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Tried and True

Keeping your SCM solutions simple can be more a effective way to keep customers happy than focusing solely on TCO.

Making products available at a price, place, and form that appeals to potential customers is the basic value proposition of supply chain management (SCM) technologies. Out of stock (OOS) situations exist when consumers reach for their favorite products, but find the store shelves empty. SCM technologies were designed to minimize OOS situations by matching supply to demand and ensuring a smooth and continuous flow of raw materials and finished products across a company's supply chain to its retail outlets.

Despite the widespread adoption of SCM technologies over the past decade, the global OOS rate has remained stuck at 8 percent, according to an exhaustive research study (see Resources). The research study's findings are of particular significance to corporations looking to use IT for competitive advantage.

A detailed analysis of the OOS occurrences revealed that more than 70 percent of the OOS situations were caused by failures at the primary customer interaction point — the store — not the supply chain. Store managers who forgot to reorder fast-moving items, didn't order enough, or mismanaged inventory caused the overwhelming majority of OOS occurrences.

The typical store manager is expected to keep track of thousands of unique items on store shelves. Given the complexity of managing the sheer volume of unique items, it's no surprise that the OOS rate hasn't gone down despite the huge investments in SCM and point of sale (POS) technologies over the past decade. In-store IT applications haven't progressed beyond POS — there's a shortage of IT applications aimed at helping front-line staff manage and stock store shelves efficiently and effectively.

Based on the research study's findings, I believe that simple IT solutions aimed at front-line store managers can substantially reduce the OOS rate and keep the customer satisfied. After all, the fundamental design axiom of IT systems has been "garbage in, garbage out." In the OOS situation, the most sophisticated SCM and POS technologies can't help if the demand signal (in this case, in-store ordering) is inaccurate, late, or altogether missing. You need to understand the true costs of OOS to develop the justification for IT systems that span business processes from the store to supporting retail distribution supply chains.

THE COSTS OF A DISAPPOINTED CUSTOMER

According to the study, when consumers don't find what they're looking for in a store, 31 percent buy the item at another store, 26 percent substitute with a different brand, 19 percent substitute same brand, 15 percent delay purchase, and 9 percent don't purchase the item at all.

Of particular concern to a manufacturer should be that 26 percent of shoppers would try a different brand when confronted with empty store shelves. Given that it may cost 10 times more to acquire a new customer than it does to keep an existing customer (see "Through a Lens Smartly"), the manufacturer will lose out if disappointed customers like the substitute product and change their preferences. Especially for manufacturers of high-margin, branded consumer goods, OOS situations can not only hurt them with lost sales, but more important, loss of loyal repeat customers!

Retailers have to be even more concerned that 31 percent of disappointed shoppers may go to another store to locate the OOS item. High-end stores and discount retailers are increasingly alarmed by a new breed of retailers (such as Costco) that stock big box discount items along with high-end consumer products from select fast-moving categories. Disappointed shoppers from high-end stores and discount retailers may become enamored by this new breed of retail store that offers a one-stop shopping experience for both low-end bulk commodity items as well as branded consumer products. An OOS situation may force a loyal retail customer to try this new breed of retailer, which not only results in lost sales for that particular item, but the potential loss for a wide range of other products as well. For the retailer, the potential financial impact of an OOS can be the permanent loss of a customer to another retailer.

Every company realizes that it's important to not only get new customers but also keep existing customers from leaving. The seemingly small 8 percent OOS situation can cause significant financial loss to the manufacturer and retailer. SCM and POS technology investments to date haven't had significant impact on reducing the global OOS rate. Business process changes supported by IT systems are the obvious solution. Unfortunately, many factors make it difficult to implement these IT solutions.

BUY OR BUILD?

The study suggests that automatically linking POS data to in-store inventory with automatic reorder triggers could help reduce the OOS situations. In this scenario, the store manager is taken out of the loop for the reorder decision and an automated system (that analyzes and acts on real time information) takes care of reordering for thousands of items within a retail store. Assuming that this solution will work for all retailers (which it won't, for reasons discussed later in this section), the traditional IT approach to evaluating potential IT systems can lead to selections that fail to make an impact on an OOS situation.

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