What causes stock-outs?
One common reaction to a stock-out is “the Buyer did not buy enough”. Stock-outs really hurt a business and it is important to understand the cause and not merely deal with the symptoms.
We will get back to the issue of whether it really is the Buyer’s fault or not, but first let’s examine a few other issues.
Stock–outs are caused by the following, the most significant being listed first:
- Under estimating the demand for a product and therefore under ordering
- Late delivery by a supplier. You ordered enough but your supplier did not deliver when expected
- Using the wrong lead time. A supplier lead time that is in fact shorter than the time it will actually take the supplier to deliver will result in the delivery arriving later than planned. The consequence of this is that the re-order level will be too low
- A Safety stock level that is too low to cover the risk profile of an item
- Under ordering – perhaps as a result of a poor ordering system or poor decision making. Many businesses make the decision of how many to order at the point of ordering. A correctly designed Inventory Management System calculates the recommended order quantity as the arithmetic result of key inputs such as the forecast, lead time, planned replenishment cycle and safety stock. For this reason, whilst the Buyer may have a useful perspective of the requirements, the Buyer is not the person who should be deciding how much to order.
- Product quality issues resulting in a high level of returns to the supplier
- The supplier refusing to deliver due to a credit hold on your account due to non-payment on your behalf.
- A shortage of working capital may limit the value of orders that can be placed each month. This could be caused by poor cash flow management or other inventory issues such as too much cash tied up in high levels of excess
Coping with the real world – dealing with the problem
We do not live in a perfect world and every business is at risk of stocking out.
Every business in the market will be subjected to these same factors.
To build a competitive advantage, you need the right tools and business processes:
- A Stock-out Dashboard that identifies the existing stock-outs. This must be visible to Management, Sales and Purchasing and is absolutely essential for effectively resolving the problem
- Once a stock-out has been identified, the first step is to deal with it by placing an emergency order or procuring the item from a competitor and communicating with the affected customers
Resolving stock-outs must be top priority for someone in your organization and that person must be held accountable
- This process will be more effective by ranking by the highest potential lost sales so that these receive attention first. This enables the maximum benefit to be derived with the least effort in the minimum time.
- A date stamp that identifies when the stock-out occurred assists in the prioritization and management
Be proactive – solve the problem before it becomes a problem
- An Inventory Management System with a Potential Stock-out Dashboard that predicts an item that currently has stock will stock-out before the next order will be received is an essential tool.
- Placing emergency orders or expediting existing orders is required to prevent these items stocking out
- Again, this must be visible to Management, Sales and Purchasing
- Forecast variance management. The Potential Stock-out dashboard and many other calculations, use the forecasts and these calculations are only as good as the forecasts. It is essential therefore that forecasts are re-aligned to the real market demand as soon as changes in demand are identified
- A supplier order expediting system that identifies orders close to their expected delivery date and most definitely identifies items that are overdue