Retailers suffer the high cost of overstocks and out-of-stocks


Overstocks and out-of-stocks cost retailers $1.1 trillion globally in lost revenue, according to a new study from IHL Group, commissioned by OrderDynamics.
Overstocks are responsible for 3.2 percent in lost revenue for the average retailer, and out-of-stocks, 4.1 percent.
In North America, the loss from overstocks in the region is estimated to cost retailers $123.4 billion annually and out-of-stocks $129.5 billion although better forecasting tools have resulted in improvements to both metrics in recent years.
The blame for the $1.1 trillion in overstocks and out-of-stocks losses was placed on five areas:
Bad Processes ($284.9 billion in losses): Issues include inadequate refrigeration, improper training, inadequate relationships with intermediaries or disconnects between departments. Technology overhauls often complicate processes. Wrote IHL, "The vast majority of these issues are processes that made sense at one time, but either the business outgrew it or changed making the process a bottleneck."
People Problems ($259.1 billion): This "broad category" covers everything from employee mistakes to laziness, lack of training or outright fraud by offering discounts below what they should be. Improving training and skillsets, adding labor scheduling technologies and simply providing enough people to adequately serve customers were identified as some of the solutions.
Source: “Retailers and the Ghost Economy: $1.75 Trillion Reasons to be Afraid,” IHL Group
Data Disconnect/Systems ($222.7 billion): Approximately 60 percent of these issues are due to retailers not systematically measuring the impact of overstocks and out-of-stocks. Another quarter relate to tracking but not sharing the information across the enterprise. The remaining 15 percent are because systems can’t talk to each other. A single system to track underlying issues was offered as a way to reduce these issues.
Supplier Issues ($158.5 billion): Challenges include suppliers providing too much product against forecast, delivering at the wrong time or not being able to fill orders. Offshore manufacturing has intensified the challenges with out-of-stocks. Better integration of systems and data sharing between retailers and suppliers are expected to reduce these problems.
Theft ($161.6 billion): Globally, employee involvement is considerably higher than customer theft.
"These problems are within retailers’ grasp to solve, but it requires more than data, more than business intelligence," said Greg Buzek, president of IHL, in a statement. "It requires understanding the root causes of inventory and data disconnects and implementing the technology solutions and operational changes to address these revenue-limiting issues."
- New Research Report: Retailers Lose $1.75 Trillion in Revenue Worldwide Due to Overstocks, Out-of-Stocks and Returns – OrderDynamics
- Report: Retailers and the Ghost Economy: $1.75 Trillion Reasons to Be Afraid (report) – OrderDynamics
Which emerging technologies, organizational realignments or other changes will drive the next leap in reducing losses from overstocks and out-of-stocks? Are technological or non-technological issues the bigger hurdle?
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14 Comments on "Retailers suffer the high cost of overstocks and out-of-stocks"
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As the article points out this is a problem wide in scope with multiple causes. Change has to start at a leadership or organizational level. I think similar problems could be identified around marketing or store execution too. In general, it seems that “business as usual” can no longer be tolerated and most retailers need to get much more serious about looking at things from the consumer’s perspective, then work back from there to prioritize how they change for the better.
Technology did not create the problem. Technology will not solve the problem. Business processes need to be created to get the right information to the right people at the right time. Once those processes have been identified for your organization and partners, then the right technology can be chosen and implemented to facilitate those processes. This is much more difficult than identifying the technology that causes or solves the problem.
To me, this issue is less about technology — although technology should be continuously upgraded and reevaluated — and more about business processes and people.
Business processes can be re-designed. In fact, when it comes to inventory management at least, they should be reviewed on an annual basis as well as being adjusted on the fly.
The “People Question” is the final frontier of inventory management and the piece that’s not so easily solved.
Wait! Before I hear the Greek chorus of folk advocating more/better/different/more humane/less humane/etc., training, let me return to old theme of mine.
Does training help? Of course! Is it a cure for the critical woes facing retailing today? Not hardly.
The issues aren’t technological. They are labor availability, compensation models, scheduling, promotion paths, etc. Until those issues are addressed stores will continue to sub-optimize on every metric including stocking.
Technology is not the issue. Technology will not immediately solve the issue. It will assist. The issue is people. Whether it is the employees who have been poorly trained or the customers slipping items in their bags and walking out. Better qualified people making some of the decisions will help reduce but not end the problem. This is an ongoing process that will take years to get to an acceptable level of loss. Loss can be prevented but not eliminated.
I have a phrase I use a lot: “The tyranny of turn.” Merchants are partially compensated based on turn. Turn is an average number. A combination of overstocks and out-of-stocks simply don’t show up in the turn calculation if it is within the same category.
Hence we incent our merchants to starve some product, because they’ve overstuffed others.
So rather than blame stores (which this report seems to do), I blame corporate compensation strategies and processes. The easiest solution is to a) calculate turn at lower levels of the merchandise hierarchy, and b) compensate buyers and re-buyers on a combination of GMROII and service levels rather than turn.
That’s the only way to capture both sides of the equation and actually solve the problem. It’s not a technology issue at all.
IHL’s reports on this issue are a collective wake-up call for the industry. Imagine the impact if retailers could reduce even 5 percent of this.
I manage dinners all over the country, and everywhere I go retailers are talking about process issues. Let’s figure out a way to share some learnings.
“Retailers suffer the high cost of overstocks and out-of-stocks.” First off, is this really news? I know I dealt with it on a daily basis when I ran stores in the ’80s. Also, CPG brands suffer along with retailers. Let’s not forget these critical business partners. Personally I still believe good, old-fashioned business process improvements can and do help this inventory optimization challenge. Trust me, I have worked with retailers around the globe and have implemented process improvements exclusively to reap tangible ROI with zero technology investments. However, can apps provide additional benefits? Absolutely! Supply chain optimization, WMS, retail execution, promotional inventory alignment technologies and many more all can add incremental savings as well as revenue growth. From my perspective, though, I see the culture of business processes still being the greatest challenge to overall improvement.
Non technical issues are the bigger hurdle, but technology can help. The quickest path to improving out-of-stock and overstock is to fix the non-technical issues.
However, as we’ve discussed this to death now, improvements in supply chain management, tracking and forecasting can be achieved with better applications of current technology.
It is really hard to discuss any one technology here because the topic “retail” is so broad. What a grocery chain needs is different from a clothing retailer. Having said that, big data will help across the board in understanding and forecasting better.
There are a number of hurdles at play here. Retailers will need to forecast more accurately and improve communication between departments to start. I think that big data is poised to make a big impact on inventory management. Making inventory decisions based on historical sales data, current market conditions, and projected sales have the ability to cut down on under/over stocking.
The best retailers have a handle on their inventory. There is a balance between out-of-stock and overstocked. Both cost money. Carrying the cost of surplus inventory can drive a company into bankruptcy or even out of business. And, customers will lose confidence if every time they want an item it is out-of-stock. Technology can help. Watching trends can help. Analytics can help you control inventory. Then you have external influences, such as weather and economic issues, which can impact sales, delivery of product, etc.