scanning technology.
“What we found is that technology improvements have been offset by process complexity and SKU and promotional proliferation,” Gruen said. Pressure to keep labor costs low has also contributed to an inability to move the needle on out-of-stocks, he added.
Focusing on the items that move the fastest can have the greatest impact in reducing out-of-stock conditions, said Gruen. “There is a strong correlation between velocity and out-of-stocks,” he explained. “You want to focus on the 20% of the items that account for 80% of your sales.”
The 2002 study showed that nearly half of all out-of-stocks were caused by faulty ordering and sales forecasting, while 25% were caused by shelving and replenishment issues, said Brackman. The new study suggests solutions for both issues.
Solving ordering and forecasting errors, or “store-based” out-of-stocks, requires retailers to have more accurate data. Ironically, out-of-stocks are a major reason demand data get distorted in the first place, Brackman explained.
“When an out-of-stock happens, it goes totally unobserved by the system,” Brackman said. “Every time that happens, it reduces the accuracy of the forecast, and if there is [product] switching going, you're now switching demand from an item that would have been bought to one that is, so there's an error going both ways whenever an out-of-stock happens.”
Other events, such as company mergers and changes to consumer products, can also erode data accuracy over time, Brackman added.
Inventory accuracy, or “shelf-based” out-of-stock issues, can be addressed by using peak-demand-based planograms, which consider product variability, or peak demand vs. mean demand, Brackman said. This is an opportunity too few retailers take, he said, noting that more than 90% of the items on supermarket shelves are given the space based on “packout,” or the number of items in the case.
Some retailers use a “red dot” program to identify fast-moving items on the shelf that need frequent replenishment, but Brackman dismissed that, too, as a “workaround” strategy. “What you should do is add more space to those items so you don't have to check them a lot,” he said.
Adhering to what Brackman called “disciplined stocking” — where shelf holes aren't hidden, excess product is not tucked behind other items and shelf tags are accurate — can also greatly reduce shelf out-of-stocks.
The study used a variety of approaches to track out-of-stock conditions at test stores, Gruen said, including manual audits, scan data and perpetual inventory systems. Manual audits are expensive and not scalable, but they can produce accurate results, Gruen said. Point-of-sale data helps identify out-of-stocks with 85% accuracy, he added, and can provide information on how long items were out of stock, from which managers can estimate the lost sales on an item.
Analytical tools applied to such data can identify out-of-stocks according to patterns and suggest the root causes for them, Gruen said.