Your inventory management solution is the problem.
Stockouts are one of the most harmful issues in store management. Empty shelves cause angry customers to go to your competitors. They look at other stores for the product that your business is selling. In some cases…
They never return.
Retail inventory management issues, such as stockouts, cost retailers nearly $1 trillion worldwide every year. That’s not a typo. One trillion dollars lost because the customer was not offered the product they wanted, when they wanted it.
The good news?
Retail stockout prevention methods and solutions are available. The right retail inventory management solution can help you keep stockouts to a minimum. Even better, implementing the correct inventory solutions and processes can transform your store and protect your revenue.
What you’ll learn:
- Why Do Stockouts Occur?
- The Hidden Costs of Stockouts
- Six (6x) Strategies That Stop Stockouts
- Putting Together a Stockout Prevention System
Why Do Stockouts Occur?
The first step is figuring out the root cause.
Stockouts do not just appear out of nowhere. They are a direct result of errors or mismanagement. The most common causes are inaccurate demand forecasting, poor supplier reliability and inefficient restocking.
Guess what…
Around 70 to 90% of stockouts can be directly attributed to poor shelf replenishment practices. This means the problem doesn’t always come from suppliers or manufacturers. The issue is located right in the store.
The good news is…
Retailers have a better level of control over the problem than they may think.
The Hidden Costs of Stockouts
Missing out on revenue is the direct result of having an empty shelf.
When a customer cannot find what they need, three outcomes happen. They switch to a competitor. They go to another branch or to another store. They leave without buying the product. All of these factors harm the retailer.
The costs include:
- Direct loss of revenue through missed sales opportunities
- Extra costs for emergency restocking and shipping
- Long-term damage to customer loyalty and retention
- Lost marketing efforts that go to waste
Over time, these issues only pile up more and more. Once a customer experiences one or several stockouts, they will eventually find another store that offers in-stock items. This is a significant amount of revenue going out the door.
Six (6x) Strategies That Stop Stockouts
Enough with the theories. Here are the methods that actually work in preventing stockouts.
Improve Demand Forecasting Accuracy
Stop making guessing games.
Advanced demand forecasting technology will help you predict what customers will want, and when they will want it. Advanced tools will process data from historical sales, seasonal demand and other market trends to provide accurate demand predictions.
Look for tools that give you precise forecasting without the need to be a data scientist. Choose an inventory system that plugs into your existing POS system and updates your forecast automatically based on actual sales.
Implement Safety Stock Levels
Safety stock can help during those times that unexpected demand spikes occur.
Instead of only ordering the amount of inventory required to meet the expected demand, it is advisable to keep a little extra stock. This safety stock will provide a cushion for demand fluctuations and avoid stockouts during high-demand periods.
In order to calculate the safety stock levels, you need to consider the following:
- Historical demand variation
- Supplier lead time and variability
- Desired service level goals
- Storage and capital costs
This is a fine line to balance. Having too much safety stock will mean tying up valuable capital, while having too little defeats the purpose.
Work Closely With Suppliers
It is important to work closely with suppliers and create partnerships.
Unreliable suppliers will create unreliable inventory levels. By creating strong partnerships with suppliers, it will lead to better communications, more flexibility during high-demand, and advance warning of supply chain disruptions.
You could also work with multiple suppliers for certain products to ensure there is some redundancy and flexibility built in. For instance, if one supplier is unable to deliver, the other can. It also provides some negotiating power on price and other terms.
Automate the Reordering Process
Automate the restocking process as much as possible.
One of the biggest problems with manual reordering is that the process is slow and mistakes can happen easily. Automated reorder systems monitor the inventory levels and trigger purchase orders automatically when stock drops to a certain predetermined level.
This system also removes the human error. The best systems take into account the time that it takes for the goods to be delivered, the reorder point and place the orders ahead of time.
Conduct Regular Inventory Audits
Inventory records and physical shelf inventory often differ.
Regular inventory audits will help identify the gap between what is on the shelves and what the system states as available. This helps in identifying shrinkage, misplaced items and any entry mistakes before it becomes a problem.
The audit can be carried out in the following frequency:
- Daily counts for high velocity stock
- Weekly spot checks for random items
- Monthly checks for the entire inventory
- Yearly comprehensive audits
The frequency will depend on the value of the products and the turnover rate. Audits for high value items should be more frequent than low-cost commodities.
Leverage Real-Time Inventory Visibility
Visibility is key in solving the stockout problem.
Visibility means being able to know, at any time, what is in stock across all locations. This information will help in making informed decisions about stock transfers, reordering and even promotional planning.
Cloud-based inventory management systems can provide real-time visibility without the need for massive infrastructure investment. Cloud systems centralise data from multiple sites and allow the users to view dashboards which will highlight potential stockout risks before they become a problem.
Putting Together a Stockout Prevention System
No single strategy is more effective than when used in combination with other strategies.
A complete system will use a number of tactics to provide a holistic approach to stockout prevention. Demand forecasting will inform the safety stock levels. Safety stock levels will then inform the reorder triggers. Automated reordering will then link in with supplier relationship management.
A complete system will include:
- The technology to provide forecasting and real-time visibility
- Processes for conducting regular audits and replenishment
- Relationships with reliable suppliers
- Staff training on inventory processes
This will ensure that multiple layers are used to ensure that issues are caught. If a particular problem causes stockouts, another strategy will also help catch any issues in that problem.
Wrapping It All Up
Stockout reduction is hard work but very possible.
The various strategies mentioned in this blog have been tested and proven to work in many different retail environments. From improving demand forecasting to better inventory systems, each solution targets a specific cause of empty shelves.
Begin by understanding where your stockouts are coming from. Forecasting issues? Supplier issues? Restocking? Once you have identified the cause, the right strategy to use is the next step.
Stockout prevention is an ongoing process and not a one-time activity. Markets evolve, customer preferences change, suppliers come and go. The retailers that are able to keep products in stock are the ones who are continuously improving their inventory management strategy.
The $1 trillion stockout problem will not solve itself. However, with the right methods in place, your store can protect its share of retail sales and keep the customers coming back.