A Guide to Efficient Retail Stock Management

Have you ever experienced buying any groceries for your home and then realising that you already have it at home or that you did not buy what you are about to run out of? In our homes, such situations do not carry huge implications. Besides, it is also easy to remember a few things. However, in business, overstocking and understocking/stockout situations have long-ranging consequences. If you run out of any item at home, your family members are unlikely to get upset with you. The same cannot be said for customer experience.

In this blog, we shall delve into the causes, consequences and cure for overstocking and understocking/stockout in retail stock management.

Causes of Overstocking and Stockouts

One of the main villains for overstocking and understocking/stockout is inferior demand projection. Oftentimes, market trends are overestimated and retailers end up accumulating excess inventory. Something similar happens on the opposite end when market demand is underestimated. Failure to correctly forecast disparities in demand between two consecutive periods may also lead to the creation of surplus or inadequate inventory. Then it must be also realised that demand forecasting is not a static science. It is affected by the dynamics of external variables as well like taxes, transportation, technology, and competition. If these factors are not taken into hindsight, the mismatch between inventory and market demand is bound to occur.

Another crucial reason for overstocking and understocking/stockout is not using retail inventory management software.  Having the right software solves a large majority of issues of inventory management including the problem of overstocking and understocking/stockout. To begin with, inventory management software provides a real-time peek into stock levels. It gives precision and timeliness to procurement decisions. This also covers preventing any potential scope of overstocking and understocking/stockout. Secondly, contemporary inventory management software solutions are equipped with many advanced analytical abilities. This is especially useful in demand forecasting. Thirdly, a large majority of these software applications are cloud-based enabling remote access to information and facilitating teamwork and decision-making.

An often underrated reason for overstocking and understocking/stockout is poor-quality inventory management processes especially demand forecasting, purchasing/reordering, and measurement and control. Having well-planned and well-defined SOPs (Standard Operating Procedures) governing each of these processes is quintessential to be precise and timely with inventory. For example, if replenishment time is not considered in the reordering process, there will always be uncertainty about the availability of stock by the needed time and place. This step must be fused with the SOP for procurement. SOPs significantly bring down the scope of human errors and mistakes in operations. Reordering is much easier with Auto Replenishment Solutions but the required steps must first be established in the SOPs. SOPs play a big role in identifying the right technological solutions and customising them to meet unique business requirements.

Sometimes supply side challenges also create situations with inventory management. The ability of suppliers to fulfil orders within narrow and defined timeframes is not always consistent; their operations too are subject to external factors. This can push inventory levels to the brink of a stockout. If orders are placed too early, it can also create excess inventory levels.

Another source of overstocking and understocking/stockout is promotional campaigns. It is not always possible to accurately foretell the response of promotional campaigns. Sometimes they perform well and there are times when they can be disappointing. Doing better than expectations creates understocking/stockout (stock runs out faster than estimations) and the opposite of that leads to overstocking (unsold stock). This is another reason why analytical abilities (both human and technology-aided) are so vital in inventory management.

The role of competition can never be ruled out in the creation of overstocking and understocking/stockout situations. While offline competitors are unlikely to be able to create any immediate impact on inventory management, the cumulative effect of competition from eCommerce players and platforms can be both quick and extensive.

Consequences of Overstocking and Stockouts

Overstocking brings many unwanted outcomes. It leads to additional operating expenditures. When considered on a macro scale, overstocking contributes to a significant chunk of spending on logistics, storage, insurance, and manpower. It also ties up precious working capital. To get rid of excess inventory, retailers may have to spend additionally on reverse logistics or try to sell them with reduced margins. One of the most undesirable consequences is excess inventory becoming redundant or obsolete. Excess inventory also puts stress on warehouse space. It can lead to damage to goods, cause accidents, misplacement, and difficulties in retrieval. To understand this better, simply imagine the days when your refrigerator is full. You might have to spend additional time and effort in placement and then in retrieving goods. Excess or more than optimal inventory levels consume more time and effort. Even replenishment can get delayed because of a lack of space arising from excess stock levels. For example, you might need more of product A and B to fulfil an emerging market demand but you would not have enough space due to excess stocking of product C. The urge to get rid of excess inventory can also lead to giving less emphasis on other products. This adversely affects customer experience as the merchandising options made available to them may have to be limited. Overstocking can also affect professional commitments and relations with suppliers as space constraints and clearance sales may restrict retailers from placing new orders. If overstocking becomes chronic and remedial measures are not implemented, inventory begins to influence every big and small business decision.

Two obvious outcomes of understocking/stockout situations are the inability to meet market demand and lost sales/revenue. From a financial and commercial perspective, these are not desirable outcomes for any business. These affect the books of accounts and eventually, the survival of a business. The next tier consists of far more damaging consequences. It includes general dissatisfaction among old and new customers, reduced chances of first-time customers turning back again, damage to business reputation, negative word-of-mouth publicity, negative reviews on business listing pages, hurt morale of employees, inability to capitalize market opportunities, and gradually receding market share. If understocking/stockout situations become lingering, all these adverse consequences begin to blow their trumpets simultaneously. Think of one of these situations from the customer’s perspective. Would you visit a store that has a 3.5 rating on search engine results or a store with a 4+ rating with an almost equal number of reviews? Losing even one customer could mean a great detail in business. That one customer, if served well, could not only become a loyal and big-ticket customer but also bring many more customers. There will be difficult customers but the point here is not to let them down because of poor inventory management leading to understocking/stockout. That situation is not defensible even if a customer is hard to please. Having customers and not being able to serve them because of the unavailability of stock stemming from poor inventory management may not go unpunished.

