Out of Stock Costs Made Easy: Part 1

by Andrew Hoeft | Jan 30, 2013 12:00:00 AM

So you really like a specific brand and type of toothpaste because it whitens your teeth and makes your mouth feel perfectly fresh. Any other brand or even other toothpaste by the same brand just isn’t good enough. When you go down the health and beauty aisle to find the store is out of your brand of toothpaste what do you do?  You can either settle for a different brand and be disappointed every time you are stuck brushing your teeth with this unwanted toothpaste, or you can go to another store. We know what consumers think about out of stock products, but let’s take a look at what they cost the retailer.

While it’s a good thing a store is selling a lot of product, it’s never a good thing to run out of something customers are looking for. Put simply, out of stock occurrences lead to lost sales. We commonly hear grocers say that it’s not a big deal if a product is out of stock because the customer will just buy a different size of the product or a similar product. While it is true that there are many substitute options for when our favorite toothpaste is out of stock, data shows that 40% of the time a customer will not even buy a similar product. Even worse, 30% of the time, the customer will buy the product at a competitor’s store instead.

Sometimes, though, a customer wonders if your store might have some of the out of stock toothpaste in back stock.  When this happens, the customer asks a store employee to see if this is true.  Checking to see if there is any more of that brand of toothpaste anywhere else in the store entails the employee going to the shelf in the store where the item is out of stock to get the UPC.  Then that employee must check on the store’s computer system to see if there is any of that type of toothpaste left in the store.  After finding out that there is not, the employee will probably check to see when the store expects to receive more.  All of this just to tell the customer it will be a few days before he/she will be able to purchase the toothpaste.  In summary, you could have been paying your employee to do his/her regular tasks instead of looking for toothpaste that wasn’t even in the store.  You didn’t get the sale, and every other task got put on hold.  In fact, the time employees spend trying to help customers find out of stock products costs grocer between $200-$800 per week!

As you can see, out of stock products are a serious issue. While there are many initiatives taking place already in the industry to reduce the frequency and costs of out of stock products, we want to point out what we believe to be the easiest and most effective first step.

One major contributor to out of stock products comes from ordering practices. Stores that are focused on rotating product when stocking are likely to let product inventory run extremely low or even completely out before ordering product. This makes rotating while stocking very easy since there are only a few items left on the shelf to rotate. However, the ease is coming at a cost of out of stock products. When all things are considered from the data we just mentioned, this ordering practice is certainly a mistake.

Now this may come as a shock, but we actually recommend that you DO NOT rotate product when stocking. By not having to rotate, you are free to order to keep the shelves full instead of ordering to keep the shelves from running out of product. Many of the larger grocers that we talk with that aren’t quite big enough to have an auto-replenishment system do not rotate. That is because an out of stock product is likely to be one of your 20% highest movers. That means that one of the select products contributing to 80% of your total sales is not available for sale. Multiply that by a few of them being out of stock and over time the result is a tremendous hit to the bottom line. Not only will having these products fully stocked reduce your loss from out of stock products, but also your labor cost of stocking will be dramatically cut from not having to rotate.

We recognize that this does cause an issue of expired product arising in the store. However, the cost of expired goods in a store is much less than the cost of out of stock products. Even better, that’s what we are here for: to make sure that you don’t have expired products in the store. Keep your shelves full, customers happy, and let us worry about expiration dates.

Remember, this is Step 1. Make sure to check out our upcoming blog post on our 300 Plan to further improve your store’s out of stock performance.

Also, click here to view the “Comprehensive Guide to Retail Out-of-Stock Reduction In the Fast-Moving Consumer Goods Industry” report published by GMA, FMI, & NACDS. The chart above and many other great visual breakdowns can be found in this article.

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