The persistent problem of out-of-stocks

As e-commerce amplifies inventory issues, grocers need to tackle the challenge once and for all

The days of the "rain check" are long gone: today's retailers have to give shoppers what they want, when they want it, wherever they are. Yet, many retailers still struggle with keeping products on the shelf at all times. While grocers have long sought to solve the stubborn challenge of out-of-stocks, the problem persists—and it’s a costly one.

Worldwide, out-of-stocks are costing retailers across sectors US$984 billion in lost sales annually, including US$144.9 billion in North America alone, according to IHL Group, a global research and advisory firm. Its report, “Out of Stocks, Out of Luck,” notes that product availability is one of the most important customer experience components. Yet an IHL survey found North American consumers experience out-of-stocks in one out of five trips to grocery, pharmacy and mass retailers. Consumers not only define out-of-stock as empty shelves (encountered by 32% of shoppers), but also include issues like failure to find staff to help (16%) and found staff, but not merchandise (17%).

When customers can’t find what they’re looking for, the negative effects go well beyond lost sales for retailers. “Lost sales and frustrated customers—those are the big ones,” says Greg Buzek, founder and president of IHL Group. “The reason people go to stores is because they need it now and they expect you to have it. So, when you have an out-of-stock, you’re training them to not shop at your store. And that is the biggest risk. It’s not just missing that sale, it’s the fact that you’re no longer reliable as a supplier for them, and they will go elsewhere going forward.”

Data from a 2015 report, “Solving the Out-of-Stock Problem,” by the Grocery Manufacturers Association and the Food Marketing Institute (now The Food Industry Association) Trade Partner Alliance, confirms the risk of shopper defection. The study found a “disturbing three-strikes-and-you’re-out pattern” with out-of-stocks. The first time a product is not available, the shopper will substitute the desired item 70% of the time. The second time it happens, the shopper may substitute the item, not make a purchase or go to another store. Strike three: the shopper will go to another store 70% of the time.

“It’s easier to switch to another brand or another store online,” says Daniel Triot, president of DHT Consulting and former senior director of the Trading Partner Alliance. “In a brick-and-mortar store, shoppers can make the switch, but it requires more work to find an equivalent product. They may come back a day later, but after two or three strikes, the consumer will switch brands or stores.”

Why are grocery retailers continuing to struggle with out-of-stocks? Simply put, it’s a hard problem for them to fix, says Heidi Sax, content marketing manager at CB4, a retail software solutions company. “At the starting point, you have to pinpoint demand for every SKU at each location in a grocer’s chain to make sure you’re ordering the right amount of stock,” she says. “Traditional reporting and even modern business intelligence solutions rely on stale data and limited categorizing to anticipate and meet shopper demand.”

The omnichannel conundrum
The out-of-stock problem is being amplified as retailers expand their omnichannel strategies. IHL Group’s report states that in 2015, out-of-stock levels were experiencing a decline from 2007 levels, but actually grew significantly from 2015 to 2018. “In North America, we were making great progress on reducing out-of-stocks with things like better forecasting,” says Buzek. “And then the whole e-commerce explosion with store fulfillment came into being.” That, he says, exposed retailers to previously hidden out-of-stocks.

If a shopper made a substitution because of an out-of-stock in a brick-and-mortar store, the out-of-stock was unknown to the retailer. Now, with the range of e-commerce fulfillment options—buy online pick up in store (BOPIS), ship from store, and click and collect—out-of-stocks are exposed, as customers are requesting specific products that may have to be substituted by the store. “The end result is you’ve got this explosion of out-of-stocks in the e-commerce area that has more than made up for the gains that have been made in forecasting,” says Buzek.

Ironically, the e-comm technology many retailers are using is one of the root causes of products being out of stock in the first place. In today’s Amazon-driven era of convenience, many grocers are stepping up their omnichannel efforts, but they typically don’t have Amazon-level e-commerce platforms.

Prakash Tilwani, executive vice-president of supply chain and media solutions at IRI Worldwide, knows this well. He used to work for Amazon as director and head of inventory planning analytics. At Amazon, “they literally know at every minute of the day how much inventory they have and how far down they can go with the prices without running out of stock,” says Tilwani.

Compare that to brick-and-mortar retailers now dipping their toes into omnichannel. “Many retailers have very old systems and the way they built is to have two systems somewhat combined on the back end, but not really integrated on the front,” he says. “What ends up happening is the e-commerce system doesn’t have a clear view into the inventory and they just don’t understand how much supply they have to create demand.”

That means online shoppers don’t have an accurate view of the inventory, either. “Online inventory can be a combination of what products are in the distribution centre, the warehouse and in the store,” notes Sameer Anand, a partner at A.T. Kearney’s operations and performance transformation practice. That means when shoppers add products to their cart for a click-and- collect order, for example, they don’t know if the product will actually be on shelf when an employee fills the order.

