The primary reason for holding stock is to generate revenue through the sale of goods and services. To avoid the risk of a stock-out occurring and the subsequent potential towards lost sales, a company will typically hold some level of stock on hand. This is generally referred to as buffer or safety stock.
The clothing giant Zara uses a strategy to drive consumer demand by encouraging product scarcity. However, this approach can have serious implications for most other organisations. In addition to needlessly damaging consumer perceptions and organisational reputations, there are many knock-on effects that under stocking can have on your business.
An occasional lost sale, in the short term, is a missed revenue opportunity and won’t necessarily have a long-term effect on your business. There is however, the risk that lost sales will lead to customers going elsewhere to meet their demand. When this happens, there is a very real chance they will continue to source their goods from your competitors.
Customer service is crucial to ongoing consumer loyalty. What happens if, as a retailer you have sold a product which, through no fault of yours, is damaged or faulty? Consumers are relatively forgiving if you can deliver on customer service through an efficient return or replacement policy. Problems will arise when you are under stocked to the point that you are unable to replace a faulty or defective product.
Retailers also run the challenge of competing with online ordering from both brick and mortar and virtual stores. Customer service and effective client relationship management helps to build customer and brand loyalty.
Providing good customer service is essential to maintaining your current consumer base. It takes up less company resources to maintain your existing customer relationships than it does to attract new customers.
Another reason for holding stock is to avoid the additional administration costs that happen when businesses are frequently re-ordering. Administrative costs form only part of the expense, the costs of freight and shipping generally increase proportional to urgent and expedited delivery requests required to meet consumer demand. The extra costs incurred when your company scrambles to replenish supplies or to restock shelves can become financially unsustainable. For manufacturing industries under stocking can have many other sizeable impacts.
The effect on production
Shortages of the inventory and raw materials required to achieve successful manufacturing outcomes can have significant ramifications for manufacturing schedules and budgets. These consequences may include labour lost time, production bottlenecks and failure to meet production deadlines.
Inadequate levels of raw materials cause production and assembly lines to stop, with workers left unable to complete tasks. This will cost the company through unproductive downtime and overtime costs if production needs to be increased to meet deadlines.
If the manufacturer has orders and production schedules they must to meet, it may be necessary for the company to spend additional money shipping the manufacturing inventory by air rather than by sea. A company that cannot meet customer orders runs the risk of customers going elsewhere.
Reason for holding stock
The knock-on effects of under stocking can have considerable ramifications for an organisation. Lost customers, increased costs, damage to reputation and the morale of employees can be affected. Proper planning and inventory control can help you to avoid any of the negative impacts of under stocking.
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.