What is a stock-out, and what happens when it occurs?

How do stock-outs affect your business and your customers?

Stock-outs are commonly reported as the biggest single concern to businesses that supply customers with stock.

Every time a customer requests to buy a product that’s stocked-out, there’s a good chance they’ll end up unhappy due to the stocking issue. Assuming the seller is aware of the stock-out, team members in the warehouse will almost certainly have to spend time resolving the problem. And what if the nature of a business is such that they may not be aware of stock-outs? That’s when the problem becomes more serious and more detrimental to the bottom line.

For businesses that stock-out too often, which for some customers is just once, there is a risk of losing customers.

Doesn’t everybody deal with this?

Most businesses experience stock-outs at some time or another, and some experience the problem more than others. Due to the nature of the typical supply chain and the risks involved, some degree of stock-outs will be almost inevitable. But that doesn’t mean businesses should just accept stock-outs.

Some solve the problem by throwing more money at it with increased stock levels, but that isn’t likely to eliminate all stock-outs. In fact, that creates a dangerous environment of excess stock that might curb stock-outs, but at what cost to the business?

Holding the amount of excess required to get rid of stock-outs requires an amount of working capital few companies can afford. That’s to say nothing of the extra space required, the insurance issues, the problems with outdated stock, and the increased likelihood of breakage or theft.

From the inventory manager’s perspective, stock-outs interfere with his or her to-do list for the day and are a real nuisance. In order to fix the issue, the person must scramble to make the problem go away by expediting existing orders or placing emergency orders, which can be costly. Worse still, little attention is usually given to identifying the reasons for the stock-out.

As a result, the problems will continue and the costs will grow.

How stock-outs affect customers and the sales team

The impact on the customer is seldom considered. Customers come to a particular business because they want a product. To discover, in the middle of a shopping experience, that this business doesn’t have the desired item on hand, customers may become irate and disappointed. Assuming they can, the customer must now hunt down an alternative source for the item.

From the sales team’s perspective, all the time and effort invested in training and motivating the sales team to achieve the company’s sales objectives has been compromised. Stock-outs can be an excuse for not achieving the sales target. For sales people, justifying the stock-out and explaining when the problem will be fixed is demotivating and even a bit embarrassing. Many of them would prefer not to be in that situation at all, which means contact with the customer is less likely to take place.

If sales incentives are in place in the form of commissions and bonuses, the salesperson’s earnings will also be compromised. Unless the stock-outs are minimized, a high turnover among sales team is likely to be the result. And to take a slightly wider view, customer relationships will continue to deteriorate for the business as a whole.

Does senior management have an answer?

At a senior management level, it is very unlikely that the achieved fill rate will be reported in the monthly management accounts nor discussed as an agenda item in the monthly meeting.  Unless the company has 1) an Inventory Management System (IMS) with an “achieved fill rate” Key Performance Indicator, 2) a forecast of the sales being lost as a result of the stock-outs, and 3) open discussions of these figures at monthly review meetings, the extent of the problem is unlikely to be visible at a senior level. The only noticeable symptom of the problem is likely to be the non-achievement of the sales targets and a high level of customer complaints.

Most businesses will not be able to measure the total impact of a single stock-out. This is especially true when the customer wanted to buy several products, but because some items are out of stock, the entire sale may be lost — and then won by a competitor.

If a customer is experiencing a stock-out for the first time, they are likely to have a higher degree of tolerance for the situation than if they had experienced multiple stock outs previously from the same business. Once a customer’s tolerance level has been exceeded, they are very likely to start shopping around.

If stock-outs cannot be entirely eliminated, the best possible strategy is to regard every stock-out as an opportunity to prove to your customer that customers and service levels are important to your business by responding appropriately. That’s not a foolproof strategy, but it at least shows customers that quality service is important, in spite of the issue at hand.

Coming up, we’ll take a look at the specific issues that plague a customer when a supplier or store they rely on comes up empty-handed in the midst of an order.

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