How can retailers avoid losing sales to ‘out of stocks’?

Blogging for SmartCompany over the past four years has been a truly interesting and educational process.

While I hope some of the observations, trends and insights are of use to readers who are retailers and manufacturers alike, many of the comments, tweets and proactive emails I receive in response to these posts allow me to further build my knowledge and close the loop by feeding them back to readers. This happened to me again recently, so here I am sharing my learning with you, my readers.

About a month ago, I received a comment on SmartCompany and then an email from a company in France. As I was about to start a month-long retail trip to the US, I didn’t have time to Skype there and then, so I researched the company, made contact and put a placeholder in my diary to Skype Paris (where the company was based) in early May. I then set off for the US.

On my trip, one of the things I saw in CROSSMARK’s Minneapolis office, the home of Target and Best Buy in the US, was a group of analysts who had formed a specialist team supported by forecasting software with the sole purpose of increasing forecasting accuracy for manufacturers trading with Target. It doesn’t seem like a particularly obvious service to offer, but Ray Fager, regional VP, and his team are making a significant difference to lowering out of stocks via this initiative.

Basically, they ensure that when a shopper walks into their local store the item they want to buy is in stock.

This sounds easy and obvious, but to do it at item level and at store level is hugely difficult, even though it’s the only method that really helps the shopper.

In fact, forecasting at a whole of business level, which is how it’s done in 99% of retailers, fundamentally doesn’t work. This is why in many stores around the world up to 10% of all items are out of stock at shelf level. Not to be confused; there’s plenty of stock available, but it’s in the store room, in trucks on their way to the store, in the distribution centre (DC) that feeds that store or on its way to that DC from the manufacturer.

The point is none of that stock can be purchased by the shopper in the store at that moment. Lost sales through store-level out of stocks is a hugely frustrating issue for retailers and brand owners alike. It’s called “creating footfall and not taking the dollar”.

Having seen the effectiveness of the work being done in the CROSSMARK Minneapolis office, I was better prepared for my late night Skype with Joannes Vermorel, the founder of Lokad, the company that contacted me after noticing this blog.

Joannes is a fiercely bright mathematician who cut his teeth working in the AT&T labs in the US. That means that he and the team he has built have been able to harness a process called ‘quantile forecasting’ to significantly improve store-level forecasting, lower out of stocks and increase sales.

By how much?

Well, for a major European food retailer each 0.1% improvement in forecasting accuracy increased sales by 1 million euros (about $1.2 million). I am not going to get into the detail of the how behind quantile forecasting, other than to say that it is a huge paradigm shift that works on large-scale retailers and corner stores.

The returns are amazing. For 150 euros per month, Lokad improved sales and lowered inventory by 1 million euros for a small retailer. This represented a drop in inventory and in working capital of 20%.

If you want to look at ways to improve inventory and sales have a look at the Lokad website. It’s unusual in that it can be used as a self-service solution, so long as you have an understanding of data analysis.

CROSSMARK chief executive Kevin Moore looks at the world of retailing from grocery to pharmacy, bottle shops to car dealers, corner store to department stores. In this insightful blog, Kevin covers retail news, ideas, companies and emerging opportunities in Australia, New Zealand and around the world. His international career in sales and marketing has seen him responsible for businesses in over 40 countries, which has earned him grey hair and a wealth of expertise in international retailers and brands.

CROSSMARK Asia Pacific is Australasia’s largest provider of retail marketing services, consulting and servicing some of Australasia’s biggest retailers and manufacturers.