By every account, tales of out of stocks are truly horror stories to retailers. Lost sales, upset customers, and frustrated staff all work together to create a situation that Lon Chaney or Boris Karloff would be proud of
Outs are a bad thing – a recent survey by the IHL Group stated that nearly 10% of shoppers completely stopped to going a store due to the out of stocks that they experienced. In fact, the same survey says that over 16% of shoppers can’t find at least one item that they are shopping for on every shopping trip.
While this is concerning data, it comes from a broad array of retail establishments, not specifically from natural and organic product retailers. However, a recent retailer survey done by Nutrition Business Journal (nutritionbusinessjournal.com), a sister publication of Natural Foods Merchandiser, shows that 35% of retails stores are carrying less inventory in their stores than they were a year ago. Odds are that these inventory reductions, which ranged up to 20%, are translating into increased out of stocks.
I know that this is an issue that many retailers are dealing with – credit is tight for small businesses and inventory represents the majority of credit needs for retailers. Out of stocks from distributors and manufacturers are also quick high these days.
I brought these things up in a “State of the Industry” seminar at the recent Natural Products Northwest event in Seattle. It led to many in-depth visits with retailers. The predominant theme of those visits was “since this is true – and it is – how do we work through it?” That is what brought me to this post.
Now that we’ve set the stage with such a positive backdrop, let’s talk about demand, specifically ghost demand.
A basic function of inventory management is that of determining replenishment. Hopefully, you have a good POS system to do these calculations for you. The logic and math aren’t hard – but a typical store carries so many hundreds (or thousands!) of items that automating this is the way to go!
You basically calculate how many of an item you sell per week and determine how many weeks of inventory you want to have on your shelves. From that you get a “build to” or a “max” number. When your quantity on hand gets less than this number, you buy up to that number. Not rocket science, but a great way to keep your shelves stocked without draining your bank account.
(My simple example above does not take in account promotions, seasonal demand, new items, etc. – but does work for rank and file products on your shelves.)
However, what if you have been out of stock on an item for an extended period of time?
A good system will calculate your sales per week over a pretty long window of time – six months to a year is pretty common. It will take your total sales – let’s say 1000 – over the previous 52 weeks and determine that you have sold about 20 a week. If you want to keep 3 weeks of inventory on your shelf, your build to number would be 60. You want a long window to “smooth out” your data and take the “bumps” out of it.
BUT – what if you’ve been out of stock on that item for a total of 4 months during the past year? Maybe not 4 months in a row – but for 3 days in January, 4 in February, a week in March, 5 days in April, 10 days in May, etc. Your system will determine that your “build to” based on 12 months in stock, not the 8 that the product was actually there. (After all, you can’t sell it if there are none on the shelves!) During the weeks that this item was in stock, you were moving over 30 per week, not the 20 that your calculations were based on!
This difference is what we call “ghost demand.” It is a cause of many chronic out of stock issues.
If your system doesn’t allow for the “ghosts” you are going to be under-ordering and continuing your out of stock problems.
The solution is quite simple – you have to remove the days that product was out of stock from your calculations to determine your “build to” number. That would be hard to do manually, hence, my recommendation to automate it.
This is not going to be a major issue if you keep several weeks of product on your shelves. Where it becomes an issue is when you are dealing with limited shelf space and/or limited funds and decide to keep less inventory as a whole. After all, how often do your distributors’ trucks pull up to your store? How quickly are your direct vendors turning around orders?
Several retailers have asked me recently about adapting a JIT (Just In Time) inventory protocol as is popular in many manufacturing environments. The concept has a lot of attractiveness, but the “ghost” issue is only one of several that make this hard to pull off successfully in the retail world.
Using the example above, you might decide to only have 2 weeks, or maybe 10 days, of inventory on the shelf. Since this number is lower than it should be, all it takes is one supplier out of stock or a slight uptick in demand and you have upset customer and lost sales.
You have to take the “ghosts” into account – or it will look like your POS system is not giving you accurate data. Ideally, your POS system should be able to do this work for you – or this logic can be programmed into it.
Ghosts – at least in this story – are too real and quite scary! They need to be avoided – and they can be!