SCDigest: Out of Stocks - and Suppliers - Short Circuited Circuit City
Through a special arrangement, presented here for discussion is an excerpt of a current article from Supply Chain Digest.
A recent SCDigest article Just How Big is the Out-of-Stock Problem in Retail?, reminded me of the "Walk to Buy" ratio, which measures how many customers walk out of a store without a purchase versus how many customers actually bought something. Typically a "walk" was considered the result of one of three things:
- Out-of-stock of the exact item and there was no substitute or the substitute was not acceptable.
- The customer could not find the in stock item, and/or could not find help to locate the item.
- The price of the item was too high.
Good marketing and pricing is supposed to fix the second issue. The third issue can be addressed through good retail layout, signage, and floor customer service. But the first one is a supply chain issue.
Out-of-stocks came up in a discussion with one of my clients regarding Circuit City stores. Conventional wisdom is that they could not compete against Best Buy.
Some of what "shorted" Circuit City was certainly self-inflicted. Exiting the appliance market and changing the compensation plan from commission to a flat sales program certainly contributed to its demise.
But what really killed Circuit City were out-of-stock issues that began about three years ago. This is anecdotal, but my own personal electronics/computer buying routine at the time included going to Tweeter, Circuit City, and finally to Best Buy.
Often at Circuit City accessories would be out-of-stock or there was no acceptable substitute. I would "walk" out and go to Best Buy. Accessories were pricier - but they were in stock. Over time, this led to a change in my purchasing patterns. I suspect I am not alone
Circuit City was unable to fix its out-of-stocks because they were unintentionally "shorted" by their own suppliers. An increase in electronic market penetration by a more "disciplined" retailer, Wal-Mart, didn't help either.
Consumer product manufacturers often do not make enough product to meet all of the demand and there is always competition from other manufacturers. The last thing that they want is excess inventory. To prevent markdowns, they don't ramp up production, but limit it so there is unfulfilled demand.
Manufacturers receive orders and often first ship complete orders to large retailers with a supplier compliance program to avoid chargebacks. Orders for a few other smaller retailers who also attended "compliance school" arrive, so they fill those too. A fraction of units remain to fill the rest of the orders, and they set priorities using the "ship by" dates. Manufacturers let the unfilled retailers know they are producing more and may ship a few days late. But by now they may get replenishment orders from 3 or 4 big retailers who have the strong compliance programs. They cut back on the smaller retailers, or the retailers without the program. The retail customers with "fill rate" compliance programs always get to the top of the allocation list.
Collaborative Forecasting and Replenishment (CPFR) as a way of trying to fix this issue didn't work. However, retailers who have really embraced a compliance program as a "collaborative" tool to improve performance can attest to how they reduce stock-outs with a strong on-time and full-fill program.
Though it tracked fill rate performance, Circuit City did not charge suppliers for poor performance in this area. That led to greater out-of-stocks than they would otherwise have faced, accelerating the ultimate death spiral.
Would fewer out-of-stocks have kept Circuit City alive? That is unclear. But it sure might have helped.
Discussion Questions: Was the fact that Circuit City did not charge vendors for poor fill-rates a significant factor in its downfall? Generally, are you for or against charging back vendors for shipping non-compliance?