How Do Inaccurate Inventory Records Cause Lost Sales?

June 17, 2020
Herb Billings

We now know that counting more often lifts sales by up to 14% (see “Do Inaccurate Inventory Records Really Impact Sales?”). Exactly how does this work? By increasing product availability and customer satisfaction. Retailers strive to have the right product in the right place at the right price and with the right promotion. Customers return to retailers who consistently meet their needs – fail at any of these and they will find another retailer. Maintaining accurate inventory records accomplishes two of the four P's: right product and right place.

Missed sales opportunities are notoriously difficult to estimate, and it's even more difficult to determine the root cause. Recent advances in retail demand analytics can give you the difference between items expected to sell and items actually sold, but this is just an estimate and gives no insight into why you fell short of expected sales. Missed sales opportunities result from both shortages and overages. An “unknown” out-of-stock condition is a type of shortage where your store is actually out-of-stock but your inventory records don’t know it yet. This is the most dangerous of shortages – if a customer purchases this item through a digital sales channel, you will have to cancel the purchase and disappoint the customer. The customer often cancels other items in the same order. This is the only missed sales opportunity a retailer can measure directly. A missed replenishment trigger point occurs when an item has a shortage where the inventory record is above your replenishment point but the actual stock level in the store is at or below the replenishment trigger point. Once the inventory records reach the replenishment trigger point, the actual stock level is either zero or reaches zero before the new items can be received. In other words, missed replenishment trigger points can become future unknown out-of-stocks. High levels of inaccurate inventory records prompt many retailers to implement a safety stock level. Safety stock levels minimize the impact of inaccurate inventory records by raising the minimum number of units required to offer an item for digital sale. For example, the retailer may have a policy to only offer items for sale if the inventory record shows more than 2 units. The retailer loses digital sales opportunities whenever the inventory record drops below the safety stock threshold. Note that this means inaccurate inventory records cause lost sales for SKUs which actually have accurate inventory records! A condition that receives far less attention is a special type of overage when the inventory records are zero or less. These items are not displayed in your digital sales channels and every single one represents a missed sale opportunity. It is important to note that safety stock levels only limit the potential for unknown out-of-stock conditions, and have absolutely no impact on this type of overage.

On the brick and mortar side, overages often indicate items that are in the back room but not on the sales floor (see “Inventory Inaccuracy in Retailing: Does it Matter?” funded by the ECR Community Shrinkage and OSA Group). In order for these to be sold, the customer must ask for help and the store associate must be able to find the items in the back room. Otherwise, the items will remain unsold for lack of visibility. Customers who don’t find what they want, or customers who have their orders canceled eventually become dissatisfied with the retailer and do not return for future purchases. According to American Express, 33% of customers will consider switching companies after just one bad service experience. Inaccurate inventory records can sabotage sales in many ways. Shortages are not the only drain on sales, overages play their part as well. Counting resets your inventory records, which can result in up to a 14% lift in sales for the remaining portion of your inventory period (see "Do Inaccurate Inventory Records Really Impact Sales?").

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