With consumers becoming less tolerant of out-of-stock items, the retailer's problem with out-of-stock situations (OOS) validates the adage 'retail is detail.' And although technology provides solutions, experts agree that OOS will remain a chronic and costly issue.
Elsevier Food International, Vol. 6, Number 3, September 2003
Daniel Corsten and Thomas Gruen

Since the 1960s when the first formal studies were conducted, the issue of out-of-stock situations (OOS) has proven to be a chronic problem for retailers, distributors and manufacturers in the fast moving consumer goods industry. Recent advances in Efficient Consumer Response (ECR), supply chain management initiatives and investments in inventory tracking technology, have also failed to reduce the overall level of out-of-stocks on store shelves.
The majority of retailers report OOS in the range of five to ten per cent. However, in studies that examine faster selling or promoted products, the rate exceeds ten per cent. In the survey conducted by Professors Thomas Gruen (University of Colorado) and Daniel Corsten (University of St. Gallen), the overall average OOS rate worldwide is 8.3 per cent. The input for the report by Gruen and Corsten came from 52 studies that examined OOS, and which covered around 661 retail outlets in 29 countries and collated the responses of approximately 71,000 consumers worldwide. Broadly speaking, 70 to 75 per cent of out-of-stocks are a direct result of retail store ordering and forecasting practices (where either demand is underestimated or ordering processes/cycles take too long) and shelf restocking practices (the product is at the store but not on the shelf).
Consumer data from the survey also showed an increased willingness of consumers - when confronted with an out-of-stock situation - to seek those items at an alternative outlet. The studies showed that 21 to 43 per cent of consumers will make that purchase at another store, while another seven to 25 per cent will not buy the item at all. Hence, retailers are likely to lose almost one-half of the intended purchases when a consumer confronts an out-of-stock.

Extent of  OOS
After examining 40 studies, Gruen and Corsten found the average OOS rate worldwide to be 8.3 per cent. While this is the average, the extent reported in each study varies not only by differing management practices but also by what is measured. The 8.3 per cent average is also similar to the primary US benchmark developed in the 1996 Coca-Cola Research Council sponsored study that was 8.2 per cent. Gruen and Corsten also split Europe into its northern and western regions (Norway, Denmark, Sweden, France, Belgium, Netherlands, Germany, Switzerland, Austria, United Kingdom, Finland) and into its southern and eastern regions (Portugal, Spain, Greece, Poland, Hungary, Czech Republic, Slovakia). Countries within each of these two areas showed similarities in OOS rates, and that differences between the two regions were substantial. Northwest Europe showed the lowest OOS rates of any region in the world, while Southeast Europe showed the highest. OOS rates in 'other regions' (South America and Asia) were lower in average (See Figure 1), although the extents varied as much or more than other regions, and the small number of studies does not provide a complete representation of these regions.
Regarding promotional effects, the studies almost consistently showed OOS rates to be higher on the promoted items than on non-promoted items. In some cases, the differences were insignificant, while in others the difference was substantial.

Substantial costs
While most studies concentrate on the sales loss to the retailer created by OOS items, the total 'cost' of OOS affects the entire supply chain and can be divided into four areas, namely: retailer shopper loss risk (when shoppers permanently switch stores); retailer sales loss risk (when

Major problem areas in OOS situations include short shelf life and seasonal products such as dairy and ice cream.

shoppers buy the OOS item at another store or when consumers buy a lower-priced substitute); manufacturer shopper loss risk (when consumers switch to a rival brand within a category); and, lastly, manufacturer sales loss risk (when shoppers make a substitution for a competitor's item or cancel a purchase) .
Other implications of OOS include logistics and information inefficiencies in the supply chain. Irregular, fill-in and 'rush' orders due to OOS situations also cause logistics-fulfilment inefficiencies. The survey also showed that the key to understanding OOS implications is that the areas of loss are interdependent. A reduction in the sales loss to the retailer also reduces the resulting shopper loss risk, the risk to the supplier, and the resulting supply-chain inefficiencies. Doubtless, the cost of OOS to the retailers is substantial. The findings by Gruen and Corsten show that a typical retailer loses about four per cent of sales due to OOS items. A loss of sales of four per cent translates into an earnings per share loss of about $0.012 (1.2 cents) for the average firm in the grocery retailing sector where the average earnings per share is about $0.25 (25 cents) per year.

