Why Retailers Are Losing Trillions of Dollars

Retailers that manage their inventory using spreadsheets or other antiquated systems are costing themselves a lot of time, which is ultimately money lost. Not having systems in place that automate inventory management is costing retailers money. From the redundancies and productivity losses incurred from paying employees to perform manual tasks that could be automated, to the cost of losing a customer to a competitor because of an out-of-stock issue, poor inventory management greatly affects your bottom line.

Out-of-stocks, overstocks and returns are costing retailers a whopping $1.75 trillion per year, a number to which, if you’re not effectively managing your inventory, your business is contributing. Out-of-stocks affect consumer perception of merchandise quality and product availability, which depresses overall store image. In addition to out-of-stocks, the obsolescence and holding costs incurred from overstocking or lost sales resulting from understocking and returns prove incredibly expensive for retailers.

Of the trillions of dollars tied up in inventory, approximately 60 percent of these issues are due to retailers not systematically measuring the impact of overstocks and out-of-stocks. Other retailers suffer losses due to inaccurate tracking and disparate systems. Let’s take a deeper look at how out-of-stocks and overstocks affect retailers, and how you can take action today to ensure ineffective inventory management doesn’t cut into your bottom line.

Out of Stock?
Fifteen percent of promoted sales (that’s $19 billion in retail) are lost due to stockouts, and it’s a phenomenon nearly all shoppers have experienced. In the past year, 75 percent of U.S. adults have come across an unavailable product in stores, and 63 percent have encountered an out-of-stock online.

What’s most troubling about out-of-stocks is the effect they have on consumers even after the checkout process. If a consumer experiences three stockouts online, more than 66 percent of the time that shopper will exit the website. Consumers have little patience for stockouts, especially when they have a multitude of other places they can shop for similar products.

The inconvenience and frustration created by out-of-stocks cause most shoppers to purchase items elsewhere or buy nothing at all. In fact, 67 percent of retail businesses surveyed by Stitch Labs said being out of stock after an order is placed — or simply overselling — is the No. 1 inventory mistake that leads to lost customers.

• What to do today: Since eliminating out-of-stock incidents leads to an average 2.7 percent increase in category annual sales, it’s worth the effort to manage your inventory more effectively. Consumers don’t appreciate stockouts, so make sure you're as transparent as possible when you don’t have an item in stock. When shoppers are notified of stockouts at the end of the checkout process, their expectations have been disrupted, which will frustrate them and leave them with a negative view of your brand. Mark items as out of stock directly under the product description to ensure you don’t waste consumers’ time.

Overstocks and Returns
In addition to not having what your customers want, retailers risk losing money in the form of both overstocking items and receiving returned items from customers. Returns accounted for $642.6 billion in lost sales last year, and overstock issues are getting worse. The number of overstocks inflated by more than $100 billion over the $362.1 billion lost in 2012.

• What to do today: The top cause of overstocks is forecasting failures, which could be alleviated with robust data and reporting and automated inventory management. When asked about back-end functionality, retailers indicated that a comprehensive and accurate view of inventory in warehouses and immediate updates on stock availability were the most helpful tools for improving front-end operations. Consider a system that will integrate with your current ecosystem and help connect disparate pieces. Having your inventory and operations in one place will provide you with the data you need to make smarter business decisions.

Don’t Let Inventory Management Cost You
For the majority of retailers, the combined impact of out-of-stocks, overstocks and preventable returns adds up to 11.7 percent of lost revenue. One way to more effectively manage your inventory is to consider an inventory management solution that automates stock counts in real time from all your sales channels. If you’re using spreadsheets to track inventory, you’re wasting time and losing money. A Ventana research study shows that, on average, people spend 12 hours per month consolidating, modifying and correcting their spreadsheets. Twelve hours per team member adds up to a lot of time your employees could be spending on improving processes and helping to scale your operations.

Since human error is accountable for nearly 63 percent of fulfillment issues, consider using an inventory management system to automate and streamline your processes. By more effectively managing your inventory, you'll reduce unnecessary errors, increase transparency and efficiency, and ensure you’re not adding to the trillions of wasted retail dollars.

Brandon Levey is the CEO of Stitch Labs, an inventory management solutions provider.