The Threat of Stockouts
Stock-outs are one of the biggest threats to businesses that rely on inventory on the shelves to meet their customers service expectations. In fact, 42% of small to medium businesses report stock-outs as being their top inventory management concern. While one or two lost sales due to stock-outs may not be a huge concern, a lost customer has major consequences for businesses. Losing a customer can unintentionally strengthen your competitor. And gaining customers back after they’ve moved on can be a daunting task.
So what causes stock-outs to occur? The obvious answer is that the buyer didn't order enough inventory. But if the answer were that easy, stock-outs wouldn’t be such a big threat. There are a number of reasons that stock-outs can occur.
- Underestimating the demand and therefore not ordering enough stock.
- Late delivery from the supplier.
- Inaccurate lead times, or lead times that are shorter than the actual delivery time.
- Under ordering due to a substandard inventory management system or unfortunate business decision.
- Quality issues with the items ordered that causes a high return rate to the supplier.
- Supplier refusing to deliver for account payment issues.
- Shortage of working capital that prevents the ideal item quantity from being placed.
- Safety Stock level(s) are too low.
A Proactive Approach
Ideally, business owners should be proactive about managing the causes of stock-outs. Preventing the problem before it occurs is the ultimate goal.
The Tools: An Inventory Management System with a dashboard that highlights potential stock-outs of currently stocked items will help predict problem areas so your team can take action before a stock-out occurs. In addition, the system should have a supplier order expediting feature that recognizes orders close to their expected delivery date and determines items that are late.
The Team: Have a team dedicated to maintaining forecasts based on market conditions. The more accurate your forecasts, the better your inventory management system will be able to predict possible stock-outs.
The Process: Low safety stock levels generally need to be addressed by management as it may require the team to raise service levels. Raising service levels will require an investment. Management will need to evaluate the the trade off between fewer stock outs and an investment in additional inventory. An inventory management system will calculate the additional investment in inventory required to meet desired service level objectives. If a potential stock-out is identified, place emergency orders with suppliers or accelerate current orders to keep these items from stocking-out.
A Reactive Approach
Stock-outs can occur even with a highly proactive inventory management team. Unforeseen conditions like weather or natural disasters can cause items to fly off the shelf at an unexpectedly rapid rate. Here’s how to cope:
Tools: An Inventory Management System with stock-out dashboards to identify existing stock-outs is imperative. And a timestamp tool showing when the stock-out occurred helps your team know how to prioritize and manage the stock-out.
The Team: Have a dedicated team member to deal with stock-outs, identify them and be accountable for resolving the issue.
The Process: If a stock-out is identified, place an emergency order or procure the item from a competitor. Rank items for the highest potential lost sales first so that they are properly prioritized.