Out-of-Stock: A Good Problem To Have?
Out-of-Stock. It’s a magical word that all retailers like to hear, especially in the fashion world where trends come and go so quickly that it’s almost a cardinal sin to have last year’s news hanging from the rack, with the exception of evergreen collections (basics, the LBD and so on). But what does this mean for customers who hunt futilely for items that aren’t even available? Let’s take a closer look.
What Happens When You Are Out-of-Stock (OOS) Too Often?
As reported in Streetspotr, studies have shown that the average OOS rate for the retail industry is 8%, which means one out of 13 product will not be available at the exact time that a customer wants to purchase it.
No big deal, they can come back and purchase it at another time. Right?
Unless you’re selling timeless investments like Birkin bags and Burberry trench coats, chances are you will be inundated with a lot of customer dissatisfaction and frustration leading to:
- Loss of customer loyalty
- Less impact on planned promotions
- High operational costs (extra time and resources needed for additional ordering)
In today’s world where there are plenty of options to shop online, the out-of-stock situation can be more damaging than expected.
Finding The Right Stock Balance
While going out-of-stock is not entirely bad, you want to make sure you find the balance between demand and supply. Inadequacy of meeting customer demands is one of the biggest challenges for any fashion retailer. As new collections are being introduced and old ones discontinued or replenished, it’s common for database inaccuracies to occur which in turn disrupts the entire supply chain.
The best way to monitor sellouts and reduce stocking inconsistencies is to utilise a retail market intelligence platform. Sellouts in this aspect would mean understanding customers’ behaviours from colour preferences, best-selling price points and product assortments. Ideally, the platform should be an easy setup without complex technical implementations as it might cause more harm than good. Nike is a very good example of such ‘unforeseen complications’.
Nike’s Demand & Supply Chain Dilemma
In response to changing sales demands, Nike made the decision to integrate a system that uses a combination of historical sales data and human input to generate sales forecasts. In the fashion world where styles are fleeting and promotions can spike sales almost instantly, the supply chain has to react fast in order to deliver just the right amount at the right time. An over-supply means more discounts needed and less profit gained, while under-supplying will lead to lost sales.
Nike had good intentions but the plan backfired on them, costing a decline in sales of $100 million. This is due to insufficient testing on the system, resulting in an excess stock of low-selling shoes when they should be stocking up on other best-selling items.
But it’s not all doom and gloom. Charles & Keith, another international footwear brand based in Singapore, was able to find the right balance between their in-stock and out-of-stock collections.
Right Products With The Right Prices At The Right Time
Charles & Keith seemed to be practicing a lean inventory management, with 65% (1,616 SKUs) in-stock rate. This indicated a focus on the replenishment for best-selling items and closely-monitored inventory levels. Exactly what is meant by having the right products at the right time.
Moreover, the high sell-out rate did not seem to be motivated by discounts, as the most common discount was a mere 10-20% (shown in the bar chart below), and the proportion of In-Stock/Out-of-Stock items for discounted and non-discounted items were almost similar as shown below.
A closer look will reveal that only 12% of products that went OOS were discounted. This further reinstate the fact that most of the OOS items were sold at full price. Also Charles & Keith’s knowledge of what to stock up on and replenish in their inventory instead of resorting to discounting practices to get rid of low sellout products.
So Is Out-of-Stock A Good Or Bad Thing?
Just like everything else in retail, there is no good or bad. It depends on the nature of your business and the speed in which your inventory is cleared out. For example, Zara doesn’t stock a lot on clothes as revealed in a New York Times Magazine report but they keep their customers updated on what’s in their stores regularly. Hence, they don’t need to resort to excessive discounting practices and it creates a sense of urgency among their customers to purchase quickly with this “now-or-never” concept.
Buying lean is not an easy feat and few retailers have it all figured out. Knowing the exact styles, colours and materials to stock up on that best meet one’s customers’ needs seem like an arduous task. Even if you know what your customer wants, you can’t predict or control what your competitors are stocking up on. But one thing you definitely can do is predict and control your own inventory and ensure you will never be out-of-stock for the wrong reasons ever again.
Learn more about how you can manage your stock efficiently. Drop us an email at firstname.lastname@example.org and we’ll be in touch!
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