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Natural Foods Merchandiser

Eight smart ways to reduce out-of-stocks

Nothing talks like an empty shelf.

It says to the customer, "No sale."

It says to the vendor, "This retailer is not professional."

It says to your competitors, "This guy's a lightweight."

Shelf sets full of gaps signal something fundamentally wrong with your store's operation. A storekeeper must have goods available to buy. And yet, it's a universal problem, with food retailers reporting about 4 percent of sales lost to out-of-stocks every year, according to Supermarket News.

Some out-of-stocks have to do with purchasing, and some with supply chain availability, says Sherwood Smith, president of The Intelligence Agency in Traverse City, Mich. "To customers they all look the same," he says. "You screwed up."

It's a $25 billion problem every year, with out-of-stock rates averaging 7.9 percent of total inventory in American supermarkets, according to a study done by Data Ventures and the packaged goods giant Procter & Gamble. And it's attracting big investments in technology among major vendors and large store chains.

Data Ventures and P&G are testing an "Item Velocity Monitor," which the partners claim can reduce out-of-stocks 25 percent by using advanced statistical models to determine sales patterns and call for more stock in real time. A test on diapers, bathroom tissue and detergents at 250 H.E. Butt stores in Texas led to changes at both the store and chain-wide purchasing levels that reduced out-of-stocks 1.9 percent and recovered $3 million in lost sales.

A different demand-forecasting program between Giant Eagle stores and Anheuser-Busch used software that analyzed two years of POS history to cut direct store delivery stockouts on beer 45 percent while increasing sales 2.5 percent.

Wal-Mart's test of RFID technology, which uses embedded radio frequency tags to track inventory, found that high-volume items from 130 suppliers were replenished three times faster when pallets and cases were RFID-equipped.

The 29-week study, tabulated by researchers at the University of Arkansas, found that out-of-stocks declined 16 percent at the 12 pilot stores, which included supercenters, discount stores and Neighborhood Market formats.

That's Wal-Mart. But what about you? Short of microchipping your customers or asking them to submit their shopping lists a week in advance, how can a small naturals retailer guard against out-of-stocks?

We polled industry experts for tips on how to make sure no customer walks away from your store unsatisfied.

Understand where the problem is coming from. Broker Sunny Crowley of A Natural Choice in Makaha, Hawaii, puts it this way: "The manufacturer might be out-of-stocking the distributor. The distributor might be out-of-stocking the retailers. Or the retailers might be out-of-stocking themselves."

Production and demand forecasting problems happen to even the best manufacturers, and it falls to their reps or brokers to keep distributors and retail buyers apprised so they can buy around a problem until it resolves.

It's in a manufacturer's interest to resolve it soon, because brand equity leaks away every time a customer makes a substitution. A survey by Stax Inc. found that 60 percent of customers would buy another item in the same category if their preferred product was out of stock. Only 15 percent would wait for the preferred item or go elsewhere to buy it.

Distributor shortfalls are a stickier problem. Too often, Crowley says, a deal program will be set up and funded by a manufacturer and accepted by retailers, only to fall flat because of lack of inventory at the warehouse. "The distributor buyer doesn't buy in time, doesn't buy enough or doesn't buy for the deal at all," Crowley says. "I know most do an excellent job, but some don't."

On the retail side, buyers come and go, and sometimes while the learning curve is being climbed, the shelves go empty. "This is where a good manager must be watching [his or her] shelves," Crowley says. "Are they being stocked properly? Is there any usable back stock to be put out? Or is the product not even in the store?"

Use the technology you have to best advantage. Watch the shelves through your ordering system as well as with your eyes. Many retailers who have implemented Order Dog, Living Naturally's ScanGenius or another POS/ inventory control system are failing to use features that can help solve supply chain difficulties.

Don't wait until you're unpacking to discover something's on back order. Review your invoices as soon as they're available to see what didn't ship, so that you can turn the shortage list into a new order to another distributor, suggests Clay McFarland, director of production control at Living Naturally.

