Retail 101. Availability — one of the key metrics of retail business
Intended as an introductory material for a general understanding of Retail. Looking forward to your comments and thoughts
Part 1. What Is In-Stock Availability in Retail? ✏️
What is In-stock Availability?
In-stock availability measures the percentage of products currently in stock in a retail store and ready for immediate purchase by a customer. It is calculated as a percentage and answers the question: “What percentage of products are available for purchase in the store at the moment?”
Why is it important?
For customers, in-stock availability is essential because it directly influences their ability to make an immediate purchase. If a desired item is out of stock, customers may face the inconvenience of waiting until it will be replenished or needing to seek alternative items or stores, potentially resulting in lost sales.
From a business perspective, maintaining high availability is critical for meeting customer demand, enabling customers to buy your products, and preventing revenue loss. This process is called Retail Inventory Management. However, it’s equally vital to find a balance between availability and cost. Maintaining excessively high levels of stock can lead to increased costs in terms of frozen stock, supply chain expenses or write-offs. This cost-effectiveness aspect highlights why effective supply chain management is a key component of any successful retail business.
What is the difference between in-stock and on-shelf availability?
These metrics refer to different stages of product availability in retail operations:
- In-stock refers to items that are available in the store’s inventory but not necessarily on display for customers. This includes items that are stored in the backroom or store’s warehouse. Usually, this metric is easier to monitor through inventory management systems.
- On-shelf availability specifically refers to products that are physically available and accessible on the store shelves for customers to see, touch, and purchase directly.
The distinction is important for both inventory management and customer satisfaction, as high in-stock levels do not necessarily translate to high on-shelf availability if the products are not moved to the sales floor efficiently. In this article, we will focus mostly on in-stock availability due to comparative ease of measurement and leave in-store inefficiencies for another article.
Part 2. Measuring In-Stock Availability: Basic Formula
To measure in-stock availability follow these steps:
- Define assortment matrix: start by defining an assortment matrix that serves as the basis for measurement. In this matrix, assign “1” to items that are expected to be in stock in the store and “0” to items that are not.
- Calculate available items: Determine how many items from the assortment matrix are in stock at the moment of calculation. If the stock level of an item is greater than 0, mark it as “1”; otherwise, mark it as “0”.
Basic formula to calculate in-stock availability:
Availability, % =
(Total number of Available items from Assortment matrix) /
(Total number of items in Assortment matrix)
Part 3. Measuring In-Stock Availability: Advanced Formula — weighting by sales 🏋️♂️
When measuring in-stock availability, it’s essential to consider the impact of individual products and their sales performance. The basic formula treats all items equally, so the goal is to create a more accurate representation of availability.
For instance, a best-selling item being out of stock could have a more substantial impact on customer satisfaction and sales compared to a less popular item.
To address this, you can weigh the availability of each item based on their trailing period product sales in either units or monetary value.
Example. Imagine you want to calculate availability today. Take a snapshot of your stock at the end of the day and apply weight to these items based on their trailing 4-week period product sales in units. For instance, if Product A was sold for $200 in the past 4 weeks, and Product B — for $100 during the same period, and both items are currently out of stock, Product A will impact the in-stock availability metric 2 times more than Product B.
Advanced formula weighted by sales:
Availability, % =
(Total Sales for past period of Available items from Assortment matrix) /
(Total Sales for past period of items from Assortment matrix)
Part 4. Frequency of measurement ⏱
In-stock availability is a metric that requires careful consideration of the product category when determining measurement frequency. The frequency of measurement is essential because different product categories have varying sales rates. This concept can be illustrated through the following examples:
FMCG (Fast-Moving Consumer Goods)
FMCG items, which include products like fresh food, beverages, and daily essentials, demand hourly measurement of stock and, therefore, availability. These fast-moving categories experience rapid turnovers due to high consumer demand. This frequent monitoring ensures that customers can consistently find these items when they visit the store. For example, consider a grocery store running out of milk in the morning. Failing to promptly address milk availability can lead to customer dissatisfaction and lost sales. Hourly measurements are essential for detecting and preventing such scenarios.
