Out-of-Stock Problems Costly for Retailers

Create: 12/13/2015 - 12:00

Despite the overall rosy report for online shopping this past November 30, aka Cyber Monday, out-of-stock rates on that day reached an historic high, with 13 out of 100 product views showing an out-of-stock message. That’s two times the normal rate. That’s a huge revenue opportunity lost because retailers fail to have accurate tools for forecasting.

Clearly, there is work to be done. The market potential is enormous: Adobe’s 2015 online shopping data for Cyber Monday found a record $2.98 billion (12 percent more than in 2014) was spent, marking the largest online sales day in history. Thanksgiving Day through Cyber Monday drove roughly $11 billion in online sales, a 15 percent increase year-over-year, with brick-and-click retailers seeing the strongest growth in sales year-over-year. Adobe noted that each of the first 18 days in December are expected to be $1 billion sales days.

The holiday inventory problem simply underscores what happens year round. Loss from overstocks in North America is estimated to cost retailers $123.4 billion annually and out-of-stocks $129.5 billion, according to a study from IHL Group, commissioned by OrderDynamics. Those numbers are actually an improvement from prior years, as retailers adopt better forecasting technology.

In a consumer survey, GT Nexus reported that 75 percent of shoppers encountered an out-of-stock moment at a store in the last 12 months. The record online was not much better: 63 percent of consumers experienced an e-commerce out-of-stock.

Considerable revenue is lost by not meeting customer demand and not having inventory available. Of course, retailers are aiming to avoid being stuck with merchandise, and overstocks are costly errors in inventory management as well. But with retail turning to omnichannel strategies that leverage the intelligence of the Internet of Things technology, the problem should be top of mind for solution providers, particularly because customer satisfaction takes a nosedive when products are unavailable, no matter where the sale is consummated.

Customers expect to find a product at the store of their choosing, and when they do not, it erodes their loyalty to that retailer. Click-and-brick retailers might be able to offer a product online with free shipping to the customer’s home, but sometimes the hot product is just not available, period. (Try ordering L.L. Bean Boots, for example.)

Customers might be forgiving in a case such as Bean’s, where the product is handmade. In fact, the items perception as exclusive may even be enhanced, to a degree. But a short supply of mass-produced items will simply irritate customers. That’s particularly true during the holiday season, where customer loyalty and happiness is crucial; some retailers depend on the end of year madness to account for a quarter of their sales. 

IT infrastructure to manage inventory is itself in short supply and that is costing retailers dearly. The GT Nexus study found that 55 percent of in-store shoppers who suffered a stock-out became “lost sales.” Translation: They purchased the out-of-stock product at a competitor, or not at all.

Improving supply chain visibility is mission critical for retailers heading into 2016. As shoppers become more selective — a hallmark trait of the Millennial customer — it will become increasingly imperative for retailers to implement technology that will allow not only tracking from manufacturer to shelf, but also the prediction of trends and the analyzing of loyalty data. Gathering and crunching sales data from the 10 months prior to the start of holiday shopping kickoff will provide valuable customer insights, for example popular styles, sizes and colors for individual stores. In that way, retailers will be able to order more precisely to match their customers’ preferences and avoid losing sales to competitors. 

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Jennifer Bosavage

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