The Real Cost of Stockouts

October 26, 2020 in Retail

The Real Cost of Stockouts

How much do the stockouts at your stores really cost?

I read an article recently that Harvard published some years back about a research study where 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 while 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 c-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 c-store operators to recapture money that’s been left on the table.

Everyone knows that stockouts cost money but very few c-store operators have the ability to measure the true cost. StoreKeep 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

The example below is a simplified description of how how StoreKeep can calculate the cost of your stockouts:

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.

StoreKeep 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. At a typical chain of ten stores before using StoreKeep , the 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 and 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. StoreKeep tracks the basket for every sale and also calculates the Total Opportunity Cost due to walkouts. We found that in the chain of ten stores, the Total Opportunity Cost is closer to $30K/Month when factoring in walkouts and the lost baskets.

Attacking the Problem

StoreKeep automatically generates alerts when a product’s sell through rate “flatlines” so that the store manager 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.

StoreKeep provides real-time scorecards for each store so c-store operators can 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. 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 StoreKeep. Please keep in mind that this is but one out of hundreds of ways that StoreKeep provides real-time insights that enable our clients to make immediate improvements to their bottom line.