The hidden consequences of stockouts

All companies have a well-founded fear of stockouts. Experiencing a disruption to our supply can be devastating to our business and has more consequences than we might first think. Far beyond the immediate loss of that product. On this occasion, to verify it, we are going to focus on stock-outs that occur in shops and supermarkets.

What happens when I have a stock out?

Let’s put ourselves in the customer’s shoes. He is in the supermarket and wants to buy his favorite product, which is your brand. He walks down the same hallway as always, and when he gets there, he’s just not there. He even sees the price tag in the empty hole where it should be. But he can’t buy it. What is that buyer going to do now?

This same question was asked in a survey by the Harvard Business Review, and these were its results:

9% do not buy the product.
15% delay the purchase of the product.
26% substitute the product for another brand.
19% replace it with another product of the same brand.
31% go to another store to buy the same product.

In the case of people who decide not to buy the product, the damage is clear and translates into the loss of a sale that will not be made again. Regarding the second case -those who will buy it, but later- one may have the false impression that no damage has really occurred; which is false. In the case of products to be consumed, delaying their acquisition also means that the next purchase is delayed. That is, if this week I don’t buy my favorite air freshener and I do it within a week, I will also buy the next refill a week later, and so on.

Among those switching to a new brand, the problem couldn’t be more apparent. In this case, out of stock causes us to throw a loyal customer who was going to buy from us into the arms of the competition. Right at the time of purchase decision and with the need to do so. A lethal combination that can cause us not only to lose that purchase, but also the loyalty of the customer who discovers a new product and does not return to ours.

The last two cases (purchase in another store and purchase of another product of our brand), which add up to 50% of the responses, could also deceive and make you believe that they are not harmful. But, as we are going to see below, this is far from the truth.

Our relationship with the distributor is at stake

Among the ‘indirect’ costs of a stock out is the worsening of our relationship with the distribution channel. It may be that, as in the last two cases of the survey, our income statement will not be negatively affected in the short term. However, the supermarket is not going to look favorably on suffering supply problems or having empty shelves. Let alone knowing that up to 31% of customers are going to go to another store to make the purchase. The client will not only stop being faithful to our brand, but also to our distributor.

It is difficult for a single break to ruin our relationship with the distribution channel. However, if they are repeated over time, we run the risk that the point of sale decides to remove us from its product portfolio. According to a study by the consulting firm Deloitte, for 16% of customers one of the biggest problems in supermarkets is the lack of stock. Hence the importance of not only counting on how stockouts directly harm us, but also on how it affects the companies with which we work.

Also, keep in mind that, with e-commerce, today it is easier than ever to go to the store next door, which is just a click away.

Up to two thirds of purchases are decided at the point of sale

Disappear from the customer’s mind

We have already talked about the opportunity for the competition that we are not on the shelves. However, we must also take into account the publicity opportunity that being present supposes. Not all shoppers have decided on the brand they are going to buy when they arrive at the store, since up to two thirds of purchases are decided at the point of sale. This will be another missed opportunity if we have our products out of stock. Companies cannot miss out on this way of being in the mind of the consumer for free. And potentially impacting you during competitor out-of-stocks.

The hidden extra costs

Loss of turnover is not the only direct impact of stockouts. Solving it will also have an impact on the numbers of our company. For example, the use of overtime by workers or the logistics costs due to urgent shipments with a higher cost than our usual transits.

We will also pay for inefficiencies, by using our resources in a non-optimized way. The bad prediction of the demand will make us work below what is necessary before the stock-out and, after it occurs, we will do it more. Incurring those extra costs.

Also, if our distributor’s distrust of us increases, he will tend to accumulate more product, which will also be detrimental to him and will continue to undermine our relationship.

Wasting advertising campaigns

The Harvard Business Review study estimates the average number of products out of stock in a supermarket to be 8%. A figure that can double when we talk about products on sale and special campaigns.

On the one hand, predicting our sales in promotional and advertising campaigns is always more difficult. New price, new conditions, new buyers attracted by advertising… And, sometimes, without reference to past campaigns or similar characteristics that can help us make an adjusted demand forecast.

However, suffering a stockout during one of these events is doubly painful. The expense made in the promotion itself is wasted, a surely higher number of products are not sold -due to the greater demand generated by the campaign- and the negative effect on the brand image is even greater. It is especially frustrating to go to a store to specifically purchase a product and find that it is not available. In the same way, empty promotional shelves cause a very negative visual image.

Demotivation of the sales team

Selling is not easy. No one knows this better than sales teams, who struggle every day to market our products or get them in front of the consumer. And, once they do, there is nothing worse than knowing that the sale has not occurred due to a stock out. Or even, as we have explained before, that the relationship with the sales channel may end due to continuous stock outs.

A demotivated sales team will be a new source of indirect and hidden costs that may not be evident when calculating the cost of our stock-outs.

As we have seen, limiting the loss of a stock-out to sales lost during that period is a serious mistake. Customer loyalty, the relationship with our distribution channel, hidden costs and the wasted work of the marketing and sales teams are among the problems that are hidden behind a stock out.

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Khaterine William

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