Podcast

Why inventory optimization should factor in your marketing plan

Out of stock analysis, or inventory optimization, is necessary for your marketing department or agency to think about if your brand is spending marketing dollars driving consumers to retailers. Kristin Demel, retail strategy director at Callahan states, “It’s important for a marketing person to be thinking about, ‘Why am I driving a consumer to a store if the product’s not on shelf?'”

In this episode, Callahan’s head of data Zack Pike and Kristin Demel and discuss the importance of understanding the factors behind out of stock products and how to incorporate that data into your marketing plans.

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Welcome to Callahan’s Uncovering Aha! podcast. We talk about a range of topics for marketing decision-makers, with a special focus on how to uncover insights in data to drive brand strategy and inspire creativity. Featuring Zack Pike and Kristin Demel.

Zack:
Hi. I’m Zack, and I am the head of Data at Callahan.

Kristin:
Hi. I’m Kristin, and I’m the Retail Strategy Director for Callahan.

Zack:
Today we’re going to be talking about out of stock analysis, or inventory optimization. This is a topic that is probably a little bit outside the ordinary for a marketing agency, but having the product on shelf is actually pretty important to customers buying it, which is important to marketing. Kristin is here because she’s got a lot of experience in this space. I’m here because I’ve got some experience on the data side of this equation. Kristin, let’s just start with a really broad question. “Why should a marketing agency even worry about this whole out of stock equation?”

Kristin:
It’s funny to hear you say, “As a marketer we don’t talk about in stock, out of stock very often,” because as a retailer we talk about in stock, out of stock all the time. If the product’s not there, you can’t sell it, and so I think if you combine that thought process on, “If the product’s not there, I can’t sell it,” well, if the product’s not there, why are we talking about it to consumers? That’s really where I think it’s important for a marketing person to be thinking about, “Why am I driving a consumer to a store if the product’s not on shelf?”

Zack:
Yup. It gets back to what we talk about all the time is making our dollars work as hard as possible. If I’m marketing a product that’s not there, those dollars aren’t working very hard. You have experience in this space, why would a product not be on the shelf? If the retailer carries it, if it’s my season that the product should be there for customers to buy, it seems like the retailer would be losing business if the product is not on shelf, why wouldn’t it be there?

Kristin:
There’s two ways you can think about this. One, something bad happened. Some delivery didn’t get shipped. A vendor could not fulfill the purchase order. Something went wrong. But also times it’s just something that was intentional. A lot of retailers today are thinking about inventory from an investment perspective. Every unit that I buy as a retailer is an invested dollar in a form of capital sitting on my shelf. So optimization, and making sure that the retailers are spending their money in an effective way is important. You hear oftentimes that a retailer is going through an inventory optimization process where they’re trying to improve turn, trying to find the most important items or key items to make sure are always on the shelf, and then also trying to make sure from a category perspective that you have the right amount of inventory.

Zack:
Something that you educated me on when you first started at Callahan. When I think about out of stock analysis, I’m thinking about my client and their product on the shelf. To me it’s really simple. If the product is either low stock, or out of stock, or my out of stock rate is rising, I’m only thinking about that client, that product. But for a retailer like Walmart for example, there’s probably five competing products that are solving that same problem all sitting together on the shelf. So if my product is out of stock, what’s happening? They’re probably buying the competitor’s product. Right?

Kristin:
Within every product category there’s a level of transferability or substitutability. Depending upon how specifically your product as a brand meets the consumer’s needs, a consumer can shift. I’m going to give you an example. We’ve recently gone through Halloween, and my daughter desperately wanted to be a mermaid. We go to a big-box store to find a mermaid costume. Sure thing, there’s five different mermaid costumes available for her.

Kristin:
As a consumer, if one of those had been out of stock, I will likely be able to shift my daughter, the consumer, to pick from the other four. That would be an example of a highly substitutable category. Now, that’s not always going to be true because she could have loved the sequined yellow one that was not in her size, and we would have been forced to go online to find something there. However, the level of substitutability within the category is generally higher.

Zack:
Customers can buy other products. That was a realization for me when I’m doing my own analysis on this data because now it’s not like I’m just not selling my product. I’m actually pushing a consumer to a competitor’s product potentially. Right? That’s okay for the retailer. That’s really bad for me as a vendor. How do we get to this point where the product isn’t on shelf? I’m thinking more from a forecasting perspective. Tell me how these retailers are typically forecasting demand, some of the challenges that are in that equation. Because from a vendor perspective, we’re at their mercy on the forecasting side, at least to the point we understand right now.

Kristin:
I think you bring up a good point that while in a seasonal category you may plan some high sell-through, from a retail perspective, most of the time you’re not planning to be out of stock. Now, you may plan on some products to have a lower level of inventory than others, but you would never say, “Oh, I’m going to be super excited if half my category is out of stock.”

Kristin:
So that really comes down to the forecasting I think, which was the heart of the question that you asked is, “Well, why wouldn’t the forecast accurately help me understand as a vendor what inventory I needed to be ready for?” There’s really a couple big factors. I would say the first thing is the lack of data that the retailer forecasting systems typically can incorporate into the forecast. Because of that, the trend lines in the forecast are often built on last year or a combination of historical years.

