Out of Stock - Stock Out (I)
What is the Stock Out in Supply Chain? Why the Stock Out happens? What impact Stock Out makes on Customer and Consumer?
Posted: Sep 2008
Probably every one of us was many times in situation that we entered to the retail outlet and that we realized that the product that we looked for is missing.
First we will feel unease and we will start looking around, hoping that the layout of store has changed, so our product is at other place. But when we realize that the product is really gone, we are angry because we miss our shopping, but also we lost some of our time.
Out of Stock or Stock-Out in Supply Chain is the situation that is very common in the trade. There are many reasons for the Stock Out. Too many SKUs for management, too much traffic, too little cooperation between supplier and retailer, bad sales forecasting, wrong orders, wrong deliveries, other priorities, delisting, etc. The Stock Out influence all stakeholders in trade, suppliers, retailers and customers in a different, but interrelated way. The sustainable competitive advantage of the company depends of the stock out level.
Consumer's perspective on Stock Out
Average Consumer has a lot of needs during his shopping. They like a high level of service, they want clean and nice shopping area, promotions, short queues... One very important need of consumers in no Stock Out. If they face the Stock Out on the product they prefer, they may choose a different brand, go to other place, return later, or they may decide not by anything. According the ECC research, 9% of sales is lost due to Stock Out.
Also, consumer's loyalty can be jeopardized if the Stock Out persist. If one brand is missing on the shelf, the consumer can easily reach for another brand. If the problem continuously persist, the consumer is likely to change the shopping place.
Retailer's perspective on Stock Out in Supply Chain
From retailer's perspective the Stock Out situation is the direct impact to the revenue and profit. Non-available product will not be sold. This means that the shopper might spend less money than planned. Still, the retailer have an opportunity to make up the lost from one brand by selling the other brand. But if the Stock Out on the important brand continue, the retailer is risking loosing a shopper.
Loosing a shopper is a very serious issue. For example, if the shopper is the family that weekly spend 100 € in the retailer outlet, this means that the retailer is loosing over 50k € in ten years. Now we see that the loss of one customer is having a huge long-term impact.
Supplier's perspective on Stock Out in Supply Chain
The supplier is in a very sensitive situation regarding danger of Stock Out. Firstly, they do not sell products directly to the shoppers. This means that he cannot make direct influence to the shopper, but indirectly, through the retailer. This is where good relationship and alignment comes as a very important factor.
Secondly, when supplier's product is Stock Out in the outlet, it leaves an open space for competition. So, it is not only that Stock Out is bringing the loss of the volume, but it also gives the food to the competitor.
Finally, lost sales due to the Stock Out is almost directly reflect to the profit. Since the company has fixed and variable costs, it takes some volume to be made in order to reach the breakeven point, where the company is at positive zero. Only after the breakeven point the company is earning profit. This means that the profitable volume comes last, but in the case of Stock Out, the company is losing profitable volume first.
The solution for effective fighting the Stock Out in supply chain management is close liaison and partnership relation between supplier and retailer. This requires openness, data sharing, flexibility, sales forecasting, etc.
Vendor Managed Inventory ( VMI ) is the good system of fighting Stock Out in Supply Chain. VMI is the system agreed by both parties where the supplier takes the leading role in managing the retailer's inventory. This means that supplier must have accurate data of retailer's inventory, sales history and to have right to create order on behalf of retailer. On the other hand the supplier is responsible for proper balancing of stock, Stock Out, over-stock and obsolete stock. Prerequisite for VMI is the mutual agreement between parties, but also technical background ( software as SAP is ).
Finally, every single percent of Stock Out reduction is the benefit for all stakeholders in the supply chain; suppliers, retailers and shoppers. No Stock Out is the only way to Win-Win-Win situation.