A minimum/maximum ordering scheme looks at inventory and sets the order based on your delivery schedule. If delivery is every week, says Living Naturally supplier account executive Jim Sheehan, set the maximum inventory for a higher amount to assure enough inventory until the next truck arrives.

Crunch the numbers for effective purchasing. To find the happy medium between stockouts and the shrink and space issues of too much inventory, a store's ordinary purchasing plan must be based on product demand and uniqueness to ensure that the most important and in-demand products never run out, Smith says. Following the 80-20 rule of demand, "identify the top 20 percent or top 20 actual products as 'never outs.' Add to this list any product with moderate volume (next 20 to 40 down) that is so unique that it will be difficult for consumers to easily find substitutes within your store."

Figuring out how much inventory is sufficient is also tricky. "Some organizations have gone three standard deviations above the mean, seasonally adjusted weekly consumption," Smith says. "If this seems too complicated, just go with an extra 50 percent over your regular purchasing quantity and then track it."

Check those "never outs" every week—if more than one or two per department still ran out, you might still be keeping inventory levels on those items too low.

Master the subtle art of promo purchasing. Whether you look up historical data or rely on "time in the saddle," Smith says, when Veggie Puffs go on deal, you need to look at how many cases you went through the last time they were at a 30 percent discount and use that as your basis to lay in quantities for the next time. The promotions manager, general manager or owner should check and document sales after the first full day of a price promotion. "If sales are way above expectations, this is the time to place a reorder, not when you are down to your last case," Smith says.

Don't create out-of-stocks where they don't exist. How do you do that? By building a case stack or placing a shipper in front of other merchandise, effectively hiding it. Customers won't play hide-and-go-seek to find an item; if they don't see it, it isn't there. Similarly, if you've built an impressive endcap display, make sure there's plenty of stock in each item's regular home. Don't send a regular customer out of the store empty-handed for the sake of catching a promo-minded shopper's eye.

Match your stock to your planogram. If the shelf tags show four flavors, and three are sold out, but your stock clerk faces out the remaining flavor four abreast, that is still an out-of-stock. Worse, it means you're overstocked on the worst-selling flavor and out of the best three. A study done by Mosaic Group and Information Resources Inc. for PepsiCo's Tropicana brand found that 90 percent of the 3,000 stores studied had stockouts, based on audits that compared the merchandising plan to what was actually on the shelf. The faster-selling the SKU, the less likely it was to get its allocated shelf space, the study found.

Minimize customer frustration when stockouts occur. Even Wal-Mart runs out of things sometimes. "You need a good system in place to deal with out-of-stocks at the point of purchase," Smith says. Shelf tags are a start. "Employees on the floor who are trained to apologize for the inconvenience, suggest a substitute and report the date that the product is due back will seal the deal. If you have a pre-order policy, this can be mentioned as an option to disgruntled customers."

Turn stockouts into special order opportunities. Consultant Danny Wells makes no secret of his belief that naturals stores should focus their inventory on the best-selling products in each category, instead of going a mile wide and an inch deep. A large, broad inventory practically guarantees the dual problems of high carrying costs and stockouts; if you carry one of everything, Murphy's Law dictates that two people will want the one package of Product X on the same day.

To put the best customer-service face on that choice, Wells says that a retailer should never say "no" without a "but."

In other words, "We don't have that brand in stock today, BUT we do have three other brands of the product that are our best sellers, or we can special order your requested brand and have it for you on Friday. Let me show you what we have."

Most of the time, he reports, the customer will leave with an alternate brand. Living Naturally's Sheehan suggests going the extra mile: Offer the customer a similar or superior product at the same price as the out-of-stock item.

If not, by asking for a deposit on the special order, the retailer guarantees a return trip later in the week. If a customer buys that item all the time, offer to set up a recurring special order so he or she will never run out, charging a credit card and handling notification via e-mail. It's a nice combination of e-commerce ease-of-use and the personal touch offered by your store.

"A retailer's job is to stock the 3,000, 5,000 or 15,000 products most of their customers want most of the time and to special order the other 90,000 as requested," Wells says.

Natural Foods Merchandiser volume XXVII/number 2/p. 14, 16, 20

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