Research on how customers respond to stock outs
Higher inventories, improve forecast accuracy, increase shipment frequency; all attempts to ensure sell out on store level. Zero stock on an active article means high chance on lost sales and the lost sales are even higher in case the article is a fast mover.
Out of stock
Point of sale data analysis shows that out of stock % in the store for fashion related articles like apparel and shoes has the highest rate in retail: it varies from 30 to 40%. This compared to the 8 to 9 % in FMCG. For fashion this means that for each article 2 or even 3 sizes are not present at the point of purchase. Consequences on the short term are loss of revenue and on the long term erosion of brand equity, loyalty and potentially market share. Equally alarming is that out of stocks (OOS) have not improved significantly over the years, even though significant investments have been made in people, process and technology by both retailers and their supplying partners.
Root causes of stocks
According to another comprehensive study 47% of out of stock positions show a strong dependency on forecasting and replenishment policies between merchandise department and store. A striking 25% of out of stocks are caused by the lack of continuous in store replenishment. It turns out that even if the article is present at the store location, the article is not visible for the customer on the designated space on the shelf. The other 28% of the root causes can be found upstream in the supply chain.
Figure 1.Root causes of out of stocks, credit Gruen,Corsten and Bharadwaj
The figure shows that the fulfilment processes, in spite of the high technology budgets and countless man hours invested, have been hampered by limited visibility into timely point of sale level data and a lack of holistic applications required triggering ‘read and react' actions from that data. All required to help improve store execution and point of sale SKU (Stock Keeping Unit or article size) level replenishment.
Customer response to out of stocks
It is becoming clear to everyone in the business that direct sales loss is only one part of the outflow OOS items produce. In a benchmark based on 72.000 shoppers, shown in Figure 2, it is made clear how poor on-shelf availability impacts sales and brand. The impact to suppliers is on average 31% of intended sales, and the impact to retailers is 43% of intended sales. The total costs can be divided in strategic and operational costs effecting both suppliers and retailers.
Retailer impact
- Operational costs are increased through personnel looking for OOS items in back room, providing "rain checks" to shoppers, unplanned restocking, etc.;
- OOS distorts true store demand, thus decreases forecasting and ordering accuracy.
Strategic impact
- Direct loss of store loyalty;
- Decreased customer satisfaction;
- OOS encourages shopping at competitor stores.
Supplier impact
- OOS lowers the potential impact of promotions;
- OOS distorts true store demand, thus category management and related efforts are less accurate and effective;
- OOS increases overall costs of the relationship with the retailer due to increased post- audit activity and irregular ordering.
Strategic impact
- Direct loss of brand loyalty and brand equity;
- OOS encourages trial of competitor brands;
- Lowered overall effectiveness of sales team resource.
Margin improvement for the fashion industry
Reducing stock outs will bring an ever increasing value for the retailer and its supplier. An integrated approach to improve store fulfilment processes will synchronize supply coming in with actual store demand. With current complex operating procedures it seems that we have lost connection with the end consumer. The consumer is the one that is spending money, all operational procedures should subordinate. The graphs prove that operational excellence not yet coincides with customer excellence.