Notes. Reliable data is the foundation of healthy inventory management especially for fast-moving categories.
Other categories (such as Fashion, Consumer electronics or DIY)
Categories with slower sales rates compared to FMCG products require daily measurements of availability. For instance, if a consumer electronics retailer runs out of a specific TV SKU, the retailer may face lost sales during the day. However, considering that this particular TV SKU has an average sales rate of 0.5 units per week in the store, hourly data is unnecessary to measure availability. Daily measurements effectively support replenishment decisions based on demand.
By understanding this concept and implementing appropriate measurement frequencies, retailers can optimize their in-stock availability, striking the right balance between customer satisfaction (reducing lost sales) and cost efficiency.
Part 5. Online availability 🛒
In the age of digital retail, assessing online availability comes with both challenges and opportunities. First, the online landscape allows retailers not only to analyze past sales retrospectively but also to measure the real-time popularity of products. This capability completely reshapes our understanding of product availability in online. Secondly, the very definition of “availability” online requires closer examination. What is an “available” product online? Delivered regardless of lead time or only for 24 hours? Let’s try to figure it out.
Product popularity
Online we can measure the popularity of a product by looking at how many times it’s been viewed or the number of product views (both on websites and apps). Products with a high number of views may indicate strong customer interest. If we combine this idea of ‘product views’ with availability, we could calculate the metric based on both actual stock status and the current popularity of the product.
Note. Take into account about product popularity that there are products that people tend to look at more but are less likely to buy. For example, expensive items or bright colors in fashion.
Lead time
Imagine you’re shopping online, let’s define what is an “available” product from a customer’s perspective. If a product is available online, it means customers can buy it and expect it to be delivered within a specific lead time. For instance, Amazon has set a benchmark by saying that when a product is available, it should reach the customer within 2 days, or 48 hours. They call this metric “Availability for 2-days shipping” or “Fast Track In-Stock”.
Advanced formula weighted by product views:
Every time a customer visits a product’s page, we should check if that product can be delivered to them within 2 days and add one to the metric called “Total number of in-stock product pages displayed”. So we could calculate availability for any period, item or category by using this metric and the total number of product pages displayed:
Availability, % = (Total number of in-stock product pages displayed) /
(Total number of product pages displayed)
Note: Target Lead time of 2 days could be a parameter that differs from country and city.
Basic formula weighted by product views:
The advanced formula requires real-time data and calculations. If you don’t have enough resources for that, you can begin with a simpler approach. You could apply the same concept of weighting availability but instead of sales use product views as your metric:
Availability, % =
(Total number of product pages displayed for Available items from Assortment matrix) /
(Total number of product pages displayed for items from Assortment matrix)
Summary
The advanced metric of availability weighted by views is the most accurate representation of what customers experience during the day in an online store or marketplace. That is an outward-facing metric focusing on the customers. Whereas previous metrics (without weighting or with sales weighting) are inward-facing and more focused on the company’s processes. The focus on customers and their experience is what is called the Amazonian approach or working backwards.
Part 6. Evolution of metrics 🚀
Business metrics aren’t set in stone, they must evolve as companies grow and goals change. Often, a business will focus on one metric, evaluate its impact, and then replace it with a more relevant metric. Amazon’s journey in refining its metrics provides a perfect illustration of this evolutionary process.
Amazon: a case study of availability metric evolution
- Number of product pages: Initially, Amazon focused on the existence of product detail pages. Their rationale was simple: if there aren’t any product pages, there can’t be any sales, hard to argue.
- Number of page views: Recognizing the importance of engagement, they shifted their focus to the number of views each product detail page received. After all, without views, there’s no sales.
- In-Stock Availability: Amazon then began tracking the percentage of product detail page views where the products were actually in stock. Their thinking? If a product isn’t in stock when a customer views it, that’s a missed sales opportunity.
