SUPPLY CHAIN MINDED

A Tale of Risk Management: How Product Types (Should) Dictate Inventory Stock-out Reactions

A Tale of Risk Management: How Product Types (Should) Dictate Inventory Stock-out Reactions

By Michael Fournier, March 6, 2014, Business2community.com

A Tale of Risk Management: How Product Types (Should) Dictate Inventory Stock out Reactions image supply chain risk management sourcing stockout strategies 300x200

Let’s talk about stock-outs for a little bit here.

Firstly, all research points to a retail stock out as loss of revenue and deterioration of brand image. Stock-outs for manufacturers can lead to an advantage for competitors; this effect is especially true for grocery based manufacturers. Why is this effect stronger for grocery manufacturers? Food is much easier for consumers to seek substitutes. If a store received no boxes of Cereal A, you’re likely to purchase your second favorite Cereal B.

In fact researchers have discussed the actual loss of revenue and value involving inventory stock-outs. A retailer can lose 10% of average sales (Gruen et al, 2002), and shareholder values have been known to depreciate by over 10% (Wu et al, 2013).

But what dictates the impact of an inventory stock-out and who does it hurt more? Well historically research focused on the resulting consumer behavior following an inventory stock-out. Business leaders and researchers were more interested in learning consumer behavior and how they might be able to respond to consumer behavior following a stock-out.

And there was a good reason for focusing on consumer behavior; consumers could switch brands if they were upset by an inventory stock out. A brand switch is perhaps the worst resulting effect. But new research wants to discuss product elasticity as a very important moderating factor that explains whether manufacturers or retailers are hurt more by stock-outs.

A Tale of Risk Management: How Product Types (Should) Dictate Inventory Stock out Reactions image closed supply chain risk management 300x200

Photo by Bryan Mills, CC

This new piece of information might be far more important for supply chain managers, manufacturers, and retailers in adjusting their supply chain strategy. Normally one would adjust their supply chain strategy to involve stocking numerous alternative articles. This way consumers will be less likely to cancel, post-pone their purchase, or switch stores/brands. What might end up being a more viable strategy is adjusting alternatives regarding product elasticity.

The researchers Wu et al (2013) found that manufacturers and retailers were affected by stock-outs quite differently when observed under stock-out periods. A stock-out period was the length of the stock-out ranging from 28hrs to 14hrs. The results of their research noticed that different products had significantly different effects following different stock-out periods.

Here are the five product types Wu et al (2013) observed and their effects on both manufacturer/retailer market share following 28hr and 14hr stock-outs. Certain products such as cosmetics resulted in large market share loss for retailers and had little change regarding length of product stock-out (Wu et al, 2013). Shampoo resulted in large market share loss for both retailers and manufacturers and had a significant change depending on the length of the stock-out (Wu et al, 2013). Whereas salted snacks resulted in large market share loss for manufacturers compared to retailers in both 14hrs & 28hrs stock-outs (Wu et al, 2013).

This information is quite important for supply chain managers and logistics experts. The results of this study indicate that not all products require highly innovative and expensive inventory or procurement systems (Wu et al, 2013). Products that resulted in large losses of market share either through brand switch or sales cancellations should require sophisticated tracking and purchasing tools. These products such as cosmetics can result in large losses of revenues for retailers and are thus priority products. Whereas retailers can be less concerned regarding products that don’t result in large market share loss following a stock-out.

A Tale of Risk Management: How Product Types (Should) Dictate Inventory Stock out Reactions image saving money supply chain strategy 300x168

Photo by epSos.de, CC

This would of course mean that products will require more expensive forms of market research to understand what is a high priority or low priority product for a firm. But understanding a firm’s product priority is important in spending capital in the right direction. However with this information, one can develop and implement processes and products that can save a firm hundreds of thousands of dollars while generating revenue. A fairly recent case involves Shahbaz Saadat who implemented an e-procurement software in his company and saved over $50,000 within 3 months.

Shahbaz realized that the owners of his previous company were finding it difficult to track and maintain inventory and spending accounts. The products they dealt with were extremely high priority products, and being in product stock-out or over-purchasing lead to massive profit loss. Cases like this aren’t rare, this is a relatively common problem facing numerous supply chains. The key take-away would be to learn what requires innovative tracking and inventory management, then implement. Assuming that inventory management requires certain technology such as RFID without understanding what requires it, can be quite detrimental.

Bibliography:

Gruen, Thomas W., Daniel S. Corsten, and Sundar Bharadwaj. Retail Out-of-stocks: A Worldwide Examination of Extent, Causes and Consumer Responses. Washington, D.C.: Grocery Manufacturers of America, 2002. Print.

Wu, Teresa, Simin Huang, Jennifer Blackhurst, Xiaoling Zhang, and Shanshan Wang. “Supply Chain Risk Management: An Agent-Based Simulation to Study the Impact of Retail Stockouts.” IEEE Transactions on Engineering Management 60.4 (2013): 676-86. Web.

Related Articles

Partnering with

Subscribe to our Newsletter

Join thousands of other supply chain professionals experiencing the best in supply chain and logistics and sign up for our newsletter to discover what’s new in the world of supply chain management.

Events & Media Partnerhips

Share your events with our supply chain community.
Get listed on our Event Calendar and set up a
Media Partnership. E-mail us the details at: events@supplychainminded.com

Follow us!

Visit Us On LinkedinVisit Us On TwitterVisit Us On FacebookVisit Us On Google Plus