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Here's how those out-of-stocks might be hurting your health food store, and how to find and correct them.

Bill Crawford

November 4, 2015

4 Min Read
Consider the ghosts in your natural products inventory

My wife has recently grown quite an affinity for cold pressed juices. There is one in particular that she really likes. I mean really likes. It is a quality product, chock full of nutritious ingredients—and organic. It has become a daily part of her routine to have a bottle of this juice.

On the other side of the consumer-industry divide, I have watched this company as a small startup just a couple of years ago grow, attract some investors and some sales/marketing talent from across the industry, gain placement in quite a few stores and become a brand with a growing national presence. It has been a great story to observe.

However, the story is not all good news.

Most of the time when I have gone into my local natural products store to buy this juice, it has been out of stock. When I find it in the cooler, the expiration date has always been good enough for me to buy the entire amount on hand. (I have to wonder if others are doing the same thing!) The result so far is only a few satisfied customers enjoying this product, little or no room for it to grow and frustration with either the store or the juice company.

As I am a friendly person with a background in the natural products industry and purchasing who spends a lot of his time educating retailers, I engaged some of the store staff and told them what was going on with this product through my eyes. It turns out that they buy a case each time that they place an order with the distributor. They were not aware that it was out of stock for multiple days in a row for many recent weeks.  The thought to increase the order never crossed their mind. They, in fact, saw what was going on with it as a success.

I do not fault the staff. With tight labor budgets, each order clerk has thousands of items spread over hundreds of linear feet of shelving to keep track of and reorder. Knowing the status of all of them would be nearly impossible. However, this particular store is a part of a successful group of stores that could afford to automate their replenishment buying, freeing the store staff to work on merchandising, solving problems and helping customers. AND—automating their replenishments would go a long way toward eliminating problems with this. 

The concept that comes into play here is ghost demand. 

When you automate your purchasing, you have to decide how many days of inventory you want to buy up to. If you want, for example, to keep 21 days (three weeks) of product on the shelf and you sell three per week, you want to try to buy up to nine when doing weekly reorders. However, what happens when you sell out of a product that you order once a week three days into the cycle? You have four days of ghost demand that your system has to account for. In fact, a good system can account for this while even the best staff probably cannot. 

Your system can count the days when products are in stock and use only those days in the calculation of how many to reorder. Using our previous example, if you sell out in the first three days after replenishing the product, the calculation will calculate daily sales for that week as having taken place over three days and not over seven days. The result is that you will be prompted to buy twice as many when you reorder. (Your system will show that you are selling one per day over three days rather than 0.43 per day over seven days.) That may give you enough on hand to last through the week rather than just the first few days. 

In the worst case, even if you still sell out, you will sell more, hopefully to more customers, before that happens, and then you will be prompted to order more the following week. Your orders will increase each order cycle until you (a) don’t sell out in between shipments and (b) have your desired inventory level on the shelf.

The purchasing system, of course, is more complicated than what we can cover here in its need to handle new items without a track record, seasonal items whose demand increases and decreases at different times of the year, items with a long-term outage due to a supply issue, and items with an unpredictable spike or drop in demand due to favorable or unfavorable media coverage. For routine items, however, a simple ghost demand function in your ordering software will keep you with a desired inventory level where order levels are corrected based on demand. Your staff can then devote their time to the exceptions that will occur.

Ghost stories can be all too true—both frustrating customers and costing retailers and manufactures sales. Smart tools, which are readily available, can help solve this problem.

In my quest to bring my bride her desired juice, it can lead to a happy ending!

About the Author(s)

Bill Crawford

Bill Crawford, a natural products industry veteran, is the founder and principal consultant at Crawford.Solutions, a management consulting firm specializing in strategy and organizational development. A former retailer and past member of the New Hope Natural Media management team, he has an extensive background working with natural products retailers. He is also a college professor who regularly teaches business strategy, marketing, data analysis and organizational behavior. Leveraging his experience and insight, he provides analysis and commentary to stimulate questions and discussion about trends and happenings in the retail marketplace and in society and how they affect natural products retailers. Read more from Bill Crawford below and catch up with older Bill Crawford blogs here. 

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