Think of any time you walked into a store, and the particular product you wanted was out of stock. Remember how that made you feel? Now think of that happening frequently. We both know your resolve will be to stop going back to that store.
This is probably how your customers would feel/react if every time they visit your store, they keep seeing the out-of-stock sign or an empty shelf. Now viewing your perspective as a retailer or manufacturer, stock outs cost thousands if not millions annually from loss of sales to loss of customer loyalty. So if stock outs are so harmful to the business, why then do they happen so often? How can the issue be resolved?
This article aims at answering these questions and, thereby, help retailers and manufacturers better businesses.
Stockouts or Out-of-Stock is usually referred to as the unavailability of specific items or products at the point of purchase when the customer is ready to buy. This situation occurs when a business owner does not order enough inventory to satisfy customer demands when demand for a particular product shoots up unexpectedly. This unavailability usually disrupts the supply chain.
i. Lost customer
ii. Lost sales
iii. Negative customer reviews
iv. Slow declining business growth
v. Damaged brand reputation
vi. Damaged customer loyalty
See how negative stockouts can be on your brand and business? I am sure you cannot help but ask what causes products to be out of stock. Let us take a look at some important reasons below.
One of the most prevalent causes of stockouts is inconsistencies between item counts and records of how many units of a particular item a retailer has in stock. Although it is easy to run into inaccuracies when dealing with inventory, there are three main reasons discrepancies occur.
i. Human Error
ii. Shrinkage or loss of goods due to damage or theft
iii. Technical Issues.
While it is difficult to quantify, most errors in inventory management occur because of human mistakes.
Shrinkage or loss can also cause inconsistencies in inventory. Between one misplaced product, other returns, or stolen goods, you find that the inventory numbers you have on paper often do not match what they have in their stores. These inaccuracies can lead to thinking that you have an item in stock when you do not, so reordering the wrong products or quantities becomes likely.
Eliminating human error is realistically impossible. However, ensuring up-to-date inventory data is much easier. So implementing a cloud-based inventory management system that aggregates data from your multiple locations, both online and in the physical store, is the first step in significantly reducing inconsistencies. With a single back end managing all your sale channels, you can rest easy that you are getting up-to-the-minute information that updates in real-time.
Additionally, if you sell through multiple channels – online store and brick and mortar, be sure to sync your inventory data through these platforms. You will need to integrate your POS system with your e-commerce site. In doing so, you ensure that all your catalogs are in sync and the stock level updates every time a sale happens. Overall you provide your customers with a much better experience.
Lastly, your POS solution can only go so far. Know that having a cloud solution can keep your databases synced, but it cannot deter shoplifters nor stop the loss of goods. You will still need your organizational skills and diligence. Try digging to the bottom of your inventory discrepancies. Are you dealing with theft? Is it an issue with staff damaging goods? In any case, get why the numbers are not adding up and take the necessary security and operational steps to stop them.
Inventory shortages and out-of-stock situations get caused by unexpected surges in consumer demand. However, inadequate forecasting or inaccurate reporting can cause out-of-stocks too.
Forecasting is about anticipating your consumers’ demands so you can determine when to order or not. There is a high probability that you can mention your most popular items off the top of your head, yet you still find that lots of times popular products sell out before reordering. This situation can happen due to inadequate forecasting. When a retailer cannot effectively anticipate demand for a specific item, it is almost inevitable that some customers will end up disappointed when that item is unavailable. You can try to forecast the expected demand on your own. By using your judgment and factoring in stock turn, historical sales data, sell-through, and other components such as seasonality, promotions, economic state, etc., these data should give you some insights into how products are going to perform.
Similarly, inaccurate reporting can cause out-of-stocks. The data you have available is what you utilize in making business decisions. So, when sales reports are not correct, making informed decisions about inventory purchases becomes that much harder.
Accurately predicting how much inventory is needed and when can be done by performing an ABC Analysis (we explained this extensively here).
Businesses that rely primarily on seasonality, such as festive periods, may find it easier to predict demand for specific products. That said, there are ways for retailers of all types to anticipate consumer demand and avoid being out of stock.
The first thing to consider when preparing an inventory forecast is to calculate the lead time. (Lead time is the time from placing an order for new products to receiving the products from the supplier). One way to measure lead time is to examine previous purchase orders from suppliers. Although while this might not suffice, it can serve as a starting point for calculating lead time from individual suppliers. Calculating lead time can be trusted to help retailers for busier periods.
Another factor for retailers to consider when predicting anticipated demand for specific products is Safety Stock. Safety Stock is the amount of stock a retailer has on hand to cushion against unexpected surges in demand.
Lastly, you also need to pay attention to consumer trends in your market. Are there any new products that are catching the interest of people? Are trends making a comeback? Take note, then stock up accordingly.
Some logistics and delivery complications are out of human control. There is only so much you can do about the weather conditions or the mechanical problems of a delivery vehicle. The truth is, logistics complications are not always straightforward. It is easy for goods to get damaged by warehouse staff or even the wrong shipment to get delivered.
Similarly, a logistics provider might indicate that a shipment is on the road for delivery when, in fact, that shipment is still waiting for processing at a distribution center. Amplify this problem across thousands of products due to be shipped, and it becomes easier to see how critical accurate logistics information can be.
Although retailers can only exercise so much control over how and when their goods are shipped, there are several best practices retail brands can follow to minimize the risk of stockouts due to logistical problems. Business owners worried about shipping problems causing stockouts may want to consider working with a logistics provider that offers advanced shipping notification (ASN). ASN is a delivery notification sent to retailers when their shipments leave a warehouse and the estimated arrival time. So you might want to check whether your logistics company offers ASN before committing.
Another option retailers can explore is cross-docking. Cross-docking is the practice of loading merchandise and shipped to customers directly from the manufacturer without being stored in a warehouse. Cross-docking works perfectly for retail businesses that offer to dropship.
Ultimately, if adaptability is the key to modern retail success, then flexibility is required. Being on top of your business is about streamlining your business process and reacting quickly to those inevitable disruptions with superior customer service.
Stockouts do not just mean disappointed customers. They also mean missed opportunities. When popular items are out of stock, retailers lose money, and shoppers take their business elsewhere.
While it is impractical to eliminate the risks of stockouts, you can reduce to a great extent the chances of being out of stock using a proactive approach to inventory management, such as the ones mentioned above. Want to know how you can successfully incorporate these techniques into your operations? You can send us an email at pos@posshop-ng.com or call 0700POSSHOP to speak with a representative.