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The Inventory Mentor

Jun 27, 2019


Minimizing stock-outs without piling on excess stock

Stock-outs hurt business

For warehouse managers, the phrase “stock outage” should be banned from the inventory dictionary. With today’s technology and the available tools, there is simply no reason why you should ever be out of stock on any product. In our instant world, customers want what they want, when they want it, and they are not prepared to wait there is seldom buyer loyalty, and they will very quickly find an alternative supplier to fill their need.

To avoid stock-outs, many businesses opt for the easy way out, let’s order extra of everything. The thinking is simple; if you have excess inventory in your warehouse, you won’t be caught with an outage. While that’s usually true, it doesn’t take into account how much that excess stock damages your business and your profit margin.

Let’s take a look in more detail and see why this is not such a good idea. The first key to understanding this problem is to get clarity and visibility into the excess you’re carrying. 

Ask yourself how much capital is your business storing in the form of excess stock. Think about all the extra costs that come along with that excess, too. Here’s a 9-point list to understand the real cost of your excess stock problem:

  1.   The cost of the actual item
  2.   The cost of transportation to get your inventory to your warehouse
  3.   The cost of the space in your warehouse to store your inventory, including rent, utilities, property taxes, and insurance
  4.   The cost of safety equipment, such as fire suppression equipment
  5.   The cost of warehouse equipment, such as conveyor belts, trolleys, forklifts, and pallet jacks
  6.   The cost of labor and security in your warehouse
  7.   The cost of loss via obsolescence
  8.   The cost of loss via deterioration, expiration, and breakage
  9.   The cost of a lost opportunity in having your cash tied up in unsold inventory

So although keeping excess stock seems to be an easy way to ensure you are never out of stock, you can see how dramatically this will affect your business. Excess inventory kills your cash flow and prevents business growth.

Instead, there are a number of practical ways to minimize stock-outs that don’t include bulking up your orders, including:

  1. Building better relationships and communication with your customers.  
  2. Formulate a stock-out procedure:
    • First, determine if there is a stock-out, as your data may not be accurate unless you are running an Inventory Management solution
    • Communicate with your client and see if they are prepared to wait
    • If waiting is not an option, consider your best and most cost-effective way to resolve the stock out:
      • Source from another branch
      • Expedite an existing order
      • Order from an alternate supplier (or even a competitor)

Most importantly, you must figure out why the stock-out occurred and look at this as an opportunity to implement systems, procedures, and policies to minimize future occurrences. Simply building up excess stock to handle these stock-out issues just won’t work in the long run.

If you are trying to run your inventory order calculations and forecasts without the use of a proper Inventory Management solution, you are doing your company a massive disservice and should look at the tools that are available to assist you.