The knock-on effects of understocking

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How understocking can negatively affect your business

Many companies these days are using different techniques to manage their inventory. One of the more popular ones is a just in time method whereby inventory is carefully managed to only be available as and when it’s needed for customers. If done effectively this can help reduce inventory management costs and mean less capital is tied up in stock sitting on shelves. However, when things go wrong and understocking occurs there are a number of knock on effects that can affect your business.

Let’s take a look at just some of the pitfalls of understocking.

A poor customer experience and lack of loyalty.

If understocking occurs, basically you will be unable to fulfill a customer’s order at the time or within specified delivery timeframes. Given your customers will no doubt expect product when it is promised, if it is not delivered on time a lot of customer dissatisfaction will occur. This is something you might get away with once or twice but if you start to get a reputation for not delivering on time or not stocking the product in store that customers expect then you will get zero repeat customer and no customer loyalty.

Also, any bad experiences will no doubt be passed on through word of mouth, which as we know can be a critical way of acquiring new customers.

Missed sales.

In a world where customers can literally buy nearly anything they want from any corner of the world, if they don’t get what they want when they want it, they will simply go elsewhere. And given the competitive nature of today’s landscape, any missed sale is a lost opportunity and a hit to the bottom line.

Extra catch up costs.

Quite often if a business realizes they are understocked they will try to make up for it by going the extra mile to get stock to customers on time regardless. This can be as simple as using faster shipping methods than they normally use i.e. air freight vs sea freight, or by ordering in extra, smaller quantities to make up for the shortage. Regardless, generally if this occurs the business will take a hit in terms of the extra costs to the business. Different, faster shipping methods mean higher fees, buying smaller quantities means less opportunity for bulk buying and associated discounts – all of which will affect your profit and margins.

Also, if the company gets into panic mode, to make up for the shortage there can be extra time and labour associated with getting the products ready and sent out. This naturally then comes with extra costs, especially if it means overtime for any workers.

Inventory management gets harder.

As mentioned, if you are playing catch up when it comes to inventory and your supply you will never really be able to maintain a good level of oversight over your inventory and how you can run it effectively. You will essentially be forever chasing your tail instead of making considered judgments and placing informed orders based on your inventory levels and associated data.

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Jorge - Unleashed Software

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