Increase Sales by Managing Out of Stock Inventory

What is an out of stock?

A retail out of stock is when the inventory available on the shelf is either zero, or depending on the product category, when the inventory available for sale is less than the typical job lot quantity.   Conceptually an out of stock is not difficult to understand and therefore one might assume it would be fairly easy to monitor inventory and avoid an out of stock.  In reality however, out of stocks average 8% and much higher on promoted items. 

Why are out of stocks important?

Out of stocks are important for two reasons: (1) lost sales and (2) lost customers.   If your product is not available the obvious result is lost revenue.  We recently studied the average out of stock for two customers for a 52 week period and found a clothing manufacture of basics averages $1,669 per week in lost dollars sold at a major department store.  A consumer products company we studied averages $1,835 per week in lost dollars sold at a major DIY retailer.   Neither of these figures may raise any alarm bells on a week to week basis; however when you total the lost dollars due to out of stocks for a full year, the loss is 7.5% and 8.2% of sales respectively.  In a retail environment where low single digit comp store growth is typical, increasing sales 7% to 8% based on simply managing inventory better has the potential to make a large impact.   Even more compelling, these figures are for one of the many retailers these brands work with so the opportunity can be multiplied several times.  The bottom line: Out of Stock stores are costing your business a significant amount of sales.   The second impact of out of stocks is lost customers.  Studies show a consumer confronted with an out of stock product will substitute for another product at the same store.   What if that consumer decides the other product is the same or even better quality than your product?  Will they purchase your product the next time they are in the store or will they stick with the substitution?   A simple out of stock could cost you a customer and the repeat sales you might have otherwise enjoyed. 

Fixing Stock Out of Stock Issues

A multistep process is required to fix out of stock issues and increase sales.   The steps in the process are outlined in Figure 1 below.  

Calculate Dollars Lost to Stock Outs

Change in any organization rarely occurs until there is a financial incentive to invest in a solution.  In order to motivate the manufacturer and the retailer to invest into solving out of stock issues we recommend starting by calculating the dollars lost to stock outs.    The initial benchmarking can be accomplished through a fairly straightforward process.   An example is provided in Figure 2 below.    The analysis will require either four or eight weeks of sales in units and dollars, ending units on hand, and the unit retail price.  The decision to use four or eight weeks of sales for the analysis depends on the rate of sale of the products being analyzed.   If the products are fast moving, four weeks of sales should be sufficient, if the products are slow moving eight weeks of sales will yield a more accurate result.   The example below includes sales for both periods.    The data should be at UPC/SKU and store grain.  In order to identify the out of stock issues driving lost sales two filters should be applied to the data.  First, a minimum sales activity filter should be applied to make the estimate as conservative as possible.  A good rule of thumb is to apply a filter requiring an average of one unit sold per week over the period.  If your products have a high rate of sale then you can increase the average.  The second filter is used to limit the data to rows with OH = 0.  After applying the filters calculate the average weekly units sold over the sales period you selected.  E.g. total units sold / count of weeks.  The average weekly units sold is used for calculating the lost dollars sold since we are assuming in this example the store would have sold that number of units had it not been out of stock.  To calculate the estimated lost dollars sold multiple the average weekly units sold by the unit price. 

Although the analysis is fairly straightforward it has proven to be a reliable benchmark for quantifying the dollars lost on out of stocks.  Keep in mind in our example the lost dollars is for one week but it is often more compelling to repeat the analysis for additional weeks so a trend can be established. 

Identify Where to Focus

The next step in the process to fix out of stock issues is to review the lost dollars sold report and identify where to focus for the largest potential impact.  A good starting point is to sum the lost dollars by store and then analyze the stores on a percent contribution to the total lost dollars sold.   This will help to identify stores which are having the largest inventory issues.  You can also sum the lost dollars by item to identify which items are having the largest impact on out of stocks.   As you study the results look to see if there is a pattern to the lost dollars.  Is there a group of stores or items which are having a disproportionate impact on lost dollars?  If specific items are having a large impact on the total lost dollars this many indicate a fill rate problem or a promotion which created unexpected demand.  This should be further analyzed to ensure the root cause is identified.   The goal is to identify a subset of stores and/or SKU’s which are having a disproportionate impact on out of stocks.   Our experience shows retailers prefer to trouble shoot problems and develop new processes using a subset of stores and SKU’s for a pilot before agreeing to a broader adoption.   As we move forward in the process we will use this subset to craft the plan to improve inventory management and sales. 