Cure for Overstocking and Stockouts

Demand Forecasting

In demand forecasting, two essential principles that must be followed, even if software solutions are used, are ensuring accuracy in predictions and keeping the methodologies of demand forecasting updated. To enhance the accuracy of demand predictions, it is important to take into account historical data, current patterns, emerging trends, and seasonal variations. To ensure that demand forecasting methodologies stay updated, these methodologies should be reviewed and improvised from time to time. For example, if more customers are tilting towards online channels, reliance on data from offline channels must be proportionately reduced. As demand forecasting becomes increasingly accurate, the chances of correctly identifying the market demand also keep increasing.

Retail Inventory Management Software and Systems

Software and systems of working must go hand in hand. These two elements play a big role in preventing overstocking and understocking/stockout situations. The use of the software applications allows real-time visibility into inventory. This helps make purchasing decisions more accurate. Imagine you are buying a monthly grocery for your home. It would really help if you know what goods are running short and the quantities of goods left. Without this updated information, you may end up making uninformed decisions that may lead to making faulty purchases. The use of software applications combined with other technological solutions also leads to automation of many tedious jobs which are also more prone to human errors and mistakes. Counting would be a good example here. Also, having a comprehensive view of the entirety of the inventory management function on one screen or within the scope of a few clicks creates scope for identifying areas of improvement in systems and strategies. Demand forecasting is surely a big reason to be using a robust and advanced retail inventory management software application.

On the other hand, a system portrays the functioning of an operational model. When mentioning systems, it goes beyond technology. A system includes strategies, policies, processes, organisation, people, technologies, suppliers, and any other element that makes that system work. In inventory management, having defined Reorder Levels is a part of the system. How quality checks are done is a part of the system. The criterion for selecting a supplier at the time of making a purchase decision is a part of the system. Thus, the quality of the inventory management system in place plays a big role in preventing overstocking and understocking/stockout situations.

Maintaining Buffer Stock

Maintaining buffer stock is an effective strategy to safeguard against the risks of stockout or understocking situations. There could be many reasons for delays in replenishment. Sometimes there could be delays on the part of suppliers and logistics partners. Sometimes a shortage of working capital may also cause deferred purchases. Overstocking leading to a shortage of space may also be responsible for delays in replenishing stock. Maintaining buffer stock is an effective practice to deal with such temporary inventory shortages. Two downsides with this strategy are additional investments get tied up in inventory and extra space has to be made. However, the doles of upholding buffer stock offset the minor inconveniences it may bring.

Vendor-Managed Inventory

Think of Vendor-Managed Inventory or VMI as outsourcing of inventory management function to suppliers or distributors. Under this arrangement, suppliers own and manage inventory on behalf of retailers at the latter’s warehouse or storage facilities. All retailers have to do is share their sales and other relevant data and marketing/promotional policies with their VMI suppliers. This allows VMI suppliers to keep a tab on the outflow of inventory and replenish stock levels as per requirement. The VMI-based model significantly reduces the burden of retailers in maintaining the required inventory at the required levels in a timely manner. Retailers no longer have to bother about lead times as replenishing stock on time is the responsibility of VMI suppliers. A critical responsibility for retailers here is sharing accurate information with suppliers on time. Technology plays a massive role in the success of VMI models. The VMI working arrangements are also customised by retailers and their suppliers as per mutual interests.

Other Useful Practices

In addition to the solutions for preventing overstocking and understocking/stockout situations discussed above, there are a few other practices and approaches worth highlighting. One of them is using small and frequent deliveries instead of relying on large and long-duration orders. It keeps the replenishment function active and agile and helps improve the efficiency and effectiveness of supply chains leading to improved lead times. Another helpful practice is the use of technological capabilities to sense demand patterns across all touchpoints in the customer journey. This includes and is not restricted to responses to social media posts, website/app analytics, in-store navigation analytics, and actual sales data.

Summing up

Both overstocking and understocking/stockout bring undesirable outcomes for retailers and yet these two can be unwelcome visitors. Speaking of overstocking, there are extended operating expenditures, strain on spatial resources, reverse logistics, parting with margins, and obsolescence. On the other end, understocking and stockout situations waiting to tell their sagas with a long list of events comprising inability to meet market demand, lost sales, displeasure among customers, damage to goodwill, adverse publicity, negative reviews, bleached morale of employees, and so on.

The quality of demand forecasting should be one of the foremost considerations in preventing overstocking and understocking/stockout situations. The better the quality of demand forecasting the higher the chances of having the right stock in the right quantities at any given point in time. It is important to ensure that the demand forecasting methodologies and technologies are reviewed and updated from time to time.

Retail inventory management software secures the next slot of significance. Software applications allow real-time visibility into inventory helping make purchasing decisions more accurate. Software combined with other technologies also leads to the automation of many tedious jobs which are also more prone to human errors and mistakes. Software and systems must go hand in hand. A system is a broader concept comprising strategies, policies, SOPs, technology, organisation, people, and any other part that makes that system work. Manifestations of the systems approach in inventory management are how/when purchase decisions are made, how the quality checks are done, the definition of roles and responsibilities, etc.

Maintaining buffer stock is a sound strategy to deal with temporary inventory shortages emanating from different possible reasons for delays in replenishment.

A relatively new strategy for preventing overstocking and understocking/stockout in retail is Vendor-Managed Inventory. VMI could be understood as outsourcing of inventory management function to suppliers or distributors.

About Your Retail Coach

YRC is a retail and eCommerce consulting undertaking specialising in solutions for enterprise setup, management, and scale. With more than 1o years in the field, YRC has delivered solutions to over 5oo clients in more than 25 sectors with a triumph ratio of over 94.5%. YRC also represents an entity with a rising global footprint.

For solutions to streamline and improvise the stock management of your retail enterprise,  please drop us a message and one of our retail inventory management consultants will shortly reach out to you. We engaged qualified and experienced retail consultants in service design and delivery.