- Fast Track In-Stock: Finally, Amazon realized the importance of fast delivery for the customer. They started measuring the percentage of detail product page views where not only was the product in stock but also ready for 2-day shipping. They evolved to this crucial metric “Fast Track In-Stock”, reflecting their opinion: if there’s no option for fast delivery, potential sales could be lost.
This progression shows how Amazon continually refines its metrics based on changing business needs and a deeper understanding of customer preferences. Metrics aren’t born ready-to-use, that is the process you need to follow.
Part 7. Right balance ⚖️
Determining optimal product availability is essential for business success. While high availability decreases lost sales and enhances customer satisfaction, it also increases inventory costs, especially in multiple stocking locations like stores. The objective is to strike a balance that both meets customer demand and minimizes costs.
Note: Achieving 100% availability is impractical and should not be considered a viable solution to any availability-related issue.
How to Analyze Availability?
1. Customer Demand (or ABC) Analysis
To optimize availability, first understand customer demand patterns using ABC analysis based on sales in units. Prioritize high-demand products (A-group) with higher availability targets, as stockouts here lead to lost sales and customer dissatisfaction. For instance, fresh milk or best-selling vacuum cleaners fall into this category.
Conversely, items with lower demand (C-group) can have reduced stock levels to minimize carrying costs. If an item like a standard TV SKU sells only 0.5 units per week and one unit sells today, the likelihood of a customer facing an out-of-stock situation today or tomorrow is low, and most likely you will have time to replenish inventory of this item without keeping the extra unit as safety stock.
2. Cost-Effectiveness
Maintaining high availability can be costly due to storage costs and frozen inventory. Depending on your business, you should consider the costs associated with storing excess inventory, such as warehousing, handling, and carrying costs, and the costs associated with frozen inventory, such as alternative sources of investment. And the costs associated with frequent replenishment, such as higher transportation costs due to lower utilization. Find the equilibrium where availability meets cost-effectiveness, by comparing lost sales from stockouts and overstocking costs.
3. Seasonality
In industries like fashion, demand varies by season. Plan for these fluctuations by adjusting availability levels accordingly: keeping higher only at the beginning of the season, declining it down as the sales season progresses, and retaining just 10–20% of the stock at season’s end to make space for new collections.
4. Internal benchmarking
Often overlooked, internal benchmarking is powerful. Compare metrics across different groups like product categories, SKUs, or regions. This helps identify best practices and areas needing improvement, allocate resources more effectively.
5. Exception analysis
Focus on exception analysis, like the Top-10 items with the lowest availability in each category. Doing a deep dive and investigating these cases could reveal supply chain and other issues, critical for business. For example, faulty input data, manual purchase order errors, faulty cost allocation. Addressing these issues will allow the organization to improve continuously week by week.
Examples of using availability in business:
- Walmart shows a customer-focused strategy with its “In-Stock Guarantee” for items featured in their ads;
- Apple keeps its inventory levels at a minimum by closely monitoring sales and inventory data in both Apple and its partner’s stores;
- Amazon’s dynamic repricing allows them to raise prices slightly in case of the possibility of out-of-stock calculated by algorithms;
- Best Buy’s ‘Ship-from-Store’: turn its retail locations into distribution centers for online orders and use them if an online warehouse runs out of a product. This model helps maximize in-stock availability online by leveraging in-store inventory, providing a seamless customer experience.
Part 8. Summary 🎯
To sum up the article, availability is a critical metric that directly affects customer satisfaction and revenue. It is worth starting with choosing the calculation formula and understanding measurement frequency. You should note that metrics could evolve over time to adapt to changing business needs as in Amazon’s example. Online always gives us new opportunities, so don’t forget to adjust your formula for online sales using product popularity and delivery lead time.
Finally, optimize availability through demand analysis and cost-effectiveness, aiming for the right balance that meets customer needs while controlling overstocking.
