Cost of Stockouts

Consider the following information pertaining to a brand with 80% numeric distribution, and 100,000 unit sales:

  • Numeric distribution: 80%
  • Universe of stores: 500
  • Number of stores handling: 400
  • Period sales: 100,000
  • Average sales per store: 250

If this brand experiences OOS of 10%, given the above information, what is the estimated loss in business — in terms of sales — due to the stockout?

  • OOS distribution: 10% 
  • Number of stores OOS: 50  
  • Average sales lost per store: 250
  • Total lost sales: 12,500

This assumes:

  1. Probability of OOS at any store, at any point in time (during the period under investigation) is 10%. (Sounds reasonable.)
  2. OOS = lost sales. (This is a questionable assumption. There are many options open to the shopper when she encounters a stockout. In instances where the brand loyalty is high a stockout may not result in the loss of brand sales.)

How a consumer responds when she is unable to find the item she wants depends on a number of factors including the following:

  • Pack or variant loyalty
  • Brand loyalty
  • Product loyalty
  • Store loyalty
  • Urgency to use

Her response is determined by the influences that are of greater importance at the time of purchase. The possible outcomes include:

  • She buys an alternative size/variant of the same brand;
  • She buys a different brand — supplier loses;
  • She buys from a different store — retailer loses;
  • She delays purchase — both supplier and retailer could lose if this leads to a drop in consumption or a change of brand/store;
  • She buys a different category — supplier loses.


Exhibit 30.13   Claimed response to out-of-stock situations for different categories of FMCG goods (Source: based on a Nielsen survey in Singapore).

 

Exhibit 30.14   Based on Exhibit 30.14, the cost of OOS to retailers is higher for categories like infant milk and liquid milk, and lower for categories like carbonated drinks and chocolate.

According to what shoppers claim, the response to an OOS can vary substantially across categories. Based on the data in Exhibits 30.13 and 30.14, the cost of OOS to retailers is high for categories like infant milk which exhibit very high brand loyalty, and low for categories like carbonated drinks and chocolate, where the shopper is prepared to switch brands. Mothers are unwilling to try a new brand of infant formula, and would look for their chosen brand in other stores. On the other hand for carbonated drinks, shoppers are prepared to switch to some other brand when they experience a stockout.

True Cost of Poor Distribution

Manufacturers do not want to give their loyal consumers any reason to try competitors’ products, let alone compel them to do so. For once these consumers experience something new, their loyalty might permanently shift to the competing product. In which case, in addition to the loss of current sales, the stockout results in the loss of future sales from that time onwards.

For the retailer, the top 10% of shoppers account for 30% to 50% of a store’s sales. These core shoppers are most affected by stockouts. If some of them switch allegiance to other stores, the cost will be their total spend from that time onwards.

Whereas earlier we concluded that the estimated 12,500-unit loss in current period sales was an overestimate, from a long term perspective, taking the impact on brand loyalty and store loyalty into consideration, one concludes that the true cost of OOS, for both manufacturer and retailer is likely to be far greater. This goes to emphasize the importance of sustaining distribution and maintaining adequate stocks in trade.

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