Identify Data Gaps

A common problem encountered with managing out of stocks is a gap in the data available from the retailer.   The most common two gaps are the lack of units on order and week grain data instead of daily data.    Units on order are a very important data point as you move forward to creating a process to manage inventory more effectively.  When you have identified an out of stock, or an item that has less than the desired weeks of supply, the next question you need to answer is does the retailer know about the issue and have they placed an order.   If the answer is yes, then you simply need to ensure the order size is sufficient and then continue to monitor the on hand to ensure the inventory has been placed on the shelf.  If the answer is no, then you will need to work with the buyer to suggest an order quantity which will fix the issue.  The second gap in data for managing out of stocks is week grain instead of day grain data.  Week grain data provides a week ending sales and on hand value which means the out of stock could have been impacting sales for several days before you even receive the data.  When you add the time it takes to recommend an order and ship the product the problem only gets worse.   Some retailers have the ability to transmit daily sales and inventory which will greatly improve the visibility and ability to react quickly to an out of stock.   If your retailer does not provide units on order and daily data you should explore the benefits of closing these gaps with them.  The lost dollars sold report created earlier in the process is a good tool to put a financial impact on the table for discussion.  

Create a Monitoring Process

Creating a process to monitor inventory proactively is critical to reducing out of stocks.   All good processes need tools, and in this case the essential tool is an out of stock monitoring report.  An example can be seen in Figure 3.   The out of stock monitoring report should include the ending on hand units and inventory weeks of supply.  The OH value can be used to identify out of stocks which require immediate attention.  The inventory weeks of supply can assist in getting out in front of a stock out before it occurs.   We add a column for minimum inventory quantity on hand so that each individual store and SKU can be set uniquely if desired.  If that level of detail is not required you can simply fill the minimum quantity on hand at a SKU level across the board.  The minimum quantity on hand value should take into consideration the lead time necessary to process a new order and ship the product as well as job lot quantity if that applies to your business.     The recommended order quantity then is simply a function of minimum quantity OH – current OH.   If the inventory weeks of supply is below the total time it takes to process and ship an order to the store that indicates a possible future out of stock which should be addressed before it becomes an issue.    After the out of stock monitoring report is ready for use the organization should identify who will run the report, the day and time the report will be run, and the specific actions to be taken based on the report findings.  The actions should be arrived at based on a conversation with the retail buyer. 

Collaborate with the Retail Buyer

There is very little benefit in creating out of stock reports and monitoring processes if the buyer is unwilling to accept and process a recommended order.  Some buyers are quite happy to collaborate with a vendor to better manage inventory.  However, our experience indicates buyers frequently need some convincing, and may even need to get buy-in from other people on their team, in order to collaborate with a vendor on inventory management.   This is where the tools which have been developed will be useful.   Create a business plan which starts with the lost dollars sold for a 13 to 26 week period as a way to highlight the financial impact of out of stocks.  Add a discussion on the long term impact stock outs may have on product substitution and possibly even causing the customer to shop at a competitor.   Use the subset of stores and/or SKU’s identified in the first step in our process to recommend a limited pilot for active inventory monitoring and include a detailed explanation of the tools and processes which will be used to manage the pilot and make order recommendations.   Include a forecast estimating the increase in sales which can be expected to result from the pilot by referencing the lost dollars sold report created earlier.  Be conservative with the forecast and propose that 70%-80% of the lost dollars on the report may be capture in new sales.  Work with the buyer to understand the steps involved in processing a recommended order as well as the people who are involved in the process and any deadlines which may impact the plan.  If there were gaps in the data as discussed earlier in this article have a discussion with the retailer about closing those gaps through a more rich set of data sent on a daily basis.   Finally, agree on the duration of the pilot, how the performance will be measured and what the rollout plan will look like after the pilot is successfully completed. 

