How can stock-outs affect your bottom line?
To begin with stock-outs will create a loss of revenue and deterioration in brand image. When it comes to groceries, stock-outs can be an advantage for competitors. Why is this effect stronger for grocery manufacturers? Food is much easier for consumers to seek substitutes. If a store received no boxes of Cereal A, you’re likely to purchase your second favorite cereal.
But what are the actual losses a retailer can face? In fact a retailer can lose 10% of average sales (Gruen et al, 2002), and shareholder values have been known to depreciate by over 10% (Wu et al, 2013). This makes understanding industry and market reactions to stock-outs highly important to supply chain risk management and a firm’s survival.
Historically research focused on understanding consumer behavior following an inventory stock-out. Business leaders and researchers were more interested in learning how to respond to consumer behavior following a stock-out.
Consumers could switch brands if they were upset by an inventory stock out. A brand switch is the worst possible result. But new research wants to discuss product elasticity as an important moderating factor in finding out who (manufacturers vs. retailers) is hurt more by stock-outs.
Understanding stock-out pressures is becoming far more important for supply chain managers, manufacturers, and retailers in adjusting their supply chain strategy. Normally one would adjust their strategy to involve stocking numerous alternatives in case the demanded product is not available. This way consumers will be less likely to cancel, post-pone their purchase, or switch stores/brands.
What might end up being a more viable strategy is adjusting alternatives regarding product elasticity.
The researchers Wu et al (2013) noticed that different products had significantly different effects following different stock-out periods.
There are a few product types Wu et al (2013) observed and their effects on both manufacturer/retailer market share following 28hr and 14hr stock-outs. Certain products such as cosmetics resulted in large market share loss for retailers and had little change regarding length of product stock-out (Wu et al, 2013). Whereas salted snacks resulted in large market share loss for manufacturers compared to retailers in both 14hrs & 28hrs stock-outs (Wu et al, 2013).
This information is quite important for supply chain managers and logistics experts. The results of this study indicate that not all products require highly innovative and expensive inventory or procurement systems (Wu et al, 2013). Products that resulted in large losses of market share either through brand switch or sales cancellations should require sophisticated tracking and purchasing tools. These products such as cosmetics can result in large losses of revenues for retailers and are thus priority products.
This would of course mean that products will require more expensive forms of market research to understand what is a high priority or low priority product for a firm. But understanding a firm’s product priority is important in spending capital in the right direction, while learning to develop your own form of supply chain risk management.