Recently this question came to me. What must be the most critical items whose stockouts must be avoided at a retail store? Those items that sell more volumes or those that generate better profit margins? Or those that generate more customer loyalty or are important to customer?
There are some items that sell at a greater pace than others. For example within same time you’re likely to sell more units (sales volume) of bread than compared to wine. Yet you will make more money for each unit of wine sold than bread (profit margin). In this case which item is more important for stockout avoidance?
And what about the fact that daily items like vegetables, milk or bread actually draw a lot of footfalls to your store than selling wine. Many of these footfalls also generate cross selling. On a different note you may actually loose a customer completely in the long term, if you will not stock such daily items of importance. Customer retention!
So how do you balance these three concerns- volume, margin and item’s importance to customer?
On the contrary there are not three variables involved here but only two- Sales volume and Profit. If you look at the customer retention concern, all you loose is actually long term sales or cross sales (sales volume that the customer may have generated in case you’d have retained him/her). So customer retention is actually a deferred sales. Lets call this item’s need/importance for customer.
Sales volume → (depend) short term sales + long term sales + cross sales
customer need/importance + sales volume → (lead to) sales volume
Again there can be items that are very important for the customer but not necessarily high volume, like fruits- neither the same ones are bought nor they are brought everytime one goes retail store. They are more likely to be bought may be once in every two visits or if we talk about each SKU, they are bought may be once in each five visits. Therefore fruits when each type considered as different SKU are not particularly high volume goods. Yet a customer when makes a trip for buying fruits also buys vegetables or viceversa. So the customer is likely to visit another store and the store is likely to miss this customers footfalls either partially or completely in the long term.
On the other hand items like a particular brand of snacks are probably high sales volume items but so much important to consumer retention, as a customer is likely to pick another snack type or another brand- An example of high sales volume yet low consumer need.
So again whats the overall sales critical for these two types? As in –
customer need/importance (high) + sales volume (low)→ low sales volume or high sales volume?
As pointed above, in either case- High customer need/importance or High sales volume there will be sales loss, either immediate or eventual. So Sales loss criticality is high if either factor is high.The only low criticality case being both the factors being low. And therefore we’ve arrived at this-
Once we’ve resolved the sales volume side, we have the second variable- Profit margin.
Synthesizing the two variable, our problem reduces down to the classic two variable case where we can use a four quadrant model to analyse stockout criticality.
Sales volume high + Profit margin high → Stockout criticality very high
Sales volume high + Profit margin low → Stockout criticality high (Why high? because if a company’s sales increase by 20% and if a company’s profit margin increase by 20% which case do you think is more favorable to a stock’s price- I guess its the 20% increase in sales)
Sales volume low + Profit margin high → Stockout criticality moderate (Why moderate? Same as above)
Sales volume low + Profit margin low → Stockout criticality low