The Cost of Out-of-Stock: How Retailers Can Master Inventory Planning

Business.com / Industry / Last Modified: February 22, 2017

Don’t let poor inventory management cut into your profits. Here's how retailers can calm their inventory chaos during hectic times.

Don’t let poor inventory management cut into your company’s profits.

Learn how small and mid-sized retailers can calm their inventory chaos during hectic seasons.

This past Cyber Monday brought in big sales, but also a record number of out-of-stock messages on big retail sites like Target and Walmart. In fact, for every 100 product views there were 13 out-of-stock messages.

That’s double the usual Cyber Monday rate, according to data from Adobe.

These statistics beg the question: if large retailers with seemingly boundless resources can’t properly anticipate inventory shortages, how are small and mid-sized (SMB) retailers with limited resource (but just as much business complexity) supposed to effectively manage their inventory during a hectic holiday season?

Related Article: Buying In the Cloud: How Cloud Technology is Revolutionizing the Retail Industry

The Cost of Complexity

Today’s SMB retailers are leveraging the World Wide Web to not only grow their businesses, but to also better compete with big-box retailers. This means having more than just a physical store (or two or three) and a branded eCommerce site.

Small and emerging retailers are increasingly leveraging online marketplaces like Amazon, eBay, and Etsy to tap into larger consumer audiences and grow sales. However, as sales channels are added and orders increase, so does the complexity of the business’s operations, ultimately compounding the challenges of managing inventory.

Whether businesses are experiencing stock shortages or surpluses, poor inventory management is costly. CNBC recently reported that out-of-stocks, overstocks, and returns are costing retailers a whopping $1.75 trillion per year. That was trillion, with a T. These are numbers that large brands can withstand, but have the potential to bankrupt smaller businesses.

Being out-of-stock during peak sales seasons causes missed sales opportunities, and overselling fuels aggravation, frustration, and brand distrust in customers. Conversely, retailers who are overstocked have unsold products taking up space on warehouse shelves and cutting into their profits.

Heeding Warning Signs

SMB retailers shouldn’t be wasting their valuable time and resources on ineffective or  under-optimized systems and processes. The following are clear warning signs that a business needs to update its current inventory management processes:

  • Regularly running out of stock or being overstocked
  • Inaccurate or unknown stock quantities
  • Limited or no access to real-time stock counts
  • Difficulty managing inventory across multiple sales channels and/or warehouses
  • Inability to accurately forecast inventory needs

If any of the above inefficiencies have occurred - or worse, are regularly occurring - it’s time to make improvements before it’s too late.

Calming the Inventory Chaos

The core driver of inventory chaos is the multitude of disparate systems and spreadsheets required to track and maintain accurate stock counts and order information. And this number of systems grows with each additional sales channel and operational tool a business puts in place.

While manual tracking methods may work when businesses are just starting out, they are extremely time consuming, prone to human errors, and will not be able to scale with a business’ growth.

Real Life Example

Take Purse & Clutch, for example. When this fair trade handbag boutique really took off in 2013, founder Jen Lewis found herself unable to accurately track and measure which handbags were selling and when she should order new inventory. Jen and team were using the laborious method of manually tallying their stock counts in notebooks and spreadsheets.

Needless to say, as more and more orders poured in, this process became unsustainable. Tracking their inventory took up valuable time and caused unnecessary, and sometimes costly, errors.

Since Purse & Clutch didn’t have proper visibility into changing stock quantities across their various online and offline sales channels, they were unable to know in real-time when a product was already sold out. Therefore, situations would arise where items were out-of-stock but still being shown as available on their eCommerce site.

No retailer wants to have to tell their new customers that the item they ordered is actually sold out or back-ordered. It was clear they needed systems to actively manage their multichannel inventory, as well as better data records to be able to identify their best selling items and know exactly when to reorder those items before they sold out.

Purse & Clutch implemented Stitch Labs’ inventory management software to help them not only  automate the tracking of their stock quantities and sales orders, but also centralize their retail data into a single dashboard.

Doing so helped their team save 5-10 hours of work per week, and gave them solid data reports to help improve the accuracy and timeliness of their reordering to eliminate out-of-stock and overselling. Jen said, “We've saved so much money by ordering what is actually selling versus simply what we think is selling.”

Related Article: Fashion Forward: Top 10 Retail Trends for 2016

Retail Lessons To Be Learned

In order for SMB retailers to master inventory management for their multichannel businesses, they must integrate all the essential tools and information throughout their retail ecosystem into one centralized solution. A streamlined and automated inventory management solution allows retailers to track purchase orders, stock quantities, sales invoices, and detailed reports across all sales channels.

Having a simplified, singular dashboard to manage and maintain all their retail operations, saves SMB businesses valuable time and resources while helping them avoid the costly stock shortages and surpluses that even larger retailers still struggle with.

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