What are the reasons behind product unavailability on e-commerce stores?
- Published: 12.05.2022
The summer season is approaching and it’s time to buy new sports equipment. You are about to place an order on Amazon for some new clothes and accessories. It’s not much, but you are keen on placing your order at one store in order to receive comprehensive service and get everything in a single shipment. After all, you don’t have time to drive to the post box every time the ordered goods arrive.
Unfortunately, upon attempting to add the last item to the cart, I found out that it was currently unavailable and they didn’t even bother to provide an estimated restocking date. As a result, you are left with no other choice but to find a different shop that has everything you need in stock.
Sounds familiar, doesn’t it? Unfortunately, this situation is not an isolated case.
Regardless of whether we look from the perspective of retailers or producers of goods, product shortages are a very common phenomenon. More than once, they have led to the collapse of a company, and what’s more, to incur huge costs in lost sales. The scenerio is known to exist for as long as trade has existed, and yet we keep reverting to the problem of the unavailability of goods. Therefore, what needs to be done in order to solve it, and can it truly be solved once and for all?
In the following article, you will find out how you, as a thriving owner of an eCommerce business, can handle constant stock shortages and lost sales.
But before we delve deeper, let's state what exactly unavailability is?
We refer to non-availability only if a product we offer is not available and the customer is actually looking to purchase it . In cases where we run out of stocked goods, that have lost the interest of our customers, we are speaking of a positive situation and this should not be considered as a shortage of stock availability.
Viewing this problem from a retailer or manufacturer’s perspective, one might be tempted to say that this is a minor issue. After all, if a customer wants to purchase a particular product, they will either come back another time when it is available or choose an alternative product that we happen to have in stock.
This, however, is clearly not the case. Shortages of availability were identified as one of the main factors for customer dissatisfaction. An irritation, often resulting in shopping elsewhere. If the problem of availability is repeated with a single seller, customers not only abandon a particular purchase, but often permanently withdraw from further transactions having lost trust in the seller. A 3-chance pattern can be observed, in this regard.
At the first shortage, there is a good chance that the customer will substitute the desired product with another available in the shop. When faced with the second shortage, it is highly likely that the basket will be abandoned altogether. However, the third time a customer encounters a shortage, at the same shop, the vast majority will simply never return to that shop.
When we confront this pattern with today’s reality, which offers the possibility of buying the same products in a variety of online shops without having to be irritated by empty shelves, we must understand that the consequences can be gigantic financial losses.
However, the ramifications do not end with lost sales alone. In addition to it, our shop’s credibility and finances suffer, as we need to use additional resources to put out fires in order to restock as quickly as possible. So, with the price of non-availability being so high, why is it that up to one in three purchases can end on such a bad note?
In order to answer this question, we must first explore the genesis of the problem, i.e. the reasons behind the lack of accessibility.
Reasons for availability shortages.
The first reason worth mentioning is the fluctuations in sales. Perhaps due to a marketing campaign, a reduced sale price, the upcoming holidays or even temporary trends among buyers. As a matter of fact, they can surprise almost any company. The problem, doesn’t lie in the occurrence of these events per se, but in the disruption of communication between the various departments within the company, which makes it difficult to understand how they might affect sales. Sales teams often plan effective promotional activities well in advance, which makes it difficult or even impossible for the operations team to secure adequate inventory quantities.
An equally common reason in the booming e-commerce industry is the frequency of inventory planning. When a company rapidly expands its product range, increases sales channels or simply turnover, employees are often faced with the fact that there are many tasks to be completed “ASAP”. Such tasks at times are done at the expense of other routine duties, such as restocking the warehouse, which ultimately results in checking the inventory situation less frequently. So instead of daily checking to see if there have been any unexpected movements in the distribution of goods, we take a peek, once every fortnight or even less frequently. Which results in us missing out on situations where we could react promptly and resupply our inventory levels avoiding shortages.
The addition of new products to the range often accompanies the growth of a company. Quite often, expanding the portfolio of offered merchandise goes hand in hand with additional sales. So, no wonder that all sales-oriented people are very keen on adding new products. An integral part of providing a wider offer is the need to control and supervise it accordingly. Obviously, it is easier to control the availability of 100 products instead of 3,000 in-stock items. When the product range is too extensive, it is difficult to set aside sufficient time to analyse the situation of each product, and this sooner or later leads to empty shelves.
