CAPTURING PHANTOM DEMAND

Dec 01, 2006 10:30 PM  By

For many direct merchants, recording phantom demand can be as elusive as capturing an actual ghost. Advancements in contact center and Website technology have made it somewhat easier to get a handle on this lost demand. But inventory management experts say that far too many multichannel marketers still ignore this mysterious metric.

Phantom demand, sometimes referred to as shadow or lost demand, is generally described as demand that cannot be filled and is not recorded. A cataloger typically captures demand data on the number of customers who actually placed an order for the item but not necessarily the number of shoppers who wanted the item but didn’t order it because it was out of stock.

“It is fair to say a true backorder is legitimate demand, especially if it is fulfilled,” says Ken Lane, founder of Litchfield, CT-based direct marketing consultancy Hathaway & Lane Direct. “Backorders that are not filled or items that sell out far before the selling season ends can create phantom demand.”

Say you’re an apparel merchant, and you have a purple, cable-knit V-neck sweater that’s been a runaway best-seller this fall — maybe because purple was the hot color for the season or perhaps because V-neck tops were all the rage in the fashion magazines. Even if you sell out of the item, customers will continue to call to order it. If a customer is willing to wait for a product that’s on backorder, you have a record of the demand. But what about all the customers who call to order the item but don’t place orders or cancel their orders once they know it’s on backorder? All the units you could have sold if you’d had the merchandise in stock amounts to phantom demand.

Phantom demand is a valuable inventory planning metric, says George Mollo, president of Nanuet, NY-based operations and merchandising consultancy GJM Associates. Because it tells a retailer how much of an item could have been sold if it had been in stock for an entire season, merchants can use that figure to better determine how much of that item they should put in inventory the following season.

In short, this information is critical for improving forecasting accuracy, fill rates, and customer satisfaction, Mollo says. If the amount of lost demand is significant, a company can become perpetually out of stock of highly requested items, as purchases will never be forecasted to true demand — and the company is of course leaving money on the table.

But phantom demand is not only an inventory or operations issue. Tracking all demand can benefit the marketing department as well. For instance, Mollo says, by not capturing information about an order that cannot be filled, some companies may lose potential customer information and thus increase marketing costs by rerenting a name that perhaps they could have added to their file. In addition, actual response rates may be underreported when demand goes uncaptured.

GETTING IT DONE

There are many compelling cases for finding lost demand, But if you’re not sure how you should capture and adjust for phantom demand, you’re not alone. Most experts are also baffled on the best way to log phantom demand. “I have tried for 26 years to find a good way to identify and adjust for phantom demand, and it’s just very difficult,” says Jon Schreibfeder, president of Coppell, TX-based retail consultancy Effective Inventory Management.

Curt Barry, founder/president of Richmond, VA-based consultancy F. Curtis Barry & Co., agrees that capturing phantom demand is one of the toughest challenges for merchandisers and inventory management. But it’s worth investing time and money to figure out how to capture phantom demand and how to plan with it. “The point is, only a small percentage of direct retailers actually look to capture phantom demand,” he says. “It’s not easy to do, but the benefits are huge.”

“The key to remember is that phantom or lost demand is only a problem if it is not captured,” Mollo says. “Once the systems capture demand and forecasting accuracy improves, the incidence of true lost demand is negligible and controllable.”

To determine if your company is capturing all of its demand, first compare your initial fill rate to your final fill rate. If you have a low initial fill rate — say, 70% or so — but a final fill rate of at least 98%, says Mollo, that’s a strong sign that you are failing to capture all of your demand.

Then consider this scenario: “Say a customer places an order for three items; two are on backorder, and the third is in stock,” Mollo says. The customer subsequently decides to cancel the entire order. “Are the demand and the immediate cancellation captured for the item that was in stock? If not, then all demand is not being captured.”

CALLING ON PHONE REPS

Your contact center provides your greatest opportunity for collecting phantom demand. If a customer decides not to place an order for a backordered item and simply hangs up, there is no record that he ever wanted the item. But if you train your contact center agents to document the request or implement software that makes collecting the information easier, you can get a much more accurate picture of actual demand.

Some merchants use a system as elementary as having a contact center agent compile by hand a list of out-of-stock requests that he then gives to the purchasing department. “In a lot of operations we work with, backorder and out-of-stock item requests are pretty much collected and sent to purchasing,” says Kathleen Peterson, founder/chief vision officer of Bedford, NH-based contact center consultancy PowerHouse Consulting. Merchants want that information because it is a revenue opportunity that could be lost. “If five different people call for an out-of-stock beach chair, and the agent just tells the customer they don’t have any more and the call ends there, it hurts the data trail because a product query was not entered.”

It’s up to management to show agents how this sort of call affects the business as a whole, as opposed to training agents only for order accuracy, Peterson says. “They need to understand the value of entering requests into the system.”

