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Understocking or Overstocking? Here’s How You Can Prevent Both

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There is a fine line between understocking and overstocking your store. On the one hand, you want to ensure that you have enough stock to meet customer demand. However, you don’t want to get to the point where you stock too much of the wrong product. Either situation can cause a significant headache.

To prevent both scenarios, it’s very much about having proper control of what’s coming in and what’s going out of your stores. More than that, it’s about knowing what your customers want and providing them with it.

Understocked vs. overstocked: What’s the difference?

Offering the right products to your customers at the right time, right place and at the right price is crucial for you to compete in today’s retail industry. Of course, that doesn’t mean that mistakes won’t happen; mistakes like understocking or overstocking your stores.

Let’s start off by looking at what understocking is and the reasons for it. Simply put, understocking is when your supply of a particular product fails to meet consumer demand. That is, if a customer walks into your store, asks for a product, then finds that you’ve run out. They’ll leave dissatisfied and frustrated. If it happens often enough, they might not return.

Of course, the reasons for understocking your stores isn’t always your fault. For example, there might have been an unexpected change in the market that you can’t know until it happens. In that case, it’s all about your ability to adapt to change. A contingency plan always helps.

Besides that, some reasons are down to retailer error. Poor to no planning is one such reason. Another is when you don’t know your market at all. In both instances, you should rethink the strategy for your different categories.

Overstock is the exact opposite, where your supply exceeds consumer demand. Again, the reasons for overstocking are similar to those around understocking. Poor to no planning is a big contributor while you can also attribute it to not understanding your market well enough to know what they want.

That said, there is another reason: giving into your suppliers

Let’s take the example of a Consumer Electronics and Appliances retailer who stocks photographic equipment.

The Sales Manager for a particular camera brand happens to walk into the store one day and notices that there are only two specific DSLR models left in stock. Since the retailer isn’t a Destination store for photography, it was decided not to order more. The Sales Manager naturally wants to sell more and persuades the retailer to buy more. A month later, none of the new stock has moved.

What are the consequences of understocking or overstocking your stores?

When it comes to the consequences of understocking or overstocking your stores, there is one that overshadows every other repercussion.

In short, it all boils down to money. More importantly, it’s the loss of potential sales and profit.

Let’s look at the consequence of overstocking on an item to further illustrate our point. As we alluded to in a previous article on why space management matters, it doesn’t matter if the product you stock is popular to not; if you have too much of it, you’ve overinvested. As a result, you won’t have enough shelf space (both in-store and in your storeroom) for the stock that actually sells and makes you money.

Meanwhile, you’ve also got your capital tied up in inventory that you’re not able to use, which means overstocking is more damaging than you might anticipate. Let’s say, for example, that you’re an FMCG retailer who stocks both coffee and biscuits. You have too much stock in the biscuits department, and so it has every chance of becoming dead stock and more importantly dead capital.

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The result is that instead of one poor performing category, which you could fix quickly, you now have two.

Understocking your store has the same effect. When a customer walks into your store looking for a product only to hear that it’s out of stock, they’re frustrated. A direct result is the loss of that sale and potentially that customer too. It becomes a more significant problem when that single loss is added up over an extended period, and you find it multiplied 5, 10 or 20 times per week or month.

How to prevent your stores from understocking or overstocking on products

          1. Understand what consumer demand looks like per product

Before you look at what products you should stock, as well as which categories to focus on, you need first to understand your consumers demand.

So how do you do that? Simple. It’s all about getting to know your customers. Learn what they can afford, what products they want, as well as what they expect when they shop your stores. For example, if your customers demand high-end products, don’t stock brands that are cheaply made or packaged in boxes with unreadable labels.

If you are already in business, you can understand demand by looking at your sales trends. It’s best practice to look at six months worth of sales to get an idea. If, on the other hand, you’ve just opened your store, you can research by watching your direct competitors or asking people on the ground.

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Let’s take the example of the Consumer Electronics and Appliances retailer that we used above. Let’s say the store is based in a high LSM environment and needs to cater for that market. You could quite easily argue that they should stock the best kitchen equipment, cameras and TV’s. In most cases, they would. However, they would also need to look at the buying habits of their customers. One pattern could be that while they might spend a fortune on a coffee machine, paying $1300 for the best product, they don’t want to spend $5500 on a camera.

While you could stock high-end camera equipment, your consumer demand would inform you otherwise. Thus, rather than combating the problem of overstocking on a product, you can prevent it altogether.

          2. Understand consumer demand trends by category, segment and sub-segment

You can base trends on your historical sales data, so there is a way to try and predict what will sell during specific times of the year. It’s especially easy to plan for seasonal events. By looking at sales trends by category, segment and sub-segment, you can more reasonably estimate future demand and plan accordingly.

That said, from another angle, a trend is a forecast and thus, isn’t always accurate. That’s especially true when you consider new trends. In such cases, it is very much about experimentation with trial and error. A best practice would thus be to test a product in a smaller environment first before launching it at all of your stores.

In short, make sure to judge the LSM value of the product so you can position it in the market before making a final decision.

Let’s take the example of 4K TV’s released to market around two years ago. Back then, it was a new trend, and so not much was known about it. So, if someone came in to buy the product, they might not have been told that they couldn’t use it yet since the available options for content were limited to a few countries. That means you’ll soon find your customers coming back to your stores demanding to return it.

Imagine your supplier had overbet on these TV’s selling well. They’d be in trouble because the product was too early to market. Your store would have wasted money and overstocked on a product that your customers can’t use.

There is also the real possibility that in this case, by listening to your supplier, you might have understocked on products that would have had a positive impact on your overall sales and profitability.

Darren Gilbert

Content Manager at DotActiv

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