Stealth Data Strategies to Stop the Dreaded Trifecta: Out-of-Stocks, Overstocks and Returns

Stealth Data Strategies to Stop the Dreaded Trifecta: Out-of-Stocks, Overstocks and Returns

The nitty-gritty details of running an ecommerce business are stressful.

Are stock quantities accurate? Are we picking and packing fast enough? Are shipments being delivered to customers on time?

There is a lot for operational managers to worry about. Data can help provide clarity through the chaos, highlighting processes that can be improved so you can keep your productivity and profit margins high.

When it comes to operational processes, there is a dreaded trifecta known to hinder organization and predictability: overstocks, out-of-stocks, and returns.

Let’s take a look at how data can better prepare you for the inevitability of these occurrences.

The Issue with Out-of-Stocks

Fifteen percent of promoted sales ($19 billion) is lost to stockouts, an issue almost every shopper has encountered. In fact, in the last year, 75 percent of U.S. adults have come across an unavailable product in stores, while 63 percent have encountered an out-of-stock item online.

And with a plethora of other sources at their fingertips, today’s consumers have little patience for any out-of-stock issues. In fact, 77 percent of shoppers will go elsewhere if they can’t find a product they want on your website.

Additionally, 67 percent of retail businesses say being out-of-stock after an order is placed -- or simply overselling -- is the No. 1 inventory mistake that leads to lost customers.

Image via Stitch Labs  

Eliminating out-of-stock incidents leads to an average 2.7 percent increase in category annual sales, so effective inventory management is vital.

Keep close track of your inventory, and when an item isn’t available, be as transparent as possible with your customers, and mark items as out-of-stock directly under the product description to ensure you don’t waste customers’ time or leave them feeling deceived and disappointed.

Historic data can help you determine your busiest seasons and bestsellers, better informing you of when you’re at risk of running out of certain products.

For example, look at your sell-through and velocity data for similar items sold at the same time last year, to account for seasonality. If you’re constantly updating your product offerings and can’t do comparisons at the variant level, you can use tagging or size and color combinations to see how similar items sold.

Year over year growth is another way to forecast sales: if you’ve been selling twice as many units as last year, you can expect you’ll sell twice as many units now. Consider how many units you sold this time last year combined with how quickly they sold to forecast sales.

Preventing Overstocks
Superman

In an effort to avoid out-of-stocks, especially during peak sales seasons, retailers often end up overstocking. According to IHL Group, overstocks cost retailers $471.9 billion each year. In addition to taking up space in your warehouse, the excess stock is cash that’s just sitting on your shelves instead of being re-invested in your business or put towards marketing efforts. 

Intelligent forecasting is needed to avoid overstocking. While accurate demand planning is one of the most difficult and critical tasks, particularly for multichannel retailers, there are basic practices and processes you can start establishing today:

I. Organize and Categorize Your Stock

When it comes to inventory management, the devil is in the details. But the more organized and descriptive your inventory is, the more valuable data you’ll be able to extract from it. This approach will only become more important as you expand into new sales channels and run more promotions. Imagine how much easier it would be to identify seasonal, style, brand, and even product color trends.

II. Implement Integrated Inventory Tracking

For all your organized and detailed product information to be useful, you must be able to efficiently track it from purchase order through to delivery. Look for a multichannel inventory management solution that integrates with your business critical systems - from eCommerce branded sites and online marketplaces (like Shopify Plus and Amazon) to shipping and fulfillment solutions (like ShipStation and Shipwire). Syncing inventory data across all your systems will help to break down data silos and provide a comprehensive understanding of what’s happening in your business. With this “big picture” view, sales forecasting and demand planning become much easier and more accurate.

III. Act Quickly to Shed Excess Stock

Through your newly focused data lens, you should be able to quickly anticipate and identify products that are slow to move. Time is money. Instead of waiting to see if they’ll start to sell, work quickly to move those items off your shelves. Offering free shipping, bundling slow-moving stock with popular items, and having a flash sale are just a few effective ways to turn an inventory surplus into a cash surplus.

