What causes stock-outs?
A common reaction to stock-outs is that “the buyer did not buy enough”. Stock-outs are bad for business, so it is important to understand the main reasons that stock-outs occur.
In order of significance, stock–outs are caused by:
- Under-estimating the demand for a product; if we sell much more than we thought we would, we are likely to have under-ordered and run the risk of running out of stock
- Late delivery by the supplier; even if our ordering is spot on, if the supplier delivers later than we expected, we will chew into our safety stock and are at risk of running out of stock
- Using the wrong lead time; a supplier lead time that is shorter than the time it will actually take the supplier to deliver, will result in the delivery arriving later than planned due to the order being placed too late
- Safety (or buffer) stock level that is too low; without factoring in under-estimating demand and late delivery, insufficient safety stock results in levels that are too low and a greater risk of running out
- Under-ordering; making a decision to order less than recommended is only a good decision when we reduce inventory and increase our fill rate as a result, but more often than not results in stock-outs
- Product quality issues; a high level of returns to the supplier due to product quality issues means less “available for sale” inventory
- Supplier refusing to deliver; if the supplier will not deliver due to a credit hold on your account due to non-payment of invoices or a dispute of some sort, you have a bigger risk of stocking out
- A shortage of working capital; which may limit the value of orders that can be placed each month, resulting in stock-outs on key selling items due to too much cash tied up in high levels of excess on slow moving items
How to cope with the problem of stock-outs in the real world
Every business is at risk of stocking out and is subject to the above reasons to varying degrees.
For starters, you need the right tools and business processes:
- Focus; the identification of current stock-outs visible to Management, Sales and Purchasing is absolutely essential for effectively resolving the problem
- Prioritisation; ranking the biggest impact stock-outs by potential lost sales value, enables the maximum benefit to be derived with the least effort in the minimum time
- Resolution; with the biggest impact stock-outs highlighted, work through each one investigating the specific scenario and the possible resolutions:
- Bring existing orders forward
- Transfer excess from nearby locations
- Place an emergency order
- Buy stock from a competitor (rather than lose our customers to them)
- Communication; once selected, communicate the resolution to affected customers, along with the new expected delivery date
Reduce fire-fighting with early warning signals
Early warning signals for the most significant causes of stock-outs enable you to minimise the level of stock-outs in your business.
Reactive “fire fighting” can be reduced or even eliminated with an Inventory Management System that:
- Identifies potential stock-outs; predicting that an item that currently has stock will stock-out before the next order will be received
- Highlights when existing orders are due in; allowing the expected arrival date to be modified based on the most up to date supplier information
- Provides month-to-date forecast versus sales comparisons; enabling the identification of items where we are selling much more than the forecast at the earliest possible opportunity
- Enables placement of emergency orders or transfers; allowing swift resolution of the stock-out
As the prediction of a potential stock-out is based on the demand forecast, it is essential that forecasts are modified to be more in line with real market demand as soon as it is seen to be incorrect. Accurate information regarding when existing purchase orders will arrive is key to the identification of any “gaps” or stock-outs.
Stock-outs are bad for business, but the impact and frequency of stock-outs can be reduced by focussing on preventing them from occurring in the first place.