Several software vendors have designed their contact center solutions, such as Witness Systems and Junction Solutions, so that agents can record lost demand with just a few keystrokes. But there generally does have to be interaction on the part of the agent.

For example, with Junction Solutions’ Junction MCR software package for multichannel retailers, “it’s up to the customer service representative to key the item in, even if it is on backorder and the customer is not willing to wait for it,” says Holly Haines, multichannel retail product manager for the Lincolnshire, IL-based supplier. But if the agent inputs an order and the customer chooses not to complete the purchase, the agent can delete the line order, and the data will still be stored. The Junction Solutions system also requires agents to input a reason code whenever they delete a line.

PHANTOM DEMAND, VIRTUAL STORE


With Internet orders, you can record when customers try to order an item that’s out of stock — if you leave backordered items up on your Website. Most multichannel merchants, however, take items off their site once they are sold out.

It becomes a question of whether you should leave a backordered item on your site to try to collect the phantom demand — and risk disappointing customers who try to buy it — or take it off the site and never get a true measure of the demand. There’s no rule of thumb, but Lane of Hathaway & Lane Direct says that if you stock the item in your other channels, you might want to leave it on the site for customers who are researching online before completing their purchase offline, if nothing else. If it’s an Internet-only item, however, Lane advises taking it down.

Stephan Schambach, CEO of Woburn, MA-based software provider Demandware, says that e-commerce solutions can track a visitor’s IP address and dwell times, or how long a page has been viewed, as well as the specific pages viewed. From there the merchant can learn about interests that didn’t yield a purchase. Analysis of the data provides clues regarding what is missing from the product offerings.

Simply by tracking the number of people who clicked on “order the item” and then did not order it — because the particular size or style they wanted was unavailable, for instance — can help you predict demand for the coming season. But in addition to helping you capture phantom demand, the Internet provides opportunities to save the sale once you have the item back in stock.

If a visitor to your online store abandoned his shopping cart after learning that the item he wanted was out of stock, you can follow up with an e-mail message, says John Squire, vice president of product management for San Mateo, CA-based Web solutions provider Coremetrics.

The e-mail could say that you know the customer was looking for product X and that you can get it back in stock if he would like it. That helps you get a better grasp on a true number of items that need to be ordered on top of the estimated demand.

“If five people clicked on the item, you might decide not to notify them when the item was back in stock,” Schambach says. “But if 100 people click on the item, you can either send the e-mail out that season or know that come the next time you order, you need to order more because now you know that the demand for that product is greater.”

Demandware’s e-commerce platform has a button built into the order page that customers can click, asking the merchant to notify them when the item is back in stock. This allows an opportunity to salvage the sale and even upsell later.

“There are a growing number of e-commerce sites that have adopted that tactic over the past two years,” says Squire. Some big-box multichannel merchants, such as computer retailer CompUSA, report that up to 10% of customers who left a site because an item was out of stock returned to buy the product because of such e-mail communications.

BEWARE THE FALSE DEMAND


Once you know how many items you could have sold if you’d had them in stock, it may be tempting to stock up on those that generated high phantom demand. But that’s not always the best idea.

Depending on the time of year and the credibility of the data, your merchandising and marketing teams need to work together to agree on baseline demand assumptions, whether by item, by category, or by promotion, says Lane. “Being overly optimistic without consensus at the item level can create overstocks, markdowns, and lower gross margins,” he explains. “Merchandise purchases that result in markdowns are far worse than the phantom demand that needs to be dealt with accordingly in next year’s planning.”

You also need to consider the artificial demand for alternative products that may have resulted from the absence of the originally desired product. Say you sell all 100 units of item A in week 1 but only 10 units of a similar product, item B. Then in week 2 you sell another 75 units of item B. The sellout of popular item A, Lane says, most likely created an artificial demand for the less-popular item B. If you plan to restock item A and item B, you need to keep that in mind, or else you could wind up with too many units of item B.

Indeed, when trying to capture lost demand, “be sure to set some thresholds,” Mollo says. For example, if a requested item is out of stock, but the customer keeps trying to order it in different colors that are also out of stock, “then only the first item requested should be captured,” he says.

Likewise, Mollo adds, if a customer is trying to find out if an item is in stock prior to officially placing her order, “you don’t have to consider that demand.”

Presales a scary source of phantom demand


Phantom demand is typically overstated when it comes to presales of eagerly anticipated products such as video game systems and the latest Harry Potter book. Depending on the product, the time of year, and the situation, you should not allocate this presale demand, says Ken Lane, founder of Litchfield, CT-based marketing consultancy Hathaway & Lane Direct.

“Let’s use the next Harry Potter book as an example,” Lane says. “Amazon.com and other online booksellers will take considerable presale orders from people ordering from multiple sites. These people want just one book, but they will do anything to ensure they get it.” If a customer preorders the book from four merchants, he notes, only one retailer will get the order. “The total demand is not four, and never was.”
TP