Execute and Adjust the Plan

The tools for proactively monitoring out of stocks are now in place and you have an agreement with the buyer for a pilot.  Now it’s time to execute the plan.    Up to this point the planning process may have been directed primarily by the sales and account management team.  It’s important to connect with your production and supply chain teams to inform them about new orders that will be coming which are above the historical rate of sale.  After all, if the pilot goes as planned and sales are increased by several percentage points, you will need to ensure there is sufficient inventory ready to ship to keep your fill rate high.  We have seen many pilots successfully identify retail stock outs and retail orders placed only to be short shipped due to lack of inventory. 

Conclusion

Addressing retail out of stocks has the potential to increase sales by several percentage points.  The data analysis is manageable with the right tools in place and the benefits will accrue to both the retailer and the manufacturer.  It’s a classic win-win.  If you would like to explore how Accelerated Analytics can help your company address retail out of stocks simply complete our information request form. 

Additional reading on retail out of stocks

Reducing Out of Stocks

How Much are Out of Stocks Costing You?

Reducing Retail Stock Outs

How Much Do Retail Out of Stocks Cost?

Calculating the Cost of Out of Stocks

Supply Chain Analytics

Retailers and vendors in today’s retail market face the unenviable challenge of reducing costs and maintaining margins, despite falling overall sales and slow-to-recover consumer demand. One of the areas in which retailers are pushing back onto vendors, is inventory management, which for vendors too often translates into retail partners that reduce overall inventories and require tightened delivery deadlines.  Retailers view the supply chain as one of the key places in which costs can be reduced—or better yet, passed off onto someone else—as a means of keeping shareholders happy despite reduced POS sales.  Wal-Mart continues to set the pace in this area, reducing its overall inventories across the board, reducing its brand assortments, adjusting its purchasing methods and imposing tough penalties on those that miss their Must Arrive By Date (MABD).

Thus, the impetus has fallen to vendors to manage their supply chains more efficiently, so that the cost-savings being realized by their retailers’ inventory adjustments might trickle down to them as well, instead of becoming a proverbial albatross.  And while the “glass pipeline” may remain elusive, industry experts postulate that, “Visibility of supply chain costs have never been better.” Since, then, there remains continued pressure on everyone in the industry to reduce costs, there exists an opportunity now to address supply chain optimization unlike any time before.

As in all such processes, the first step in addressing this optimization is identifying the major challenges, which while not simple by any means, can be boiled down to three major focal points:

1. Reduce supply chain costs
2. Improving the responsiveness of the supply chain
3. Managing demand volatility and Variability

From an IT perspective, there are things that can be done with the data already being generated or received by most companies (even small ones!) to address some significant portion of each of these.

Reducing Supply Chain costs

While the operating costs of a supply chain are often the easiest numbers to point to and the most difficult for IT to address, there are data sources that can be leveraged to reduce costs.  For example, purchase orders, shipping data, and RTV (return to vendor) data is either generated internally or is received from retail partners (sometimes in a very straightforward EDI 812 document).  Unfortunately for many companies, these data sources come from disparate business systems and are stored in multiple locations, so tracking a single PO from the time the order was received through the supply chain to its delivery at a store or in a DC is an arduous task requiring proficiency in Excel and fraught with the potential for human error.  Further, when compounded by the volume of orders received that many vendors keep up with, the task of tracking becomes futile, since the actionable information it generates rarely is identified in time to take the given action, but rather is often merely a confirmation of what has already been made known by the retail partner that fined the vendor the late delivery or shorted pallet.  Thus, the lost efficiency of the analysts and the fees assessed by the retailers become additional costs in too many cases, and analysis of this data is simply not conducted.  However, those vendors that are able to aggressively track this data and address issues that may arise in a timely manner can avoid fees and improve their relationships with their retailers.  Unfortunately, upper management often struggles to see beyond the concrete costs figures and consider these less concrete but no less important opportunity for increased revenues or avoided fees.

Improving Responsiveness and Managing Demand Volatility and Variability

The delayed turnaround inherent in the difficulties discussed above relate directly to improving the responsiveness of the supply chain.  That is, supply chain utilization must address two areas of responsiveness:

1. Responding to existing issues
2. Responding to potential issues

Existing issues, as already discussed, are difficult to ID due to the disparate sources of data and the corresponding amount of time it takes to collate the information and determine what issues actually exist, since addressing existing issues is time-sensitive.

