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Stock-Outs: Ousting Customers

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In the retail industry, customer experience, satisfaction and service are fast becoming the limiting differentiators among retailers all over the globe. Increasing competition is fashioning pressure on retailers to improve both inventory turnover and customer service. Here, poor logistic management can result in either over stocking or lost sales due to stock outs.

Stock outs from a Retailer’s perspective can be described as condition when a particular percentage of products are not there on the retail store shelf at a particular point in time. It is usually measured by audits, normally in selected categories, and then aggregated.

Stock outs from a Customer’s perspective can be described as condition when a customer looks for an item in the store and does not find it on the shelf. This can be calculated as a percentage and is usually measured by estimation from store POS data. This is quite helpful for examining fast-moving items.

Good customer service has become the success for retail. Retailers need to have efficient and effective supply chain management (SCM) in place to win the customers. If SCM is a backbone of a retailer then IT is the backbone of a great SCM. The basis for Retail Logistics starts with a thorough understanding of customer’s requirements. While establishing logistics strategies, we need to study the impact it has on corporate profitability decisions. Critical success factor here will be availability of stocks in the shelves. Many retailers still consider logistics just as back-end activities of their operations, but the modern logistics can play a much bigger role. It can help the retailers differentiate themselves from the competition and achieve a higher and sustainable growth. This can also help them offer better service and satisfaction to their customers. Higher costs can severely impact a segment’s profitability. Intelligent supply chain management and alliances will play critical role in achieving the required levels of service performance.

Retailers need to consider shelf space as their biggest asset and what occupies the shelf is the key mantra of success for them. Here the focus should be on logistics combined with technology for ordering the right inventory so as to ensure the availability of right product at the right time at the right place and in the right quantities. Inventory management and logistics in particular has become a critical activity in retail. Poor logistic management can result in either over stocking, leading to cash flow problems and unnecessary discounts or lost sales due to stock outs. Thus, it becomes important to understand the cost of retail stock outs before implementation of any retail inventory model. Unless these critical costs are known, retailers at large cannot balance the costs and risks of holding inventory with the loss of sales and profits when an item is out of stock. The relevant costs include both the lost sales from the current order because of cancellations, and the long-run costs if stock-outs reduce the likelihood of future orders and visits by the customers. Successful companies create customer value in such a way that an optimal cost/benefit trade-off is reached and the profit is maximised.

It is going to be necessary to have a low-cost producer and a value-added supplier. One needs to manage its merchandising and logistics functions as cost effectively and efficiently. Under-performance in these two functions not only reduces retailer’s effectiveness but also affects the shopping experience for the customers that can affects satisfaction and loyalty of customers.

There is a growing interest among retailers to implement inventory management/sales data systems that can help them make the most of its merchandise assortments and scarce shelf space. Major areas of efficient consumer response (ECR) activity in the grocery business include: sales forecasting and statistical management of safety stock. Best practices in retail management call for a proper balance between inventory and service levels, recognition of the importance of merchandise availability, and accurate store sales/inventory data.

Shoppers consider stock-out as a negative factor, and many times stop visiting a particular retailer after two to three such incidences. Many times, a good experience is also affected by stock-outs of promotional products. In the long term, stock out conditions may also affect future patronage of the retailer either by the same customer or by others because of negative word of mouth by dissatisfied customers. Customer response to stock-outs is driven in large part by two factors: the effect of a stock-out on the complexity of making a choice from the set, and the degree of personal commitment to the out-of-stock alternative. It is found that personal commitment to an out-of-stock choice option is a function of preference for the alternative. As personal commitment to the out-of-stock option increases, consumers react substantially and negatively to the stock-out; they report lower satisfaction and show a higher likelihood of switching stores on subsequent shopping trips.

Many retail managers think that inventory levels positively correlate with on-shelf availability but we found the opposite to be true. Higher supply chain inventory in many cases correlates with higher rates of stock-outs. This obvious paradox can be explained by the fact that the retailers with lower inventory levels tend to manage their logistics better and have their inventories in the right places.

Many retailers have invested heavily in new technologies but the impact of technology improvements implemented by the retailers have been offset by process complexity because of proliferations, store level assortments and promotional proliferation. Many deterrents in retail logistics are faced at point of sales (POS). Here, if the data does not get transferred from the warehouse to POS, then neither is the store in a position to sell the products, nor does it reflect in their stocks, and this finally leads to stock discrepancy. This poor inventory control could lead to either over stocking or lost sales due to stock-outs.

Retailers need to take initiatives that cut across functional boundaries, and also require a basic rethinking of retailer processes. As retailers improve their logistic management and meet the demands of customers more efficiently, they are more likely to generate greater value for all their stakeholders.