Having too little product on hand can have far-reaching consequences for your business. Take for example the retailer Lululemon, which implemented a strategy of lean inventory in its stores. The combination of supplier issues and a website migration resulted in widespread dissatisfaction as the company had a lack of inventory available for purchase both in stores and online. As a result, Lululemon had to spend extra to have products shipped faster, by air transportation rather than sea. Below, we summarise the knock-on effects such understocking can have on your business.
Ultimately, understocking means you risk having to pay extra to expedite shipments or pay workers overtime for orders that have required last-minute work. This has obvious financial consequences for your business, which can be avoided with proper planning and product flow.
Understocking not only has immediate financial consequences for your business, however. Failing to provide customers with their purchases in a timely manner may also tarnish your reputation overall, deterring potential buyers and inhibiting the retention of existing customers.
Relatedly, since understocking can create the need to work overtime, you run the risk of overworking your employees. This can lead to high levels of staff turnover, and can also increase the likelihood of workplace accidents if workers are tired and prone to making mistakes.
Understocking effect on competitive prices and discounts
Understocking may also mean that you risk missing out on the best prices available. Buying stock sooner rather than later may provide more competitive prices. As an example, from 1994 many coffee companies who did not buy stock ahead of time had to pay extra when they eventually stocked up, with prices soaring to more than double the original cost for the next three years.
Relatedly, by ordering large quantities of stock ahead of time, many companies can secure discounts from suppliers. Suppliers are less likely to give out discounts on smaller, more frequent orders, so paying attention to these patterns will help businesses to save money. It is also worth noting that larger, less frequent orders can reduce shipping and clerical costs.
A Balancing Act
In avoiding the knock-on effects of understocking, you also need to avoid overstocking. Therefore, getting it right can be a real balancing act. Below are three tips for preventing both extremes.
- Communicate Between Departments
- Adjust sales predictions
Understocking is often a symptom of inadequate or outdated sales predictions. That is why you must consider how both internal and external factors may influence the demand for products, so that you can adjust stock levels accordingly. Factors such as economic changes and changing social climates must be taken into consideration.
- Plan for scarcity
The retailer previously mentioned, Lululemon, came into trouble partly because it used planned stock scarcity to excite customers and increase demand. However, supply levels were not carefully enough adjusted to meet customer needs. When implementing such a strategy, you must pay exceptionally close attention to the relationship between supply and demand.
It is essential that your supply chain can flow smoothly with as few errors as possible. This is much easier when you make interdepartmental communication a priority, so that no one is caught off guard. This will prevent different departments from being blindsided by changes made to the website or changes in manufacturing plants.
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.