Potential issues are no less difficult, since these are often identified by considering all the aforementioned data sources and then including additional data sources such as POS data (from which forecasts are derived).  Mike Griswold, VP Retail for AMR Research, says, supply chain optimization “involves better forecasting methods and moving away from looking at warehouse shipments and toward POS and online sales data.” He goes on: many vendors fail to utilize POS data effectively for addressing supply chain issues because “it’s easier to get your arms around warehouse shipments because you’re dealing with weekly or twice-weekly sources of data.  When you get to POS, you’re getting down to day-level granularity for items and stores, and creating a forecast for three or four weeks out requires a fair amount of processing power.”  Of course, Griswold qualifies his position—forecasting based on POS and other data sources isn’t the final step.  “Retail is not designed to be an inventory holding area,” he says. “You may [get] an order for 1,000 televisions to be deployed across 100 stores, but not every store can handle 10 of each item.”

Thus, forecasts must be based on actual POS historical sales, current trends, other considered supply chain factors, and tempered by the limitations of the stores for which the forecasts are generated.  Retailers provide a shelf-space and assortment designation (called plan-o-grams, modulars, sets, etc.) for most vendors which allows vendors to consider these factors when filling orders, and combined with their own warehouse quantities and capacity, now a very comprehensive and useful picture emerges, from which one may then deduce those potential issues and act to address them, instead of reacting after they become a time-sensitive emergency.

How Accelerated Analytics®  Can Help You Optimize Your Supply Chain

Unfortunately, University of Pennsylvania professor of Operations and Information Management Marshall Fisher says the industry trend for vendors faced with the decision to have too little inventory and lose sales or have too much and be forced to liquidate leans toward the former. “Most companies are just moving along with less inventory. They are downsizing to meet less demand and accepting higher stockouts. The risk of a lost sale is smaller than having lots of unsold inventory.”

But what if you had an integrated database solution that tied all of the disparate sources of data together into a single source of truth, from which actionable decisions could be made on timely, comprehensive data? The Rainmaker Group™, creators of Accelerated Analytics®, was first a business intelligence (BI) company and its expertise in BI solutions can be leveraged to create such an integrated database behind the Accelerated Analytics® interface, creating a powerful yet user-friendly tool that business users need and which management can understand.

Advantages offered by Accelerated Analytics®:

• Integrated database to tie together all your data sources (P.O. files, Shipping documents, POS data, Plan-o-gram files, and more!) in a single location from which may be derived a single source of truth.
• User-friendly reporting solution which provides rapid access to any of the data in the system and reduces the overhead normally associated with the collation and calculation of data
• Exceptions reporting to identify shipping delays, stockouts, etc. automatically as often as required.
• Proven forecasting methodology to generate proactive forecasts based on actual sales and inventory information

Calculating the cost of out of stock's

Vendors know an out of stock or empty peg is a very bad thing, so it's hard to understand why most vendors are not managing their retail sales at a store and item level. Here is what we calculated for a vendor this week to estimate their lost sales due to out of stocks. The results were pretty eye opening.

This vendor has 4 retail customers. Retailer 1 has 3,600 stores, retailer 2 has 2,500 stores, retailer 3 has 1,800 stores and retailer 4 has 950 stores. Total retail stores = 8,850. Average in-stock % across all four retailers = 98% so approximately 177 stores are out of stock each week. Weekly unit sales for their top selling items average 6 per week so approximately 1,062 unit sales are being lost each week, which is roughly $15,000 in lost sales per week.

In other words this vendor is loosing over $750,000 per year in sales.

Reducing Out of Stocks

Probably three of the ugliest words for a retailer or vendor are -- out of stock. Each and every time an out of stock (OOS) occurs, the retailer, vendor, and consumer lose. Revenues go down, profitability goes down, consumer frustration rises. This is not a news flash, one can find a wealth of OSS research with a simple Google search.  And worse yet, "thought leaders" have been writing articles and funding research for decades to quantify the magnitude of the problem, diagnose root causes, and create solutions. The net benefit of all this work... drum-roll please.... average OSS rates are holding steady at about 8% to 10% (double for promoted items) and have not changed much in the last 17 years, according to GMA/FMI/CIES/VICS.

