What causes stock-outs?
“It’s the Buyers fault; they didn’t purchase enough.” Sound familiar?
Running out of stock hurts business in the long and short term. Research from Harvard Business School found that 7 – 21% of consumers faced with a stock-out will continue shopping but wont buy a substitute product but 21-43% of consumers will go to another store to purchase their desired item. This suggests that retailers can potentially lose nearly half of intended purchases when a customer encounters a stock-out. For a billion dollar retailer this could mean a $40 million per annum in lost sales.
Take a look at some of the other interesting statistics from this research in our infographic below. Or skip to delve into the major causes of stock-outs.
It’s one thing to be able to rectify a stock-out, but it’s way more important to understand why it occurred. Fix the cause, not the symptom. Before we start pointing fingers at whose fault it is, let’s examine a few issues relating to stock-outs.
Stock-outs are caused by the following, the most significant being listed first:
- Under-estimating the demand for a product and, therefore, under ordering.
- Late delivery by a supplier. You ordered enough, but your supplier did not deliver when expected or only delivered part of your order.
- Using the wrong lead time. A supplier lead time that is shorter than the time it takes for the supplier to deliver will result in the delivery arriving later than planned. The consequence of this is that the re-order level will be too low
- A Safety stock level that is too low to cover the risk profile of an item
- Under ordering , this could be the result of a poor ordering system or poor decision making. Many businesses decide how much to order at the point of ordering. A correctly designed Inventory Management System calculates the recommended order quantity from the arithmetic result of key inputs such as the forecast, lead time, planned replenishment cycle, and safety stock. For this reason, while the buyer may have a useful perspective of the requirements, the buyer is not the person who should be deciding how much to order.
- Product quality issues resulting in a high level of returns to the supplier
- The supplier is refusing to deliver due to a credit hold on your account from non-payment on your behalf.
- A shortage of working capital may limit the value of orders that can be placed each month. This could be caused by poor cash flow management or other inventory issues such as too much cash tied up in excess inventory
Dealing with the problem in the real world
We do not live in a perfect world, and every business is at risk of stocking out at some stage. Success comes when you can reduce the frequency of those stock-outs.
The first step to mitigating stock-outs is having the right tools and business processes in place.
These steps include:
- A Stock-out Dashboard that identifies existing stock-outs. This must be visible to Management, Sales, and Purchasing and is essential for effectively resolving the problem.
- Once a stock-out has been identified, the first step is to deal with it by placing an emergency order or procuring the item from another warehouse and communicating with the affected customers. A last-resort option is to buy the item from a competitor.
- Resolving stock-outs must be the top priority for someone in your organization, and that person must be held accountable.
- This process will be more effective if you rank by the highest potential lost sales so that these customers receive attention first. This enables the maximum benefit to be derived with the least effort in the least time.
- A date stamp that identifies when the stock-out occurred assists in prioritization and management.
Solve the problem before it becomes a problem – be proactive
- A Potential Stock-out Dashboard that predicts when an in-stock item will stock-out before the next order is received, is essential. This allows you to rectify the situation BEFORE it becomes a problem.
- Placing emergency orders or expediting existing orders is required to prevent these items from stocking out.
- Again, this must be visible to Management, Sales, and Purchasing.
- Forecast variance management. The Potential Stock-out dashboard and other calculations use the forecasts, and these calculations are only as good as the forecasts. It is, therefore, essential that forecasts are re-aligned to the real market demand as soon as changes in demand are identified.
- A supplier order expediting system that identifies orders close to their expected delivery date and most definitely identifies overdue items.
Selecting the right tools to stay on top of your inventory is the name of the game. You will find that your investment in this type of technology will pay off very quickly.