The final reason, and a major contributor to the causes of shortages, is human error. No thought of bad intentions here. The reason is rather mundane. It is a part of human nature to make mistakes and, statistically speaking, everyone makes one sooner or later. So, if all the work to secure the availability of goods is done manually, it is only a matter of time before we end up ordering too little of something because we incorrectly checked the current inventory levels or rcent sales. When doing hundreds, or thousands, of product demand calculations per month, human error can easily occur.
How can inventory management help address the problem of shortages?
The solution to most of the issues involving stock availability begins with recognising that the problem is already affecting us, or is about to start. Once we have reached this step, we can move on to defining the company’s policies and addressing questions such as:
- Depending on the product, how much supply do I want to maintain?
- How often do I want to verify stock levels?
- Who is responsible for each step of the process?
- How do I determine how much do I actually have to order and when to place my order?
The answer to these questions is none other than inventory management, i.e. defining a set of rules to manage inventory so that it does not suffer from both shortages and surpluses. For this purpose, we can use existing and widespread methodologies, such as MRP or DDMRP, or develop our own. However, it is paramount to have pre-defined answers to the aforementioned questions. Thanks to this, we will know what to do, how to proceed and when to act, so that we do not have to face repercussions.
The past and the future of inventory management
In the middle of the previous century, the MRP (Material Requirements Planning) methodology, with its philosophy built around the art of forecasting, was born and then became increasingly popular. Entrepreneurs had to prepare their future estimations and, based on what they predicted, they bought and produced stocks. This solution became extremely popular in the second half of the 20th century, and it is fair to say that at some point there was no business management system without tools based on MRP.
However, things that performed brilliantly a few decades ago don’t really meet present-day needs. The assumption behind the high effectiveness of MRP was the stability of the market on behalf of customers as well as suppliers, and in-house production. The plans, once drawn up, could be quietly implemented without the need for any changes. At the time, this solution worked brilliantly and definitely made it easier to recalculate the demand in relation to the stocks.
By the time this solution met the modern-day world, its shortcomings began to surface. Every now and then, the surrounding business world encounters disruptions that have a significant impact on every link in the supply chain. We constantly hear of further geopolitical tensions, imposed quarantines due to the spread of COVID-19, or the subsequent shortage of raw materials which, unfortunately, are necessary to manufacture the products we sell. About the last thing we can say about this world is that it is stable.
In these circumstances, relying on forecasts, very often we ended up in situations where our stock did not reflect the customer’s real needs. Not only have we been taken by surprise by new, unforeseen events, forecasting itself has become such a complex process that, without specialist knowledge and tools, it is difficult to hit even 50% accuracy on what exactly customers will be seeking from us in the future.
Are we doomed to face availability shortages?
Well, not really. While the business world casts many hurdles in our path, the Demand Driven Material Requirements Planning (DDMRP) methodology, described more extensively in the early 2000s by Carol Ptak and Chad Smith, comes to our rescue. It provides a kind of remedy to the challenges we face. Despite the fact, that a functioning MRP on the market was one of its foundations, by plucking out the best elements of this methodology and several other management theories, an entirely new approach was created to respond to the high volatility of the market.
The foundation of DDMRP became relying on carefully calculated inventory buffers to protect the company against any fluctuations in demand or supply. By recognising the fact that we will face demand spikes, we can properly prepare for them. Buffers were created precisely for this purpose, to act as shock absorbers, taking care of the quality of our journey and protecting us from bumps on our road.
When should you place your next order to restock your inventory is the second major element of this methodology. On contrary to the MRP methodology, this isn’t based on forecasts, but rather on real orders placed by customers and information about current inventory in stock and the one on the way.
Such a solution not only ensures we systematically place orders to rebuild our inventory, but also sets a limit that prevents us from ordering more than we actually need. With this approach, we solve the two biggest inventory problems, i.e. situations where there is too much in stock, or even worse, where there is a shortage.
Is this the right solution for me?
The DDMRP-based solution works perfectly in the e-commerce industry, allowing you to maintain adequate product inventory in a simple and transparent way. Rather than figuring out on our own what inventory to hold and when to place our next orders, we can use ready-made apps that, based on data collected from platforms such as Amazon and eBay, are able to determine the necessary buffers and inform us each day about what needs to be restocked so that the availability of our products is not compromised.
If you are curious how this solution could work in your company, please contact us. At Taxology, we support our clients with the smooth implementation of the DDMRP methodology. Write to us and let’s discuss our cooperation in a joint implementation.