Why is reducing out of stocks and improving self-availability such a hard issue to tackle? Didn't someone tell us all that barcodes, ECR, VMI, RFID, CPFR, and new POS software would fix all of these issues and usher in the age of the 99.999999% efficient supply chain?

The fact is, most vendors are blind to actual consumer demand at POS. At a recent conference, I asked 5 large vendors and 3 small vendors if they knew their in-stock percentage at a store level for their retail customers. It seemed like a logical question, because they were all describing 7 figure investments they had just made into trade promotion software.  Certainly if you are going to run a BOGO, you want consumers to actually see product on the shelf when they arrive at the store. The answer for all eight vendors was-- NO! They have, at best, delayed visibility (usually 3 weeks) into what is happening at a store level, and in many cases, the only visibility they have, is chain-wide monthly scorecards the retailer sends showing their grade on in-stock %.

This reminds me of coaching my 9 year-old son's baseball team.  While they want to do all the cool and difficult things like turn a double-play, the game is won and lost on the most basic elements, like running as hard and fast as you can down the first base line and then 10 feet through the bag.

Reducing out of of stock's is a complex problem, with many moving parts and multiple parties that have to execute in harmony or the entire system breaks down. But, you cannot manage and improve what you are not measuring. And it's hard to believe a vendor is making an effort to reduce OSS if they are not measuring on-hand at their retail customers. If you are a vendor dependent on a retailer maintaining good self-avaiablity to grow your sales, then you need to proactively manage in-stock. That means, if your retailer makes POS activity available at midnight Sunday, your team should be taking action by 11:00 am Monday morning. Not just loading data into a spreadsheet,  so they can start the analysis process. Or worse yet, not even receiving the data.

Next Article: Increasing Sales By Managing Out of Stock Inventory

Store Level Merchandising Analysis Using EDI 852

The following is a step by step process to aid replenishment vendors in identifying stores on an item level basis, that are losing sales due to inventory stock outs or inventory that is present but unavailable for sale.  Such unavailable inventory may include lost or damaged items or items on the shelf but not available to the customer for any of a variety of reasons.  This process assumes that the vendor is receiving accurate and detailed EDI 852 Product Activity Data (or POS data via Retail Link or Partners Online, etc) on no less than a weekly basis from their retailing partners.  This article will focus on identifying and addressing underachieving stores. 

Step 1
The vendor will calculate average weekly sales velocity (Avg WS) at an item level across all stores.  This is best calculated using the most recent twenty-six weeks of sales.  Thus, for a given item, the calculation would be:

            Sum(last 26 wks. unit sales) = Avg WS
                               26

Step 2
Calculate the average item sales velocity (Avg WS) for each item for all stores for the last ten weeks of sales.  For each item, look at the last ten weeks of unit sales at the store level and separate the items by store into five categories.  For ease of identification, label these categories A-E.  The categories are as follows:

A.  Most recent two weeks of sales.

• Stores with sales in the last two weeks for any given item will fall into this category

B.  Most recent four weeks of sales.

• Stores with no sales in the last four weeks for any given item will fall into this category

C.  Most recent six weeks of sales.

• Stores with no sales in the last six weeks for any given item will fall into this category

D.  Most recent eight weeks of sales.

• Stores with no sales in the last eight  weeks for any given item will fall into this category

E.  Most recent ten weeks of sales.

• Stores with no sales in the last ten weeks for any given item will fall into this category

The total percentage of sales of any given item for a given category can be accurately calculated by dividing the number of stores per item in any category by total stores (TS). 

            Total Stores in a Category  = % each category is of the total
                         (TS)

This percentage calculation is a better, more accurate way to judge relative performance of each category than by comparing unit sales.

Identifying & Addressing Underperforming Stores
The remaining article focuses on underperforming stores, that is, stores that fall into categories D or E.  Now that you know how many stores are in categories D or E, go back to the list of items and the last 10 weeks of sales, and identify what store numbers are present in the bottom two categories and not in any of the other categories. These stores are stores with no sales in the past 8-10 weeks.  Pull the current inventory on hand for each store.

