Retail Out of Stocks

A research study conducted at Emory University, Goizueta Business School, Atlanta, GA USA; University of St. Gallen, Institute of Technology Management, Switzerland; and College of Business and Administration, University of Colorado at Colorado Springs, USA Principal Authors: Thomas W. Gruen, Ph.D. University of Colorado, Colorado Springs USA; Daniel S. Corsten, Ph.D. Institute of Technology Management, University of St. Gallen, Switzerland; Sundar Bharadwaj, Ph.D. Goizueta Business School, Emory University, USA Draft Version 6.1 April 18, 2002Overview and Objectives Over the past year our team of researchers has gathered and analyzed a broad array of studies that examine the issue of out-of-stock products worldwide. Using the previously published results of 15 industry and academic studies to provide benchmarks and guidance, we examined an additional 36 proprietary studies. This report presents what we believe to be the largest and most current single compilation of findings regarding the extent, causes, and consumer responses to out-of-stock (OOS) situations in the fast moving consumer goods (FMCG) industry. Moreover, this is the first study that enumerates OOS on a worldwide basis. The objective of the study has been three-fold: to present an updated and accurate "map" of facts surrounding out-of-stocks, to examine out-of-stocks worldwide, examining rationale for similarities and differences, and to examine differences in findings based on different methodologies of measuring out-of-stocks. Key Findings Some of our findings reinforce what we learned from previous studies: First, out-of-stocks remains a large problem for retailers, distributors, and manufacturers in the FMCG industry. The advances in supply chain management, Efficient Consumer Response (ECR) and category management initiatives, and investments in inventory tracking technology have not, by and large, reduced the overall level of out-of-stocks on store shelves from what was reported in previous studies. Out-of-stock rates vary wildly among retailers and their outlets depending on a variety of factors, but the majority tend to fall in the range of 5-10 percent. More importantly, in studies that examine faster selling and/or promoted products, the rate regularly exceeds 10 percent. Our overall average OOS rate worldwide is 8.3 percent and is illustrated on the attached chart.Second, most of the direct cause of out-of-stocks occurs at--and must be remedied at--the retail store. Most of the studies we examined revealed that 70-75 percent of out-of-stocks are a direct result of retail store practices (either underestimating demand or having ordering processes/cycles that are too lengthy) and shelf restocking practices (the product is at the store but not on the shelf). Interestingly, the responsibility breaks out into the following approximate general groupings: Retail store ordering and forecasting causes: 50% Product is at the store but not on the shelf (shelving and replenishment): 25% Combined upstream causes: 25% The report provides extensive detail behind these general summary numbers in the section on causes of OOS (refer to Section III C for detailed informaiton).Other of our findings present new evidence that changes our understanding of the issues: Relative to previous reports, our consumer data show an increasing willingness of consumers--when confronted with an out-of-stock situation--to seek those items at an alternative outlet. Our consumer studies show--depending on the product category--that when confronted with an out-of-stock situation, 21-43% of consumers will make that purchase at another store, while another 7-25% will not buy the item at all. The consumer studies show that retailers are likely to lose almost one-half of the intended purchases when a consumer confronts an out-of-stock. This loss does not include the impact of substituting which is generally towards a cheaper substitute. The worldwide averages are shown in the following chart. The report provides extensive detail behind these general summary numbers in the section on consumer response to OOS (Section III B).Second, the implication of the above finding suggests that the cost of out-of-stocks to retailers is greater than what has been reported in previous studies. Our findings show that a typical retailer loses about 4 percent of sales due to having items out-of-stock. The report provides extensive detail behind these general summary numbers in the section on implications of OOS (Section III D). Third, the out-of-stock issue shows some striking similarities worldwide (for example aggregate root cause attributed to retail stores), while it also shows clear differences by region (for example, consumer brand substitution). We did find differences in the variance of the extent of OOS in developing countries (greater variance). Moreover, while the causes attributed to the retail store were consistent in the aggregate, there were clear differences among the regions when it came to the amount of store ordering vs. forecasting vs. replenishment. Our study sheds considerable light on both the worldwide differences and similarities in terms of extent, causes, and consumer responses to OOS. Fourth, our study examined several measurements of out-of-stocks by a new method that uses scanner data and product movement to predict and identify out-of-stock situations. Previous studies have relied on physical store audits that provide measures of out-of stocks at specific periods of time. However, identifying an out-of-stock through a physical audit does not necessarily identify the true effect of that out-of-stock, nor does it provide a precise measure of the duration of the out-of-stock. The latter consideration, the duration, is managerially relevant since the length an item is out-of-stock indicates the true damage to the store's sales. The findings using the new method of measurement were reasonably consistent with the store audits, and this suggests that the new method provides reliable measures.II. Introduction and Overview of StudyClick on the Attached File at the right to view the entire study in PDF format.ConclusionsBased on the many studies reviewed for this report, we found that the worldwide average sales loss due to OOS is 3.9%. It is important to understand the limitations of this finding as well as the likely validity of it. First, sales losses due to OOS in the FMCG industry that are reported in other studies tend to fall in a similar range. For example, both the NACS study and the Coca-Cola study reported sales losses of 3% in the USA. In the UK, in 1999 Safeway PLC reported estimated sales losses of 4-5% on OOS items. Therefore, our findings are consistent with other findings. Second, it is important to understand the limits of projecting based on the findings of this report. The data was not collected in such a way that macroeconomic projections of the total cost to the industry can be confidently projected from these findings. However, any retailer can utilize the findings here to use as a benchmark comparison when addressing OOS items. For example, if the retailer estimates sales losses as greater than 3.9% due to OOS items, they will likely have a large payoff from addressing the issues. Alternatively, if the retailer estimates sales losses as much less than 3.9% (for example if the losses are about 2.1%), then the payoff may be much lower.Regardless, the OOS problem remains a major issue for not only the retailers but also for all parties in the FMCG supply chain. As many retailers are beginning to address OOS with the newer technologically sophisticated solutions (such as those developed by Data Ventures or IBM-IRI), they are setting a new standard in OOS levels that consumers will expect as the level required to earn their business. As we examined consumers across the world, we found that consumers are indeed localized in their choices. However, when their choice is taken away through a item being OOS, consumers behave in a similar manner globally. In the end, the retailers (and their supply chains) that satisfy customers will be those more likely to succeed.

Retail Out of Stocks

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