2.3 Introduction
In retailing, the biggest single customer-service complaint is not having the item. If Kohl’s is promoting Dockers at 25% off this week, you’d better believe the pants will be in stock. Otherwise, it’s like inviting someone into your house and not offering him a seat.
—Kohl’s Executive
Have you seen an advertisement, decided you wanted to buy the product, and rushed to the store only to find it out of stock? After checking the shelf, searching the aisle (including the end caps), and asking a store employee for help, you gave up. The product was not in the store! How did you feel? Sorry for bringing back bad memories, but rest assured you are not alone. Retailers fail to have advertised product on the shelf 16.5% of the time. A more lenient, in-store measure (the product might be in the backroom) revealed an out-of-stock rate of 12% for advertised items. 1 Non-advertised items fare better: Studies report out-of-stock rates from 7-10%. 2
Comparable stats for online retailers are hard to calculate. Online retailers can promise delivery without actually possessing the product. If the product is not in the local DC, the retailer can The logistics practice of transferring product from one warehouse to another or from mode to mode of transportation to another in order to fill an order. from a distant DC or The logistics practice of shipping an order directly from a manufacturer (or distributor) to a customer, bypassing the retailer. from a supplier—without ever telling the customer! But, costs go up and delivery may be delayed.
Now, let’s return to your feelings when you discovered the product was out of stock. Why were you frustrated? Probably because an advertisement is a promise! If the store doesn’t have the product available at the promoted price, it has broken its promise, violating your trust. The Federal Trade Commission (FTC) labeled Also called out-of-stock event, a stockout occurs when demand for an item cannot be filled from existing inventory. occurrences of advertised products an “unfair or deceptive” practice.3 Beyond being peeved, why should you care? Consider two facts:
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Customers Defect: When your product is not on the shelf, what are your customers' options? Customers can buy a substitute or leave empty handed—waiting or switching to another store? The failure to assure availability invites the customer to switch brands or to shop elsewhere. Online, it only takes a few clicks to find an alternative supplier. Although we have used a B2C example, stockouts invite defection in B2B settings as well.
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Service Failures are Costly: Research has estimated that out-of-stock occurrences reduce overall sales by four percent, costing worldwide retailers about $435 billion in 2010. 4 We will dig more deeply into the cost of stockouts and other service failures later in this chapter.
What does this mean for you? Time or place failures (e.g. stockouts, late deliveries, or damaged shipments) cost your company customers—and profits! Therefore, you must design your firm’s logistics system to deliver goods and services on time and at low costs.