Causes of Out-of Stocks
Previous studies have placed most of the responsibility for out-of-stocks on retailer store ordering and forecasting practices. Retail store managers must simultaneously manage thousands of SKUs (stock keeping units) and work with hundreds (often thousands) of simultaneously promoted items, while keeping personnel costs within reason. Causes of out-of-stocks are usually traced back to one of the three general processes: ordering, replenishing and planning. The ordering process covers two general categories. Firstly, the retail store may have ordered too little or too late so that the warehouse could not deliver before the retailer ran out of a particular item. Secondly, the retailer forecast may have misjudged demand for an item and ordered an insufficient supply.

Regarding the replenishing process, the product is in the store, often in the backroom or sometimes in another area of the store but not on the shelf at the time the consumer comes to buy the product. This can be caused by inadequate shelf space, the lack of an adequate signal to retail management or poor back-room inventory. Replenishment issues also occur on the warehouse level, when due to insufficient inventory to meet demand, the warehouse 'scratches' the retailer's order. Poor planning includes possible causes such as the item may have been discontinued but not communicated to the retailer, or the manufacturer may not have shipped adequate inventory.
Worldwide, the two greatest causes are inaccurate forecasting (34 per cent), an indicator of increasing demand volatility, and shelf-replenishment (25 per cent/See Figure 2). In the US, more causes of OOS are attributed to ordering (51 per cent) than in Europe (32 per cent). But in Europe there seem to be more problems with replenishment (47 per cent) than in the US (32 per cent), particularly shelf replenishment. Somewhat striking, 72 per cent of all OOS across the world are caused in the store, by poor store practices, by late and insufficient ordering, wrong forecasts, or shelf restocking problems.

A chronic problem
Gruen and Corsten have ferreted out some insights on the OOS issue. Firstly, OOS has been, is, and will continue to be a problem. Secondly, OOS is costly. While the total costs to the supply chain have not been investigated, the Cruen-Corsten survey has found that the worldwide average sales loss due to OOS is around 3.9 per cent. Thirdly, not all OOS are the same. A slow moving item that is OOS will be less costly to the store than a fast moving item. Similarly, consumer substitution varies extensively among categories, affecting the retailer and manufacturer to different degrees.
Fourthly, duration of OOS is important. While techniques for measuring OOS duration are fairly new, the impact of long-term OOS problems not only affects the sales of the item, but also the likelihood that a consumer will switch stores.

"Working closely with our suppliers helps us understand what products need to be on our shelves. Our computerised 'Retail Link' system gives our suppliers access to sales data and trends on a store-by-store basis. Retail Link tracks items sold and automatically places re-orders based on historical sales patterns." Wal-Mart

Fifthly, most of the responsibility for lowering OOS rests in the retail store. Unfortunately, manufacturers have placed their resources towards lowering OOS on solving supply chain problems. This focus will need to shift if the OOS problem is to be effectively addressed.
It also important to understand the limits of projecting based on the findings of the Gruen-Corsten report. The data was not collected in such a way that macroeconomic projections of the total cost to the industry can be confidently projected from these findings. However, any retailer can use the findings in the study as a benchmark comparison when addressing OOS items. For example, if the retailer estimates sales losses greater than the estimated 3.9 average due to OOS, they will likely have a large payoff from addressing the issues.
Finally, Gruen and Corsten found that consumers across the world are indeed localised in their choices. However, when their choice is taken away through an item being OOS, consumers behave in a similar manner globally. In the end, the retailers (and their supply chains) that satisfy customers will be those more likely to succeed.
Gruen and Corsten also warn that it would be a mistake for retailers not to continue with actions after having measured the extent of OOS since most retailers have not reached the threshold beyond which the cost of improving out-of-stocks exceeds its benefit. A caveat: in some categories the occasional out-of-stocks can even be beneficial as sure availability may eventually increase price competition as some studies indicate.
Whichever way one views the issue, the out-of-stock problem remains a major concern, not only for retailers but also for all parties within the supply chain. As many retailers are beginning to address OOS with newer technologically sophisticated solutions, they are setting a new standard in OOS levels that consumers will expect as the level required to earn their business.

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The original article by Professors Thomas Gruen and Daniel Corsten is published in the latest June 2003 edition of Executive Outlook. Gruen and Corsten's article is based on a research study for the Grocery Manufacturers of America, conducted at Emory University, Goizueta Business School, Atlanta, Georgia, US; University of SI. Gallen, Kuehne-lnstitute for Logistics, Switzerland; and College of Business and Administration, University of Colorado at Colorado Springs, US. The study was funded by a grant from the Procter & Gamble Company.

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