Understocking is a serious concern for product businesses. If there isn’t enough product to meet customer demand, you’ll miss out on sales, disappoint customers, and hurt your margins.
In this article we break down the dangers of understocking and how you can guard against it.
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.
Understocking creating poor customer experience
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.
Understocking leading to 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 understocking 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.
Understocking making inventory management challenging
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.
How to guard against understocking
There are a variety of tools and approaches that a business can use to ensure they stay in the sweet spot, holding enough inventory to operate without overstretching their budget.
Almost all of them require that the business has the ability to meaningfully monitor and control their inventory, which is exactly where software comes in. With this in mind, let’s take a closer look.
Invest in the right inventory management software
Easily one of the best things a business can do from the start is to choose inventory management software that is right for them. Thankfully, with the rise of new technologies, like cloud computing, there are a number of options available.
If we start from the idea that all businesses wish to operate with the right amount of inventory (neither too much nor too little) then inventory management software is an essential step towards achieving this. With the kind of intuitive automation that good software provides comes consistency, accuracy and the minimization of human error – all factors that are needed to keep the balance right.
With software comes the ability to, not only control but, meaningfully monitor the whole supply chain.
And it’s through the use of software that essential data can be collected and reviewed, safety stock requirements set for each item of stock, warehouses and logistics effectively managed and manufacturing processes optimized and automated with accuracy.
Ultimately, every technique that a business will use to better manage their inventory can be (and should be) utilized through an inventory software platform. All of the safeguards that help eliminate over and understocking can be harnessed, optimized and automated through good software.
How do I choose which software is right for me?
The status quo, especially for large businesses, has been to buy on-site software suites, powerful enough to handle complex and diverse supply chains.
Previously, this has required businesses to house their infrastructure on-site and employ some kind of IT department to run it.
For many businesses, this is still a good way to go as everything is handled on-site and the expertise needed to problem solve or upgrade is in their employ. For many other businesses, cloud computing is offering some great solutions that free them from large initial outlays of capital and the ongoing burden of IT costs and in-house upgrades.
Inventory management solutions that are supplied via Software as a Service (SaaS) are becoming a great way for businesses (especially small or start-ups) to utilize cutting-edge software without needing on-site infrastructure or large IT costs. Most are available for a monthly subscription, creating more financial and practical freedom.
At the end of the day, each business can decide for themselves which software solution is right for them. All that’s needed is some research and a clear idea of what functionality they need.