Out of Stock Stores
Stores with no sales and zero inventory on hand are most likely out of stock stores.  Vendors will want to identify the last week that a given store recorded a sale for a given item in categories D-E.  The vendor can then estimate lost sales by unit for that item/store combination by multiplying the number of weeks since the last sale by the average weekly sales (Avg WS) calculated in Step 1.

            (Avg WS) *[Sum(weeks w/o sales)] = Lost sales by unit due to stock-out (LU)

Lost sales by unit (LU) can also be multiplied by the price of the item to determine lost sales in terms of revenue (LR).

            (LU) * (price of given item) = LR

Inventory stock-out problems are typically due to one of two things: Inaccurate inventory replenishment reorder points or inventory availability issues on part of vendor.  If that item was out of stock due to high reorder quantity, then a vendor can contact the replenishment manager at the retailer responsible for the underperforming store(s) and suggest changing the inventory replenishment set point, using lost revenue (LR) as the rationale for the recommendation.  This exercise can be performed for all item/store combinations that had few or no unit sales for an 8-10 week period (categories D-E) and showed no inventory on hand.

Stores with Inventory on Hand, But No Sales
Some of the stores are going to reflect no unit sales in the past 8-10 weeks, but still have on hand inventory. This typically indicates inventory which is misplaced, lost, stolen or stock on the shelf, but out of view of the customer for whatever reason.  It may also include damaged inventory and inventory otherwise unavailable for sale.  In this case, the vendor would contact the retailer and investigate the problem.  The inventory replenishment system from the retailer will not release an order for new merchandise until the vendor visits the store directly or contacts the store manager to investigate the problem and demonstrate that the product is not available for sale.  It is useful, when contacting the store manager, to know the date of the last unit sold.  This date, and the average weekly unit sales (Avg WS) calculated in Step 1, will indicate to the store manager when a sale should have occurred.  That is, if, on average, a given item is sold every other week, and 8-10 weeks have passed at a given store without a sale despite recorded inventory on hand, this is indicative of a problem, since 4-5 units should have been sold during that timeframe. 

Business Rationale for Store Level Merchandising Analysis
Conducting a store level merchandising analysis can be a time consuming effort for a vendor.  Many vendors have trouble rationalizing the expense, especially vendors with very good in-stock rates.  But, even a vendor with an in-stock rate of 98.5%, still has 1.5% of stores out of stock.  In a typical 3,000 store chain, this could represent as many as 45 stores out of stock.  If those stores averaged just one unit sold per week, that translates to as many as 2,340 units of lost sales per year.  Since this represents only a single item, and out of stock stores typically are out of multiple items and average significantly more than one unit sold per week per item, this vendor is looking at hundreds of thousands, or potentially, millions of dollars of lost revenue (LR) per year, despite a very high in-stock rate of 98.5%.

Resources:   Whitepapers on SKU Sales Analysis, Store Analysis, Out of Stock Analysis and SKU Forecasting are available.  http://www.acceleratedanalytics.com/download-whitepapers/

Poor Weather Causes Out of Stocks

According to the WSJ, the snowstorms that blanketed much of the country in the past week caught apparel retailers in short-sleeves.

Most clothing chains have very little winter clothing left on their racks, the result of tightly managed inventories and better-than-expected holiday sales.

But, with nearly 70% of the country covered in snow, store shelves are mismatched to the weather: filled with new spring fashions that frigid customers aren't in the mood to buy. The lack of appropriate dress could cost retailers some momentum after improved holiday and January sales periods, said analysts.

An employee at a Gap store in downtown Washington, D.C., said the store had been sold out of cold-weather hats, scarves and gloves for over a month.

Macy's Inc. said, it’s My Macy's merchandise localization program, which lets buyers modify merchandise assortments based on local needs, helped it avoid shortages. A spokesman said Thursday, that the department store chain planned for fresh flows of coats, gloves and hats in February and March in cold-weather markets. "Macy's continues to have ample supplies of cold-weather merchandise," the spokesman said.