Managing Returns
Warehouse

With more than 60% of online shoppers making at least one online return each year, returns continue to be the bane of existence for most retailers. Data has proven that how a company handles returns can impact repeat purchase behaviors.

A study conducted by the professor of Business Administration/Marketing & Advertising at Washington and Lee University found that customers who had to pay to return items decreased their spending with that retailer by 75-100 percent over two years while customers who were offered free returns subsequently spent 158-457 percent above pre-return spending. 

Bottom line? It pays to offer free returns to online shoppers. However, it pays, even more, to reduce returns overall.  

So, what can you do today to limit return-induced headaches?

Provide thorough and informative online product descriptions to reduce instances of returns due to a misunderstanding.

Listing dimensions, size charts, and product reviews will help customers make more informed decisions, thus reducing their need to return, for example, a skirt that runs small or a jewelry box that appears much larger in photos.

Retailers that have sophisticated customer analytics can use that information to identify and segment customers by their likelihood to return their purchases. If you know a particular subset of your customers are more prone to return or exchange items, you might want to create targeted communications to decrease their returns timeframe or possibly remove free returns as an option.  

Whatever your return policies are, make sure customers and employees are on the same page with explicit, transparent rules. Some retailers, such as shopping membership site Jet.com, are getting creative with returns.

At checkout, Jet.com allows customers the option of lowering their total amount if they choose to waive returns.

Jet waive returnImage via TechCrunch

Additionally, most retailers have a standard cutoff for returns and exchanges. Having a timeframe in which to expect returns will help you more effectively manage your inventory.

Finally, when it comes to returns, consider partnering with a third party logistics (3PL) provider. Dave Vehec, senior vice president of retail logistics for Genco, said, “Logistics service providers have the opportunity to offer business intelligence tools and value-added services to investigate and look for patterns--information a retailer can marry up with data to see, for example, if a product launch had a higher-than-expected return level.”

Partnering with a 3PL makes fulfillment and shipping much more efficient, as they can handle a few returns across tens of thousands of customers as opposed to a retailer taking a lot of time to handle a process that is often less than 5% of total orders. Using this information combined with data from supply chain audits, point-of-sale, etc., can help retailers determine why items either aren’t selling or are being returned at a higher than usual rate.

Beyond the Trifecta: Operational Improvements You Can Make Today

In addition to trying to tackle the operational inefficiencies brought on by overstocks, out-of-stocks, and returns, there are many small improvements you can make that when added together, can have a huge impact on your operations and logistics.

I. Don’t Undervalue Your Own Time

When you’re committing to making an operational system or process more efficient, you might not be accounting for how much your time is worth. It’s important to understand your worth, and what it costs your company per hour for you to complete tasks that can be automated.

II. Use Data to Inform Product Decisions 

Use data and sales velocity to determine which products are moving slowly and which you might want to consider discontinuing to avoid overstocking.

III. Know What You Have and Where to Find It

More frequent cycle counting can help eliminate the daunting (and incredibly time consuming) task of infrequent inventory counts. Cycle counts are less disruptive to daily operations, provide an ongoing measure of inventory accuracy and procedure execution, and can be tailored to focus on items with higher value, higher movement volume, or that are critical to business processes.

IV. Consider Economies of Scale 

While outsourcing operations tasks can intimidate many retailers, at a certain point, it makes sense. Consider shipping and logistics. Working with a 3PL provider is a prime example of benefitting from another company’s specialization since you’ll never match their shipping or fulfillment rates because they perform all of these tasks at scale. 

Data can help you organize and automate your processes big and small to run a more efficient business.

Most companies only analyze a mere 12% of their data because, for most retailers, the data needed to inform important purchasing and merchandising decisions live in disparate systems.

To make the most of the data you invariably already have, consider using a platform that centralizes your various systems, providing you with clear visibility into how your data works together and how it can inform better business decisions.



About The Author

Bridge Mellichamp is the Director of Data Science and Special Projects at Stitch Labs. Numbers excite her more than you can imagine; at the core, she’s driven by helping Stitch and its customers make sense of their data so they can make incredibly smart business decisions.