Impact of Stock-Out on Retailers
One of the worst nightmares for a retailer is to have a stock out or out-of-stock situation when it comes to selling products. This is a very serious issue and can be detrimental to the bottom line of any business. Aside from lost sales, stock-outs also lead to reduced customer satisfaction and lowered loyalty levels. When a customer requests to buy a product that is out of stock, they are going to end up unhappy with the inventory issue and you most certainly don’t want to disappoint your customers. Many cases of stockouts may be easily prevented by taking steps to better understand your business and products, and by refining your e-commerce processes.
Common Reasons for Stock-Outs:
Let us start by taking a look at some of the most common reasons for stock-outs:
Inaccurate data: It can be hard to maintain accurate inventory counts. This may be due to several reasons such as misplaced products, product returns, shipment variances, and even stolen goods. As a result, the data in your inventory management system may not reflect what's in the warehouse.
Failure to reorder on time: This especially happens with your best sellers. Items with high-turnover, such as consumer products and grocery items are the most commonly affected. Due to either a poor forecast or a missed signal on a hot seller, you may run out of products before you’ve had a chance to reorder and restock your inventory.
Unclear communications with suppliers: Another cause of stock-outs is when you don’t have clarity in your communications with your supply chain. Failure in effective communication with suppliers may lead to missed or delayed orders, resulting in stock-outs.
Effects of Stock-outs on Business:
If a product is not available for delivery to a customer who has placed an order, there are four possible outcomes:
- Customer agrees to wait for the item: For important items, a customer may be willing to wait for it. However, the customer is likely to still harbor some disappoint in the interaction.
Customer back orders the item: While not the ideal solution, the order still gets fulfilled. Again, customer satisfaction declines and most customers won’t repeat this process with you unless you are the sole provider of the item.
Customer cancels the order: Customers today are savvy. They are shopping the competition. If the customer knows that the item is available from another retailer, they may simply cancel the order and ask for a refund. The customer may be unhappy, but they may still order from you again in the future.
Customer cancels the order, and never returns: This is the worst case scenario as a result of a stock-out situation. An angry customer here may be so disappointed in your fulfillment process that they never order from you again.
Implementing demand forecasting is one of the most important steps to avoiding stock-outs. You can try to forecast demand on your own by factoring in stock turnover, sell-through, historical sales data, and other factors such as promotions, economic state, seasonality and using your judgment. Analysis of these data points could give you insights into how products will perform. Stock-outs also tend to form patterns such as recurring on a particular day, at a particular time. Through analysis of stock-out patterns, you can better predict potential inventory and consumption problems and build a better forecast.
In the next article in this series, we'll look at how artificial intelligence can be leveraged to help you see patterns in your data, and make suggestions to a more accurate forecast.