Mitigation Of Out-of-Stocks

The Fallacy that Full Shelves Equate to the Mitigation of Out-of-Stocks

All retailers face the dilemma of determining how to reduce Out-of-Stocks while not increasing costs in inventory, investing in expensive technology like CAO (Computer Assisted Ordering) and in payroll for store stocking. All SKUs are not created equal. Full shelves on every item increases unnecessary inventory and takes shelf space away from the fast moving and sale items that drive your business.

The reality of the situation is this; we know that 50% of all items in the store represent less than 15% of all cases sold and that 86% of all items on the shelf have more than a week’s supply of inventory! This is a result from the fact that 91% of all plan-o-grams are based upon case size which leads to having 25% of the sale items and the fastest moving items accounting for over 66% of the sales loss. Retail Wire reported that retailers lose $93B in sales annually as a result of Out-of-Stock.

Some retailers develop a never-out list, but in effect, that is admitting you have a problem without addressing the issue(s). Some retailers allow stores to limit ordering in some categories or SKUs of their own choosing, in the belief that they know what sells and/or will make the right decision on the category, SKUs and on the inventory levels needed to satisfy their shoppers.

Symphony IRI (Retail/CPG Market research company) found that in 2010 there were 150,000 “new” items, of which, 96% were line extensions. The proliferation of SKUs increases cost across the retailer’s landscape from the warehouse to each store. It also adds to the shopper’s inability to make a correct and a timely decision as to which item will be their solution to a problem.

Adding to this, some retailers still have slotting budgets in their belief that if they don’t, they will leave money on the table, but in essence, forces their procurement personnel to bring in “new” items to make their procurement budget and not based upon if the “new” item will add incremental sales and margin while satisfying a shopper need. The results are shelves that get cluttered with non-value added SKUs that decrease shelf space available for those items that drive the retailer’s business.

AC Nielsen study

A related AC Nielsen study showed that 7.2% of shoppers for Personal Care will leave the store without buying anything if their item is Out-of-Stock. For household items the rate is 5.7%, for Dry Goods it is 4.7% and for Frozen Food it is 4.4%. This leads us to understand that not all SKUs are created equally. “If you are out of OREO’S, you are out of COOKIES”.

Retail Wire also reported that the two largest causes of Out-of-Stock are procurement making planning mistakes and store’s failure to execute.

The best approach is to first determine what are the categories that drive your business and then determine what brands within those categories do shoppers have loyalty towards and finally which SKUs within the category/brands drive your sales and margin. This top down approach would allow retailers to get granular in their business, develop a clear understanding which items are the “power SKUs” and focus on the 20% that actually the business.

Yes, you need the smaller categories, brands and SKUs in your offering; but you do not need to devote the same amount of time, resources, inventory and shelf space as you do to the power categories and SKUs.


Bernard Anderson

Principal Consultant with NextOrbit, thought leader with extensive experience and expertise in the Retail and Consumer Products industry.