By Mark Roberti
A great deal of attention has been focused on a study of radio frequency identification’s impact on out-of-stocks at Wal-Mart. The study, conducted by the University of Arkansas’ RFID Research Center, indicated that the use of RFID reduced out-of-stocks by 16 percent overall at RFID-enabled stores—and by more than 60 percent on fast-selling products. But a leading expert on out-of-stocks says that RFID won’t completely solve the problem, and it might be ineffective if not deployed smartly.
Tom W. Gruen, associate professor of marketing and e-commerce at the University of Colorado’s Graduate School of Business Administration, authored the seminal 2002 study on out-of-stocks for the Grocery Manufacturers Association. That study indicated that globally, mass merchandise retailers don’t have an item on the shelf about 8 percent of the time.
In a speech to retail executives in Mexico City in May, Gruen pointed out that over the past 15 years, companies have thrown a lot of technology at the out-of-stock problem—bar-code scanners, handheld computers for store employees, collaborative forecasting and replenishment software, and so on—with little success. The out-of-stock rate has remained stubbornly at 8 percent.
With all the investment in technology, why haven’t retailers had more success replenishing the shelves? Gruen said he thinks a key reason is that as soon as companies deploy a new technology solution, they immediately use it to increase the complexity of their operations. They add more stock-keeping units (SKUs) or new display methods or some other innovation that offsets the benefits of the technology.
He suggested that retailers deploying RFID might suffer the same fate—that is, they might use the improved tracking capabilities RFID provides to increase the complexity of their operations, instead of reducing out-of-stocks. That’s possible, but unlike other technologies deployed to solve the out-of-stock issue, RFID enables companies to better manage complexity by allowing for the automatic capture of data and alerting people to anomalies.
Gruen said that about 25 percent of the time that an item is not on the shelf, it is somewhere else in the store. Wal-Mart has been effective in using RFID to automatically generate lists of products that need to be replenished from the back of the store. But Gruen also said that 18 percent of the time, out-of-stocks result from planning and related problems, including communication, data and shelf-space allocation issues.
RFID can’t solve out-of-stock problems caused when a new product replaces one that has been discontinued and the retailer is unaware of the change, or when the manufacturer and retailer have different information associated with the same SKU. So, it is critical for companies to focus on global data synchronization before deploying RFID.
RFID could help reduce out-of-stocks caused by poor shelf-space allocation. Many times a retailer will have more than a week’s worth of inventory of a product on the shelf, while other items that sell more quickly are not replenished often enough. RFID could help give retailers not just a clearer idea of which products need to be replenished but also which products need more shelf space.
Often, products are brought from the back room to the store floor and then returned to the back room because there is insufficient shelf space. By matching how often a product is returned to the back room to how often it’s out of stock, retailers could create lists of products that need more shelf space.
So, if retailers want to use RFID to reduce out-of-stocks, they will need to avoid using the technology to add new SKUs or additional complexity to their operations. They also will need to improve their ability to share good product data with their supply-chain partners, and they will have to focus on using RFID data to continuously improve their allocation of shelf space. Otherwise RFID will become another in a long list of technologies that have failed to bring down the out-of-stock rate.
Out-of-Stock Stats
Tom W. Gruen, associate professor of marketing and e-commerce at the University of Colorado’s Graduate School of Business Administration, is the leading expert on out-of-stocks. Here are some statistics from his presentation to retail executives in Mexico City in May.
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1. Shoppers, on average, spend 21 percent of their time in the store looking for items that are out of stock.
2. The average store spends $800 per week on employees looking for items that are out of stock for shoppers, which means a retailer with 100 stores spends about $4.1 million annually.
3. Items are out of stock roughly 8 percent of the time, but promotional items are out of stock 17 percent of the time.
4. For every 13 items a shopper wants to buy, one won’t be there.
5. For every seven promotional items a shopper wants to buy, one won’t be there.
6. Out-of-stocks vary significantly by the day of the week, rising from an average of 7.3 percent on Saturday to 10.9 percent on Sunday.
7. More than half of all items that are out of stock are not replenished for more than 24 hours.
8. Total sales lost due to out-of-stocks is about 4 percent.
9. About 25 percent of the items that are out of stock are actually in the store.
10. About 42 percent of out-of-stock situations are caused by phantom inventory—that is, inventory the retailer thinks it has but which isn’t really there.
Illustration by John S. Dykes Collection.