Can one desire too much of a good thing? – William Shakespeare (1564-1616)
Here is one of the most widely accepted logical propositions in retail:
- Customers can’t buy product that’s out of stock in the store.
- Inventory doesn’t sell when it’s sitting in the warehouse.
- Ergo, the more stock you have in your stores, the better it is for sales
It makes some sense, so long as you don’t think about it too hard.
While this thought process can manifest in good ways – reorganizing the supply chain to flow product quickly through a stockless DC based on what’s needed at the store, for example – it can (and often does) result in behaviour that can actually harm sales and productivity.
The old “You can’t sell it out of the warehouse!” chestnut is most often trotted out when the warehouse is packed and they need to make room.
Tell me if this chain of events sounds familiar:
- The warehouse is running out of space
- The decision is made to clear out some stock
- Products are identified that are the biggest contributors to the capacity issue (i.e. they’re taking up a lot of space and not being drawn out as quickly as everyone would like)
- Push it out to the stores!
A couple weeks later, you run some reports:
- Warehouse picking efficiency has skyrocketed as a result of shipping out oodles of pallets out to the stores – SUCCESS!
- Warehouse is unclogged and has sufficient space to maneuver for the next few weeks – SUCCESS!
- Stores now have all kinds of stock to support sales – SUCCESS!
If we just stop there, we’re feeling pretty good about ourselves. Unfortunately, there’s usually a bit more to the story:
- The store receives way more stock that can fit on the shelf, so they need to put it somewhere – stores don’t have the luxury of being able to push product out the door to unwilling recipients.
- Where the stock ultimately ends up is scattered throughout the store – on promotional end caps, in the back room, on overhead storage racks, shoved into a corner in receiving, sometimes even in offsite storage – solving a capacity issue in one location has just created capacity issues in dozens of other locations.
In the best case scenario after this has happened, stores are extremely disciplined and organized in their stock management and can always replenish the shelf from their overstock once it starts to get empty. But protecting sales comes at a significant cost. After the initial receipt of the overstock goods, the product will need to be moved around many times again before it leaves the store:
- Shelf gets empty, go to the back room and bring out some more, fill the retail displays, bring what didn’t fit back to the back room again, repeat.
- The overstock product is finally cleared out of the back room, but now you need to start taking down secondary displays as they deplete to replenish the home and fill them up with something more deserving that should have been there in the first place.
In the second best case scenario, the stock is within the 4 walls of the store – somewhere. When the shelf is empty, the vast majority of your customers will seek out a staff member to find the product and wait patiently while said staff member recruits other staff members to go on a costly scavenger hunt that hopefully… eventually… turns up the stock that the customer is waiting for. Crisis averted! Sale retained! But again, at a steep cost.
In the worst case (and most common) scenario, the customer sees an empty shelf and just leaves the store without alerting anyone to his/her dissatisfaction. A couple days later, a staff member walks by, sees the empty shelf and thinks “I’m sure the replenishment system will take care of that.” But it won’t. According to the stock ledger, the store has tons of stock to sell. After a couple more weeks of lost sales, someone realizes that they need to try to find the stock somewhere within the store. After an hour of searching, they give up and just write the stock off in the hopes that more will be sent to fill the hole in the shelf, further exacerbating the overstock problem until it turns up months later during the physical count.
And in all of the above scenarios, the management of overstock is consuming finite store resources that could negatively impact sales for all products in the store, not just the problem children.
So there you have it – rather than an enabler, inventory can be an impediment to sales. Even though inventory is in the store, it might as well be on Mars if it’s not accessible to the customer.
In an ideal world, you would set up your processes, systems and constraints in such a way that product can flow into the back door of the store in such a way that what’s coming in can largely flow directly to the shelf with minimal overstock. it’s not super easy to accomplish this, but it’s not advanced calculus either.
But in the event that you do end up with overstock in your supply chain, the best place to have it is upstream where the product is not yet fully costed, better processes and tools exist to manage it and you still have options to dispose of it or clear it out as cost effectively as possible – you know, postponement and all that.
Arbitrarily pushing stock out to the stores in the hopes that they’ll figure out what to do with it is about the worst thing you can do.