Too Little Inventory Killing Sales – Part two
In Part one of this article
I explained that retailers are doing a poor job of keeping their shelves filled and gave examples of failures at mom and pop stores as well as at the national chain store level. When consumers go to a store and cannot find the product they want, it is all too easy to order it on Amazon. After all, if I have to wait, why not just place the order, get it off my mind, and have it show up at my doorstep in a few days? It certainly won’t cost more than the store and maybe it will cost less. And it gives me a chance to punish
the retailer for wasting my time at his store. But, now to the next point –
Why are retailers reluctant to carry more inventory?
Conversations with retailers, wholesalers and manufacturers has led me to these reasons:
a) Mental scarring left over from the economic crash of 2008-2009 i.e. Fear of overstocking and being stuck with too much merchandise in the event of another economic meltdown. Retailers learned to operate on a shoe-string level of inventory and staff, and, like a cat once burned on a hot stove, are still afraid to be aggressive.
b) A “just-in-time” philosophy towards inventory levels that doesn’t have enough buffer inventory to cover even minor hiccups like delays in replenishment, out-of-stock at the manufacturer level or economic growth spurts. This is perhaps one of the most dangerous situations and also the easiest to fix. The reason it is the most dangerous problem is that it exists simultaneously across ALL levels of the supply chain. From the vendor of the raw materials who supplies the manufacturer, to the manufacturer who supplies the distributor, to the retailer. When all levels of the chain – materials, manufacturer, distributor or wholesaler and retailer – are running on very lean levels – no slack exists for a mistake, or growth. For merchandise with long production lead times, this means prolonged shortages – and consumers don’t sit still for that! It is so easy to find replacement vendors for virtually anything today. These last few years have had erratic weather patterns – like ice storms and deep freezes. Retailers should factor those types of exotic delays into their levels. You can’t predict exactly what will happen, but we do know that “stuff happens” in more years than not – so build in some extra capacity.
c) A failure to conduct a physical inventory on a regular basis. I doubt many retailers even know that they are out of stock on the shelves. Does management walk the entire floor of the retail store? Did someone steal some goods and the darn computer doesn’t know it? Only one way to fix that!! I would encourage small retailers to do a physical inventory 3 to 4 times a year – or more. The vitamin store could run one in two hours or less, as they have such little inventory. The bike shop I use constantly runs out of water bottles, training food items, odometers and other items. There is no excuse for this. Telling the customer to come back, and that you will get it from your “other location”, is NOT an acceptable answer. If you are a retailer, and recently opened more stores, then load up more inventory proportionately. If you have a problem with shrinkage, then put in digital cameras, screen your new employee hires better** and prosecute thieves.
What does it cost not to have the product in stock?
Wow – what a question – the costs can be extraordinary – like losing that customer forever. Once upon a time there was much fuss made about the lifetime value of a customer – see Tom Peters
books. Customers have alternatives; there are other
bike shops in my neighborhood and there are other
vitamin stores. There aren’t any other local supermarkets – so Publix has me by the short hairs, so to speak – but there is a Fresh Market, a Costco and more. (Someday there will be home grocery delivery in my area.) For those staples that I tend to load up on at Walmart, there is Amazon. So, assume that not having the product in stock is very costly! Once the customer starts clicking on Amazon, they may just buy six other items as well.
I use Amazon Prime – so the shipping is sort of free (somehow, the prices of the items on Amazon now seem to equal what they used to cost plus the old shipping fees – an item that used to cost $31 plus $3.90 shipping, now costs $34.90 for Prime, but Amazon is still relatively cheap and sometimes much cheaper than the retail store.)
If I HAVE to wait for a product, well, I might as well just order it on Amazon and not waste the time, energy and gas on a trip back to the store, who may or may not have the product even then.
Why the cost of carrying inventory is cheaper than it has ever been in the last 6,000 years of recorded history
The cost of carrying inventory at retail can be as high as 30 to 50% of the value of the inventory annually – Inventory carrying costs include breakage, shrinkage, the opportunity cost of the money, the cost of the warehouse or retail space it sits in – including the cost of heating, cooling, lighting that space – also the cost of insuring the inventory and conducting a periodic physical inventory. There is also obsolence and decay. All told, these costs are substantial – so retailers are smart to watch it carefully – but not having the right items defeats the whole purpose of being a retailer. It is a well known phenomenon of the retail industry that consumers buy more when the shelves in a store are full.
a) The cost of money is the cheapest it’s ever been in anyone’s lifetime. Businesses can borrow for next to nothing (by historical standards).
b) It’s one sure way to compete with Amazon – consumers still have little patience for satisfying their needs – we want it now. (Three weeks lead time to get a basic stock model bicycle is NOT acceptable. Tell me to wait three weeks and I will go home and search online for the same product and then drive two hours to get it).
c) Inventory is tracked better than it ever has been due to bar codes
, scanning at numerous entry and exit points and more sophisticated inventory tracking systems
. This helps keep costs under control.
d) Digital surveillance cameras can reduce shoplifting
and are cheaper and more powerful than ever. While not a 100% perfect solution, cameras discourage theft and reduce shoplifting.
Retailers need to stock more goods! The war is over and demand is rising. In short, all of this screams for a business model where the shelves are full and the product is available for immediate delivery. Don’t hand your business to Amazon – have what the customer wants, on the shelf, at all times!
** Small note to retailers – the labor market is tightening – you need to pay a little more to get decent people and then you need to train them more thoroughly. Trust me – I’m in your stores every day and there is much room for improvement.