You may think that understocking does not sound that bad, however the reality is there are several knock-on effects which can severely jeopardize the company. Understocking, simply put, indicates a lack of correct stock control and a misunderstanding of supply and demand. These things need to be addressed in order to ensure profitability.
There is a fine line between saving resources by utilizing lean manufacturing and simply ‘cutting the fat’ too much and ending up with products or raw materials in short supply. The latter actually results in wastefulness, as measures need to be quickly taken to rectify the lack of stock or raw materials. These measures usually mean things such as expedited shipping resulting in financial penalties, going to a second or third supplier who might not be on the ‘approved suppliers list’. This could compromise quality and price, or sometimes it could mean production staff having to work overtime to catch up. All of these scenarios have a financial cost to the company and jeopardize the quality of the product.
When a customer orders stock, having carefully considered their own needs, timelines and finances, they will not be satisfied when their plans have to change because of a lack of stock from their supplier. Placing a customer in this precarious position will undoubtedly cause them to reconsider their supplier relationship with the company. Causing your customers to doubt your reliability and your ability to fulfill orders in a timely manner will result in a loss of reputation, which can easily be conveyed to other clients. Not only is this a major faux pas for a company, but also the work required to re-build a reputation is vast and requires long, hard hours from management and staff. Again, there are financial costs to this as well as the risk of over-pressurizing staff, causing them to buckle and leave the company, which creates further pressure. Value your staff and your customer base above all else, as loyalty from both is absolutely priceless.
We have looked at some of the effects of not controlling stock properly and ending up in a position of understocking. In all scenarios, there is large financial component where more money and time is required to make up for the shortfall in product. The company may be able to handle this once or twice but if there is a habit of understocking and not being able to fulfill product obligations, then the financial penalties of this will severely erode profit margins, which is not sustainable for the company in the long-term. Inventory management systems such as Unleashed have been created to help understand a company’s demand from customers and whether they can fulfill that demand adequately without too much wastage in the process.
Knowledge is the key to success and it is well worth taking some time and spending some money to have a good grasp on how much stock needs to be ordered and when. This will help to ensure understocking never occurs and that overstocking is well controlled and utilized.
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.