The Dangers of Understocking

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If every inventory manager or business owner were to sit down and write a list of their biggest inventory nightmares, it’s a safe bet that understocking or ‘stock-outs’ would sit near the top of most lists. And with good reason, as having enough stock to satisfy demand is the central task of any inventory-centric business.

As modern businesses understand the importance of getting this right, a lot of time and money are invested in finding ways to improve critical management systems. Everything from a business’ delivery models and automated reordering, to sales forecasting and mobile technologies, are constantly analyzed and improved.

Understocking – no stone should be left unturned

Managing inventory can be a complex and challenging task that incorporates a wide variety of skills and systems. This complexity is reflected in the range, diversity and usability of inventory management software solutions available on the current market.

For most businesses, the days of Excel spreadsheets and daily counts are a thing of the past. These are now replaced with sophisticated inventory management systems that are connected to every facet of operations and grant a level of control unheard of 20, or even 10, years ago.

Beneath this complexity are the boiled-down fundamentals. Primarily, inventory management can be seen as the great balancing act – the art of navigating the thin line between too much and too little.

Both extremes have their problems. Carrying too much stock means tying up capital that could be better used elsewhere, whereas carrying too little generally equates to lost sales and the potential for loss of customer loyalty – the death rattle of customer relations.

With the increased use of lean inventory practices, there is a large (and mostly positive) focus on maintaining the least amount of inventory possible. This helps keep running costs and losses down, as well as contributing to a business’ overall streamlining and efficiency.

The flipside of this though, is what happens when a business understocks too aggressively or without discernment. Although lean practices deliver results when used well, some businesses wrongly conclude that less is always better.

Understocking has the potential to create some serious problems for all kinds of businesses. These problems can range from the loss of sales and customer loyalty to the cost of expensive restocks and missing out on discounts.

Stock outs don’t just mean lost sales

The most obvious, and often most damaging consequence of understocking is of course, stock-outs. While the immediate financial cost of lost sales is significant, there are other, more long-term losses to consider.

Much of any business’ day to day, is finding out how to provide the right products to the right customers at the right time. Customer loyalty is a highly courted commodity as repeat business is critical for long term success.

As customers base much of their loyalty on a business being able to provide their products at the time they’re needed, the potential damage caused by lost sales to a business’ reputation can’t be overstated. Lost sales don’t just equal lost revenue, they mean the loss of customer loyalty – not to mention the loss of opportunities to both upsell and expand customer relationships.

It is losses such as these that can break a business. Customer loyalty is the Holy Grail of customer relations, something that businesses spend a significant amount of time and money trying to foster.

Missing out on discounts and deals

One way that businesses look to save on inventory costs is to take advantage of discounts and deals offered by suppliers. Many businesses that use a variety of raw materials or parts will sometimes buy in bulk to maximize on a special price or reduce the cost of shipping and transport. Retail stores may take advantage of a weak currency value by purchasing a popular overseas line in bulk. Most of the time, a business that is frequently understocking, will find itself unable to utilize such techniques.

Inefficient ordering and safety stock

When a business understocks as a matter of policy or due to poor inventory management, there can be knock-on problems in regard to ordering and safety stock requirements.

Supply chains can be complex and varied, something that many businesses navigate by using a variety of tools, approaches and rules of thumb. Obviously, some lines or items sell better than others so ordering requirements will often be as varied as the supply chain itself.

Setting safety stock levels for each item or line is an essential tool for managing inventory and one that can be negatively limited by understocking.

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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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