How much do stockouts at your stores really cost?
I read an article recently that Harvard published some years back about a research study. In this study, grocery store chains used technology to track the inventory levels of their top SKUs in an effort to reduce stockouts. The article reported that one chain saw an increase of 2% in their top-line sales. Another chain reduced stockouts by over 20% due to tracking their top 1,500 SKUs and sending alerts when inventory was running low. This study prompted me to think about the real cost of stockouts to convenience store operators and how we could calculate it using real-time data. As soon as we released this feature, it became very clear that attacking this problem is one of the easiest ways for convenience store operators to recapture money that’s been left on the table.
Everyone knows that stockouts cost money but very few convenience store operators have the ability to measure the true cost. Taiga’s Front Office Platform uses real-time integration with the inventory and POS system at each store. Real-time data allows it to track the sell through rate of every product in a store, calculate the cost of stockouts, and provide tools to attack the problem.
Calculating the Cost of Stockouts for a Convenience Store
The example below is a simplified description of how Taiga’s Front Office Platform can calculate the cost of stockouts for your Convenience Store:
|Step 1||Identify when a product’s sell through rate drops to
zero or “flatlines”.
|Step 2||Measure the duration by knowing when the product
starts to sell again.
|Step 3||Predict the number of lost sales that would have occurred
during that time based on historical averages.
|Step 4||Multiply the sales price by the number of lost sales to
estimate the cost of the stockout.
Taiga’s Front Office Platform uses advanced technology to perform this calculation on all SKUs in the store. It was alarming to see how big stockout losses actually are when we began to analyze real customer data. None of our clients had ever been able to quantify stockout losses like this before. Before using our Front Office Platform, a typical chain saw Product Sales losses average about $20K/month. However, there is more to the story…
The Total Opportunity Cost of a Stockout
Research says that the implications of stockouts are much larger than simply the loss of a sale. In some cases, customers will buy a substitute. But over 40% of the time, they will walk out and go to another store. In the case of tobacco products, the walkout rate is much higher. These products are your top sellers. If a product simply appears to be out of stock for a few hours the losses add up rapidly. When a walkout occurs, the entire basket is lost. Taiga’s Front Office Platform tracks the basket for every sale and also calculates the Total Opportunity Cost due to walkouts. In a chain of ten stores, we found the Total Opportunity Cost is closer to $30K/Month when factoring in walkouts and the lost baskets.
Attacking the Problem of Convenience Store Stockouts
Our Front Office Platform Issue Detection module automatically generates alerts when a product’s sell through rate “flatlines”. This notifies the store manager so they can check for an empty shelf or obstruction. On high volume products, the system can detect a flatline within hours. The system also provides early warnings when a product’s sell through rate will exceed the inventory on hand before it is replenished. In addition to showing up in our executive dashboards, these real-time alerts can be sent directly to a store manager in the form of a task list so they can attack the problem immediately.
Taiga’s Front Office Platform provides real-time scorecards for each store. This allows convenience store operators to compare store performance and track their progress over time. While this is a new feature, we have already seen a significant reduction in stockout losses at our convenience store clients. It’s too early to know for sure, but we believe a reduction of 25% or more is possible within a few months of installing our Front Office Platform. Please keep in mind that this is but one out of hundreds of ways that our Front Office Platform provides real-time insights that enable our clients to make immediate improvements to their bottom line.