Evaluating the Effects of Inventory Stock Outs

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A business that fails to exercise accurate inventory control, either through inadequate inventory systems or bad business practices and decisions driven by out of date and out of touch data, will find itself rushing to empty shelves to fulfil orders from impatient customers. The consequences of stock outs crisis often touch every node in the supply chain and are in most cases indicative of more systemic inventory management issues within the business.

The effects of stockouts

Unless a business takes immediate steps to implement a recovery strategy, driven by the implementation of a powerful inventory management software solution, the losses can be significant on numerous fronts.

Missed sales = lost revenue = diminished profitability

When a business does not have what a customer wants when they want it and in the quantity they want it they lose a sale. Lost sales in both retail and wholesale distribution or manufacturing enterprises spell the same outcome – lost revenue.

A business is in business to make a profit and losing revenue as a result of not having sufficient inventory is a cardinal sin in inventory management. The root cause of most stock outs is poor inventory control. If a business does not have the ability to access accurate inventory information in real-time, then it is in effect hamstrung when it comes to analyzing previous sales cycle performance on SKUs, forecasting future demand or automating re-supply points so as to avoid stock outs in future.

Eroded profit margins through stock outs

When a business has to scramble to fulfill orders where items are out of stock, it incurs a range of ‘rush delivery’ costs that destroy profit margins. At best, a ‘break even’ price point is reached. For some businesses operating with slim margins to begin with however, the result is having to sell at a loss.

Expedited shipping costs contribute to sending the COGS (cost of goods sold) skyrocketing. These could include: having to use expensive express air courier services rather than ocean freight forwarders, ordering under established discount minimum order quantity (MOQ) agreements, additional labor, picking and packing costs among others.

Mass customer migration to competitors

If the stock out is endemic, the business will likely suffer a mass migration of its customers to a competitor, particularly in an online context. In an ever-increasing global online marketplace where customers are bombarded with an abundance of options on where to spend their money, loyalty in the face of a stock out tends to evaporate quickly.

Dominoes of devastation – the knock on effect, losing reputation and learning the hard way how no business operates in a vacuum

It is often said that it takes years, even decades to build up reputation, but just moments to destroy it. When a business is unable to meet its customer service targets due to ineffective control of its inventory it suffers a loss of esteem in the eyes of its customers. But the effects of running out of stock on a critical order can be more far-reaching and destructive than simply loss of reputation. When the order is big enough, a stock out can sweep all involved in the transaction towards the precipice of business failure.

For instance, a manufacturer working to deadline to fulfill a make or break purchase order with a big customer ordering a large shipment of essential raw materials. When the supplier (your business) is unable to fulfill the order due to a lack of inventory, the knock on effect can be catastrophic for all involved. The supplier loses the revenue of a big order, a valued customer and its reputation. The manufacturer in turn has to increase its lead-time beyond what was agreed, placing them at risk of losing the customer. Alternatively, they will have to scramble to secure the inventory it needs at a premium and with expedited shipping costs on top of that. The end consumer ends up having to either deal with a delay in delivery or the hassle of cancelling their order and searching supply from another manufacturer. If severe enough, a stock out has the capacity to severely damage not only your own business but your customer’s business and their customers too.

There is good news – the promise of proper inventory control

Businesses that implement an integrated inventory management solution (like the one offered by innovative SaaS inventory management software develop Unleashed Software) are able to operate proactively.

Under stock can be planned against by automating inventory level warning points so that purchasing managers are instantly alerted when inventory levels are dropping to a point where re-supply becomes imperative. The power of integration also ensures that all the key personnel in their relevant departments – from procurement and production to sales and distribution – are in synch with the situation on the ground at all times.

This fosters a synergy of easily and remotely accessible inventory data that can be used to drive forecasting and automate key supply chain functions such as processing re-orders. A business can ensure that it is able to maintain accurate inventory levels and from there, improved efficiency, productivity and profitability will ripple through the entire organization.

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Melanie - Unleashed Software

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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