Probably every one of us have many a times encountered this situation that we entered the retail outlet and realised that the product that we are looking for is missing, resulting in frustration caused by loss of time and effort.
Out of Stock or Stock-Out in Supply Chain is the situation that is very common in the trade. There are many reasons for the Stock Out. Too many SKUs for management, too much traffic, too little cooperation between suppliers and retailers, bad sales forecasting, wrong orders, wrong deliveries, other priorities, delisting, etc. The Stock Out influences all stakeholders in trade, suppliers, retailers and customers in a different, but interrelated way. The sustainable competitive advantage of the company depends on the stock out level.
Consumer's perspective on Stock Out
If a customer doesn’t find a product of his choice/preference, he may choose a different brand, go to other place, return later, etc. According the ECC research, 9% of sales are lost due to Stock Out.
Also, consumer's loyalty can be jeopardised if the Stock Out persists. If one brand is missing on the shelf, the consumer can easily reach for another brand. If the problem continuously persists, the consumer is likely to change the shopping preference or place.
Retailer's perspective on Stock out in Supply Chain
The retailer may have an opportunity to make up the lost time from one brand by selling the other brand. But if the Stock Out on the important brand continues, the retailer is risking loosing a shopper.
Loosing a shopper is a very serious issue. For example, if the shopper is the family that weekly spend 8k $ in the retailer outlet, this means that the retailer is loosing over 32k $ in ten years. Now, means that he cannot make direct influence to the shopper, but indirectly, through the retailer. This is where good relationship and alignment comes as a very important factor.
Secondly, when supplier's product is Stock Out in the outlet, it leaves an open space for competition. So, it is not only that Stock Out is bringing the loss of the volume, but it also gives the food to the competitor.
Finally, lost sales due to the Stock Out is almost directly reflected on the profit. Since the company has fixed and variable costs, it takes some volume to be made in order to reach the breakeven point, where the company is at positive zero. Only after the breakeven point the company is earning profit. This means that the profitable volume comes last, but in the case of Stock Out, the company is losing profitable volume first.
The solution for effective fighting the Stock Out in Supply Chain is close liaison and partnership relation between supplier and retailer. This requires openness, data sharing, flexibility, sales forecasting, etc.
Vendor Managed Inventory ( VMI ) is the good system of fighting Stock Out in Supply Chain. VMI is the system agreed by both parties where the supplier takes the leading role in managing the retailer's inventory. This means that supplier must have accurate data of retailer's inventory, sales history and to have right to create order on behalf of retailer. On the other hand the supplier is responsible for proper balancing of stock, Stock Out, over-stock and obsolete stock. Prerequisite for VMI is the mutual agreement between parties, but also technical background ( software as SAP is ).
Finally, every single percent of Stock Out reduction is the benefit for all stakeholders in the supply chain; suppliers, retailers and shoppers. No Stock Out is the only way to Win-Win-Win situation.