Zack:
Can I stop you? One thing that I’ve seen for the clients that we do this type of work for, not only in forecasting but just in the out of stock analysis itself, is the math, and the amount of data that’s required to actually do this effectively is massive. If you think about an out of stock, an out of stock is one store, one product, and either one day or one week where the product is not on the shelf. That’s fine for one store and one product, but you need to understand this stuff at a broader level. Right? I want to understand if the Southeast is having more of a problem than the central part of the country.

Zack:
To do that, now you’re taking all of that single store, single product, single week information, trying to roll it up but not wash out all of this bad out of stock behavior with the stores that have good in stock behavior. This has been a challenge that I think probably these retailers have on the forecasting side just with their own data. But we’ve had it when we’re doing this analysis for our own clients. It requires lots of data, lots of technology, and the math to be able to get there, which I’m sure is a big challenge for them too.

Kristin:
Yeah. While from a high level, the retailer can typically see SKU one has a 75% in stock, which would be a quarter of the store is being an out of stock for whatever period of time. The system automatically will generate information like that. What it won’t automatically generate for you is that Texas store number 123 is really where your problem is, and by the way, it’s on Saturday. Any sort of analysis that you want to drill down to that level then becomes ad hoc. Then we all know, when you start to deal with lots and lots of data and ad hoc analysis, that’s where you get super challenging. And that’s a one SKU example. Yeah, so forecasting.

Kristin:
More than half my life in retail was spent within planning and allocation, so forecasting is near and dear to my heart. We talked about one of the biggest issues is the amount of information that you can take to put into the forecast and historical sales being most commonly what’s used. But we all know that there’s other things that are impacting how a product is going to sell besides just how it’s sold historically. I think the biggest one is weather. In the retail side you always hear weather being blamed for this, that, or the other thing, which keeps it top of mind.

Kristin:
However, when push comes to shove, and you have to put some sort of math or assumption in the system, what are you going to put in there? That’s where weather can become very complicated. The other thing I would say is promotional behavior. While you may remember as an inventory analyst that last year this product was put on sale, what was the impact of that? Did you really dissect the elasticity, and your system likely does not remember that, and so that’s another manual intervention that an inventory analyst would need to make.

Zack:
Let’s take this to, I’m a vendor. I’m selling a suite of products inside of a retailer. Why would a retailer listen to me? Let’s say that I know that I have this seasonal product. At the beginning of the season I see my out of stock rate in your establishments spike. It kind of slows down during the season. You’re maintaining stock levels better. But at the beginning of that season, to me it feels like you’re losing sales.

Zack:
Then on the tail end of the season it also feels like you’re losing sales because I’m seeing out of stock rates spike as the season tails off. What can I do as a vendor to help the retailer that would be in my best interest? Because I want them to have, perfect world, my product is on the shelf all year round. Right? They can’t do that though. How do I arm them with this information that I know that is leaving money on the table? Then what do I need to think about that they may be thinking about would make me a better consultant for them?

Kristin:
Yeah. I think there’s two truths, and then I’ll give you three things that brands can do. The first one is, retailers know that their forecasting systems are not perfect, and that they know that they’re limited. The second one is, that all brands want retailers to buy more. You have to keep that in mind that your story, if you’re talking to your buyer saying, “If you buy more, you’ll sell more,” is not going to be a unique story. That’s where you need to separate yourselves, and really come to the table as a partner. That’s where I would say I have three tips for you.

Kristin:
The first tip would be, bring the right data and insight. If you’re going to say, “Buy more, and you’ll sell more,” why? How can you substantiate that? What historical information, information that you know from how you’ve seen this work at your other retail partners, what data points can you bring to help share with your buyer partner and your inventory analyst partner so that they know how much, and when to buy, and what it’s going to do for them.

Kristin:
Then the second one would be, “Don’t let the retailer be the only one keeping an informed forecast.” I can’t tell you how many conversations I had with brands that were upset with my team when I was on the retail side because they were out of stock, because we didn’t buy enough, because our forecast wasn’t accurate. Well, my first question is, “Well, how did our forecast compare to your forecast?” Sometimes you get the shoulder shrug and then they say, “Well, I just rely on your projections.” That’s not going to help anybody win. I’m being a little flippant, but I would say, “Keep your own forecast,” because at the end of the day that leads into tip three is-

Zack:
Well, if I can just add one thing. It’s bring a solution to the problem. Right? Don’t just tell me I need to order more, and that my forecast was off, because you don’t know if it was off. Right? They don’t really know. If they haven’t done their own forecast, they don’t know that yours was off. I think that’s a big piece of it is, and I keep hearing from you the longer we work together is, “Vendors can be consultants if they’re bringing this type of information to the retailer.”

Kristin:
A hundred percent, and that’s exactly what my tip number three is, is be an active participant in the forecasting and planning process. Make sure that you’ve built a relationship both with your buyer and your inventory analyst so that you can have these productive conversations. Share your insights and be a partner.

Zack:
Yeah. Makes sense. Anything else you would add?

Kristin:
Yeah. The thing that I like to tell brands to keep top of mind is, “If you want to stay relevant with your retail partners, make it hard for them to run their business without you. You can do that by having a strong brand, and having strong data and insights leading you to be the partner that they can’t live without.”

Zack:
That’s great. That is a great quote, “Make it hard for them to do business without you.” Well Kristin, I learn more every time I talk to you. I mean that. For everybody listening, thanks for taking the time with us to talk about out of stock analysis.

You’ve been listening to the Uncovering Aha! podcast. Callahan provides data savvy strategy and inspired creativity for national consumer brands. Visit us at callahan.agency to learn more.