When retailers are out of stock on an item, overstock other items, or must take returns, it costs them—that’s no surprise. But the amount of this cost actually might shock you. According to one recent analysis, revenue losses due to overstocks, out-of-stock events, and returns add up to a staggering $1.75 trillion every year. The solution, according to this analysis, is for retailers—especially multichannel retailers—to get better, rather than only getting bigger.

For example, when it comes to overstocks, multichannel and online retailers, with their extensive inventories of items available on websites, have too much stuff on hand. Because the inventories are so vast, the individual items get lost in the shuffle, such that consumers might not even recognize that they are available. Accounting for about $123 billion in lost revenue, these overstocks generally imply inefficient uses of analytics and forecasting software. As a solution, some retailers are making better use of alternative channels, such as when Nordstrom moves unsold merchandise quickly into its Nordstrom Rack stores.

On the other side of the equation, out-of-stock events cost retailers about $130 billion in revenue. For Walmart alone, insufficient inventory led to estimated losses of $3 billion in one year, even as the total amount of inventory it offered for sale increased. Here again, the crux of the problem seems to be ineffective forecasting. At Target for example, the special introduction of a line of clothing by Lilly Pulitzer sold out almost immediately. Customers responded with frustration and anger, including promises never to return to the retailer if it could not live up to its promises.

Finally, it might be impossible to eliminate all returns, but better operations could help retailers avoid those that stem from their own mistakes. A retail group recently held a contest in which it asked consumers to send in pictures of online orders they received that they had to return. Many of these photographs reflected needless errors, such as a purse sent without its strap or a red hat sent when the customer’s order clearly indicated a preference for the blue version. Such unnecessary returns (i.e., those that are not due to the customer’s preferences or choices) represent $246 billion in losses to retailers.

A consistent solution to these “ghost” costs thus emerges: better data analysis, more effective forecasting, and smarter supply chains. But if the answer is so obvious, why are so many retailers still struggling to get better when it comes to returns, overstocks, and out-of-stocks?

 

Discussion Question:

What is the impact on the strategic profit model of out-of-stocks, overstocks, and returns?

 

Source: Sandy Smith, Stores Magazine, July 2015