This is an interesting example of how using EDI 852 and analyzing POS data may have been able to help avoid out of stocks. Although the fashion supply chain tends to have long lead times, if retailers and vendors had been more closely watching the weather and local demand signals, they may have been able to either reallocate inventory between warehouses and stores, or perhaps place additional orders.

How much do retail out of stocks cost?

A recent RIS article  titled, “How Much Are Out-of-Stocks Costing You? Much More Than You Might Think”, By Greg Buzek, provides more evidence that retail out of stocks are costing vendors huge lost sales.  Buzek quantifies the scope of the loss; “A retailer that invested in completely fixing its out-of-stock problem, would gain a solid competitive edge. The average retailer could increase same store sales 3.7%, by converting all perceived out-of-stocks into transactions. Specialty soft goods could have the biggest potential win: solving out-of-stocks would boost their same-store sales 7.1%, while department stores would see a 4.2% jump.”

The good news is we have seen dramatic improvements in in-stock performance by active store and item level analysis.  The methodology is pretty straightforward:

1. Determine the lead time from order to product arriving at a store.  Let’s say this averages 2 weeks.  This is your minimum on hand weeks supply to avoid a stock out.
2. Next calculate the average weekly sales velocity for each item, and each store.  Yes, you must know the average sales velocity for each peg or shelf position.
3. Calculate the weeks supply on hand for each item and store by dividing the current on hand inventory by the average sales velocity.
4. Filter the results to show only those items with less than the 2 weeks supply on hand.  These are the stores you need to make sure you place an order immediately to avoid a stock out.

This type of analysis is not hard to do, but if you don’t have the proper tools it can be very time consuming.  But, it’s well worth the effort.  If you can improve your in stock performance by even 2%, you stand to gain significant sales.

Next Article: Increasing Sales By Managing Out of Stock Inventory

Avoiding Out of stocks

Brrr, it’s cold outside. I live in south Florida and we have been experiencing record low temps for well over ten days now. Last night it got down to 28 degrees at my house! I know-28 degrees would be a welcome heat wave for many places in the US right now, but down here this is a record cold. The cold temps have resulted in stock outs of space heaters at Home Depot stores in central Florida. "The majority, if not all, Home Depot stores in Florida are out of stock of space heaters," said Craig Fishel, a spokesman for the company. The company continues to sell them online. We blog all the time about how to use POS and EDI 852 data to avoid stock outs. It’s not very complex, simply look at the current on hand inventory and the current rate of sales, and weeks of supply can be easily calculated. This stock out was pretty easy to predict; weather forecasters have been predicting the abnormally cold temps for 10+ days. More than enough time for buyers to work with their suppliers to bring in sufficient inventory to handle the upcoming demand. I wonder how many lost dollars have resulted?

Next Article: Increasing Sales By Managing Out of Stock Inventory

How Much Are Out-of-Stocks Costing You?

A recent RIS article titled “How Much Are Out-of-Stocks Costing You? Much More Than You Might Think”, by Greg Buzek, provides more evidence that retail out of stocks are costing vendors huge lost sales. Buzek quantifies the scope of the loss; “A retailer that invested in completely fixing its out-of-stock problem would gain a solid competitive edge. The average retailer could increase same store sales 3.7% by converting all perceived out-of-stocks into transactions. Specialty soft goods could have the biggest potential win: solving out-of-stocks would boost their same-store sales 7.1%, while department stores would see a 4.2% jump.”

The good news is we have seen dramatic improvements in in-stock performance by active store and item level analysis.  The methodology is pretty straightforward:

1. Determine the lead time from order to product arriving at a store.  Let’s say this averages 2 weeks.  This is your minimum on hand weeks supply to avoid a stock out.
2. Next calculate the average weekly sales velocity for each item, and each store.  Yes, you must know the average sales velocity for each peg or shelf position.
3. Calculate the weeks supply on hand for each item and store by dividing the current on hand inventory by the average sales velocity.
4. Filter the results to show only those items with less than the 2 weeks supply on hand.  These are the stores you need to make sure place an order immediately to avoid a stock out.

This type of analysis is not hard to do, but if you don’t have the proper tools, it can be very time consuming.  But it’s well worth the effort if you can improve your in stock performance by even 2%, you stand to gain significant sales.

Next Article: Increasing Sales By Managing Out of Stock Inventory