No big deal; it happens all the time in retailing. Stock outs are the result of back orders from vendors, greater sales than projected, especially favorable weather, didn’t buy enough, greater than anticipated consumer demand, etc. etc. Whatever the cause, the consumer doesn’t care; they just want, what they need, when they need it!
If you as a retailer believe the cost of a stock out is simply the value of the lost sale, you vastly under estimated the expense of losing a sale. Consider the following:
How many times must a customer experience the frustration of finding the retailer out of stock of exactly what the customer came in for before they say, “That’s it; I’ll shop elsewhere.” The cost of the lost sale is pale when compared to the cost of a lost customer. That’s expensive!
Moreover, each instance of a stockout and lost sale only serves to reinforce the consumer’s experience that the internet is more reliable, faster, cheaper and with less time and hassle than making a trip to the shopping center. The lost sale plants a negative image of the store in the mind of the consumer.
Each time a sale is lost because of being “temporarily out of stock,” the retailer is sending a message that says “go shop at my competitors”, they might have a more reliable stocking position.
Need more reasons to avoid the dreaded stock out situation? Consider that when you lose a sale, you have also lost the opportunity to sell upgrades, ancillary accessories, additional services and/or the advertised items currently in play.
Lastly, to the extent that you have invested in the cost of advertising, personnel and other related selling expenses, you have absorbed such costs with literally no return on these costs.
I recently took a weeklong fishing trip to Canada. In preparation for my trip I went to one of the nationally recognized tackle stores with a long list of lures and equipment I needed for the trip. Canada: that means norther pike and therefore 12” steel leaders are required equipment.
To my utter amazement, the store was out of 12” leaders. Amazingly, they were seemingly out of sales staff as well. I left the store without making a purchase and went elsewhere and bought my leaders and spent an additional $250. Lost sales can cost a retailer both lost sales, lost reputation and lost customers.
How to avoid out of stock syndrome
So, what’s the cure for this kind on problem? First, acknowledge the gravity of the problem. Secondarily, understand that not all inventory has equal value. “A” items are those that produce 80% to 90% of the sales. Therefore, time, effort and money should be devoted to identifying, stocking and promoting the “A” items . . . the drivers of the business.
If 20% of your inventory generates approximately 80% of your sales, the issue becomes how do you identify the most sales productive 20%? That’s the right question but the answer is a bit complicated.
In a word, the retailer needs to know for a specific point in time, which items are producing the most dollar sales, ranked best to worst. This dollar sales ranking is then compared to inventory levels ranking. This kind of analysis will indicate sales ranking of each SKU versus the inventory dollars invested to support those sales.
I encourage retailers to take a more sophisticated look at their sales versus inventory. Profit dollars are more replete when these two indicators are in balance.
Remember, it’s not just the sales dollars that count, but rather the sales dollars generated relative to the cost of inventory. Have at it!