For home delivery, the challenge is compounded because the local store typically doubles as the fulfillment centre. “In the grocery world, where the delivery window is short, typically the source of inventory is only one location,” says Tilwani. “So because of the first challenge—not having visibility into your inventory—if you run out of stock, there is just no other option .”

At the same time, omnichannel solutions are putting more pressure on stores, which can impact manual inventory monitoring. “As stores become microfulfillment centres for things like click and collect, it creates a lot more operational demand on stores and store managers,” says CB4’s Sax. “That makes it even harder for them to walk the floors and detect out-of-stocks and manage their orders because they’re doing a lot more than ever before.”

With e-commerce growing at unprecedented rates (20% growth in Canada in 2019, according to eMarketer), retailers have to get serious about solving out-of- stocks. “The problem is more critical ... because you cannot if you’re not fulfilling the orders properly,” says Buzek.

How to prevent out-of-stocks
Out-of-stocks will likely never be completely eliminated—no system is perfect. However, the problem can be greatly reduced by following best practices and investing in the right tools and technologies. Here’s a look at just a few:

Culture: Retailers that want to get serious about reducing out-of-stocks have to make the effort part of the organization’s culture. IHL Group’s report notes there are many technical solutions that assist in fixing the out-of-stock issue, but the first step for retailers is admitting they have a problem. “Simply accepting out-of-stocks as a normal part of business is business suicide in an environment where consumers used to have to shop and now must want to shop,” the report states.

Share data: DHT Consulting’s Triot says part of the cultural shift for trading partners is to be more open to sharing data, including allowing access to online, in-store and promotional sales to better understand where the product should be allocated and what is truly “on-hand.” “Retailers and manufacturers tend to, understandably, be cautious in terms of sharing data, but the most successful companies are those that believe the data belongs to both partners,” he says. “Sharing data is more of a benefit to both parties than being ‘restrictive,’ allowing retailers and manufacturers to collaborate more effectively on on-shelf availability to better anticipate consumer needs.”

Collaborate with suppliers: Poor communication with suppliers can lead to missed or delayed orders that, in turn, can lead to out-of-stocks. “Communicate with them, provide them the visibility, have the dialogue because this is a win-win,” says A.T. Kearney’s Anand. “It’s in brands’ best interests to make sure the product is on the shelf. So, have a truly collaborative dialogue with them and figure out how to work together to grow the pie.”

Computer vision: New in-store technologies use a combination of computer vision and shelf and ceiling cameras, or autonomous robots, to keep an eye on the shelf. Typically, this type of system takes pictures at regular intervals, sends them to the cloud, analyzes the images to see if products are on the shelf and in the right spot, and reports back to the retailer. “Computer vision can help retailers a great deal in understanding mismatches on the shelf, where you have items that are completely out of stock but also items that are in the wrong place, or the vendor filled up the rows with the wrong thing, so it looks full but it’s not actually full,” says Buzek.

Artificial Intelligence: There is a wide range of AI applications for grocers, from demand forecasting and pricing, to loss prevention and promotions. Longo Bros. Fruit Markets is one retailer that’s investing in demand-planning technologies with AI capabilities. Rick Furtado, senior director of supply chain at Longo’s, says one of the main factors impacting out-of-stocks is multiple forecasting—from the store team, distribution centre, supplier and manufacturer. “The slight variation in forecast at each stage magnifies and generates a ‘bullwhip’ effect, which leads to out-of-stocks,” he says.

The new tools have the capability to leverage not only historical sales data, but also data points like weather forecasts and social trending data. “As a result, we hope to achieve better quality forecast,” says Furtado. “It’s important for us to understand our guests’ needs, which will allow us to anticipate changes in demand, instead of traditional lagging indicators, such as historical sales to repeat future activity.”

Whatever tools and technologies a retailer chooses, the most important aspect of mitigating out-of-stocks is having an accurate view of the inventory. “The connected devices, the smart shelves, the RFID tags, the robots ... It’s all about having the right visibility into your stores and your distribution centres, and having it on a more real-time basis,” says Anand. “Having that visibility is important because you need to be able to take action.”

Effectively reducing out-of-stocks truly is a race for retailers. Buzek likens to it the average person racing Olympic athlete Usain Bolt in the 100-metre dash. Not only is his first step faster, but every subsequent step is faster. “There are retailers that have not only made investments , but they’re still investing more and racing ahead on the solutions,” says Buzek. “Where it gets really critical is they’re racing to this accurate inventory piece. And whoever gets there first will start destroying the competition.”

This article appeared in Canadian Grocer’February 2020 issue.

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