A Loss Prevention Contribution to Reduce Out-of-Stocks

Out-of-stocks is one of the worst failures we can have in supermarket operations, causing huge dissatisfaction in customer service. Although it is a recurring subject of publications focused on the sector, very little is said about the real loss it causes, in terms of values. The loss surveys point us to the loss of inventories as well as their causes, but it does not touch on the issue of out-of-stocks.

Loss prevention has undergone many changes over the years, moving from a culture focused on security to one more focused on processes, turning its eyes to the loss of productivity and seeking to increase profit. It is also common to see assignments such as inventories and internal inventory movements as part of loss prevention’s responsibilities. In other words, loss prevention has the opportunity to contribute to the effort to reduce sales losses caused by the lack of products, dealing with the information that is generated in the process of controlling inventories and inventories counts.

There is no lack of technology for monitoring out-of-stocks today. We have solutions that point when products have stocks and do not sell, to the point of the information showing if the item stopped selling for an hour, pointing through reports or collectors, where a simple visual check already solves the problem, determining the refueling in the shelves, or generating information for stock correction and, consequently, new purchase order. But it is possible to deal with product breakdown even without having market tools and applications at hand, setting up these control processes internally.

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Tools and Processes for Monitoring Out-of-Stocks

It is very common for the lack of confidence in inventories system information to generate orders for larger than proper purchases quantities, for fear of lacking the product. The correct stock information is essential to perform correct purchasing management in supermarkets, which avoids excesses of inventory and financial losses due to standing capital, but it must also be used to generate indicators of commercial (external) and operational (internal) out-of-stocks, for the problem to be addressed and correctly treated.

The commercial department, responsible for purchasing operations must address the external disruption by starting with an appropriate product system register, where there are clear rules for insertion as well as to inactivate or exclude products that should no longer be purchased. This consideration can be made for the entire chain or store-by-store, depending on the characteristics of the region or customer profile. Within this register management, it is suggested that seasonal items should be treated separately. Once these rules are defined, for any out-of-stock or lack of product, a decision must be taken, delete or inactivate in the register or place a new order to solve it. It is common for negotiations with suppliers to generate a lack of orders, but this penalizes customers a lot, and they should not be harmed by this.

The operations department, responsible for the store’s management, must also include routines and inventory monitoring in its operational processes through reports that provides correct support to monitor the point of (re)supply of products. It must be ensured that all products that store receipt are supplied or be stocked in the shelves on the same day as the entry occurred, as well as a follow-up of items that are not sold, at least once a week, to avoid that items without refueling that could be remain in back office or warehouse.

Both the loss due to external and internal out-of-stocks must be measured with the information on the average sales of the products, multiplied by the days that these products were not sold. In addition to measuring the loss of financial sales from the disruption or lack of products, you should also measure the amount of missing items. In the case of external out-of-stocks, which is the responsibility of the commercial and purchasing area, the quantity of missing items must be measured, dividing by the active mix of products in the register. It can be done by department or by buyer. In the case of an operational disruption, I suggest measuring the number of items with out-of-stock divided by the items with a total positive stock balance. This avoids dividing by the active mix that includes items in external disruption.

Another issue that impacts the financial loss is that the disruption influences the average sales information. If the parameter used to measure the average daily sale is to consider the last 90 days of sales, for example, if the product has an average sale of 10 units/day, if it goes 45 without selling, its average sale will drop by half, creating an adverse effect that both distorts a new order, which will buy less than the original demand, as well as distorts the financial loss, which tends to be much greater.

A Loss Prevention Contribution

Supermarket companies must have in their organizational culture a real notion of the importance of a good execution of processes in operating results and productivity gains efforts. In this context, loss prevention plays a vital role, as an auditor of the processes that are carried out both by the commercial, logistics and purchases area, as well as by store operations. Sales and operations execute the processes and loss prevention measures this execution and returns the feedback so that there are appropriate corrections to the audited areas.

And the information generated by the processes carried out specifically by loss prevention team, such as inventories (rotating, general, negative, high risk goods), shelf audits, internal inventory movements (internal consumption, exchanges, bakery production) generate a lot of information that the loss prevention manager Today’s must have the expertise to know how to compile this data so that they can be used as indicators for both operations and commercial.

In this context, carrying out stock inventories, audits of shelves and internal stock movements must be well-defined and well-executed processes to ensure the reliability of stock information. This information, together with the audits and checklist of operational processes, will show the level of efficiency of losses in operations and generate the necessary key indicators, such as internal and external disruptions, inventory coverage (which measures excesses), internal consumption (important for the expenses with packaging and raw materials) and product exchanges.

The latest Abras (Brazilian supermarket association) Loss survey shows us that thefts, internal or external, represent 24% of losses. Therefore, 76% of all loss is tied to processes in general. Loss prevention should focus its efforts on monitoring processes that generate greater losses in supermarkets.

In addition to ensuring a safe environment for both customers and employees, when loss prevention acts more intelligently, focusing on processes, measuring losses with well-defined operational routines and that generate reliable information and stock indicators, it assumes a more strategic role within supermarket companies, not only acting to reduce inventory losses, but also to reduce out-of-stocks, improving overall productivity and profit the operation’s bottom line.

About the Author

Luiz Gustavo Chaves de Toledo
Luiz Gustavo Chaves de Toledo

Luiz Gustavo Chaves de Toledo is a loss prevention and inventory control specialist with more than 12 years experience in supermarket chains in Brazil. He holds a bachelor’s degree in Business Administration and a master’s degree in Production Engineering. He is currently loss prevention manager for Big Mart purchasing center and member of the Abras (Brazilian supermarket association) Committee for Loss Prevention and of Food Losses and Waste.

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