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Out-of-stocks could be costing you more than money

By : Patrick O'Mara

March 09, 2018 08:00 AM

It’s no secret that today’s shopper expects to get what they want, when they want it. According to research by the Trading Partner Alliance, shoppers say product availability is among the top three reasons they shop where they do – but on average, one out of every 12 items on their shopping list (and one out of every 10 or less promoted items) is not on the shelf. This is a significant issue in terms of customer satisfaction and loyalty, as the research uncovered that by the third occurrence of an out-of-stock, 70 percent of shoppers will go to another store. It’s also an expensive issue. According to a recent study by IHL, in the US alone, retailers lose $129.5 billion revenues due to out-of-stocks and $123 billion due to overstocks annually. (Worldwide this problem causes $634 billion lost revenues from out-of-stocks and $472 billion due to overstocks.)

 

These figures underscore the necessity of finding the right balance between optimization software, inventory visibility and store personnel. It’s incredibly risky to completely replace one system with another on a live store without running parallel processes for a period of time, to look for and resolve issues. During this time, it’s important to continuously monitor and identify the cause of out-of-stock issues and adjust for them. Plus, adopting new systems, especially those managing critical tasks such as inventory ordering takes time, and user adoption of the technology is as important as the technical rollout. We’ll talk through how to make an inventory replenishment system rollout successful.

 

When diagnosing the root cause of an out-of-stock, a few key items should be investigated:

 

  • On-hand inventory (on the shelf and in the back room):  The most common cause of out-of-stocks is inventory distortion, typically caused by vendor mis-shipments, counting errors, or inventory disorder.
  • Forecasted movement:  Projection of expected sales, typically calculated based on recent selling history, sales trends, promotional history and adjusting for long-term trends such as seasonality.  
  • Manual adjustments:  A key area to monitor is the extent to which store users are manipulating recommended orders, either directly or by adjusting influencing factors used in the calculations.

 

The good news is that the right solution provides analytical tools for monitoring all these key diagnostic areas. This allows users to easily identify anomalies that may be causing incorrect ordering and make adjustments accordingly.

 

Retail operations teams should gain a holistic view of inventory across the retail enterprise with the ability to move product through the supply chain to support stores with the greatest demand.  Additionally, inventory replenishment systems must have the ability to seamlessly communicate with the retail website or retailer mobile app. This simple integration prevents customer dissatisfaction due to ordering a product online that isn’t even available at the time of ordering.

 

Application forecasting capabilities can be validated using the Mean Average Percentage Error (MAPE) calculation, which compares expected performance against actual performance. Retailers should review this discrepancy, and tweak system parameters that could influence forecasts in order to optimize orders for each SKU. It’s also important that system administrators confirm all possible data points are being provided to the forecasting engine – including promotions, major weather events, and any other influencing.

 

Proper user training is also important in making a roll-out go more smoothly. Store users with expertise in manual ordering might not understand how the technical solution works, and may assume their performance will be better than that of an automated system. Store users should be trained to recognize computer assisted ordering systems as tools that accept their input, rather than autonomous systems. By working hand in hand with a forecasting and ordering solution, a store manager will be more effective.

 

Monitoring current performance of an inventory-replenishment system and understanding how stores are using the technology helps retailers drive down out-of-stocks and reduce overstocks – which helps them recognize greater, more profitable sales! 

 

At NCR, we have a team of implementation consultants who work closely with our clients to oversee the smooth roll out of our demand-driven replenishment solution. With boots-on-the-ground experience, NCR consultants leverage proven best practices and years of experience to help with both process optimization and change management needs. Our inventory replenishment solution learns every item’s movement, taking into consideration seasonal and promotional factors, to create a specific forecast for every SKU. In addition, our solution has a special focus on highly perishable items with short shelf life, as these items incur very different demand replenishment cycles than shelf-stable goods. 

 

Learn more about how NCR can help you right-size your inventory to simultaneously reduce costly spoilage and out-of-stocks.

Patrick O'Mara

Consulting Solution Engineer

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Patrick is a retail specialist with experience ranging from cashier, stock boy, store management and implementation projects. Patrick is currently serving as a Consulting Solution Engineer for NCR with a focus on merchandising and inventory solutions.