Oct 18, 2016
What is a stock-out and what happens when it occurs? [Updated]
Having excess inventory robs you from investing cash in other areas of your business, but a stock-out of inventory is even a more significant issue. In today’s instant economy, instant gratification is expected and customer loyalty is hard to get and harder to keep once you have it. It’s quite simple if you don’t have stock, your customer will find a supplier that does.
Stock-outs create havoc with your warehouse teams in the time they end up spending trying to resolve problems. In some instances, companies aren’t even aware they have a stock-out — this is when the problem becomes a lot bigger and more detrimental to your bottom line.
Aren’t stock-outs a common problem?
Some degree of stock-outs are inevitable, and most companies will experience this at some time or another. Should you be content to accept this? Most definitely not! Stock-outs should be the rare exception. So, what is the answer to avoiding a stock-out? Some companies spend lots of cash and increase their stock levels so they can eliminate a stock-out, but this is a very costly way to try and rectify the situation. Now you have the opposite problem – excess stock that could potentially become damaged, spoiled, or even obsolete. Additionally, couldn’t that working capital you used to buy extra stock be spent on other growth areas in the business?
Stock-outs are a real nuisance for inventory planners as they take up valuable time to fix, resulting in focus being lost on other vital activities being concluded, such as expediting existing orders and keeping those customers happy. Planners scramble to try and find a resolution to that stock-out by perhaps placing emergency orders on suppliers or choosing a faster, more costly delivery option. Often lessons aren’t learned, and little attention is given to identifying the reasons for the stock-out in the first place. As Albert Einstein said “The definition of insanity is doing the same thing over and over again, but expecting different results.
How stock-outs affect customers and sales teams
Companies need to consider the impact a stock-out has on a customer. To discover in the middle of a shopping experience that the supplier is out of stock of the desired item is annoying and disappointing. You may not only lose out on the sale of that item; sometimes customers will be so irritated that they may abandon their trolley of other things and go to another provider to get their full list of items.
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 is compromised. You are also providing them with an excuse as to why they can’t meet their sales targets. For salespeople, justifying the stock-out and explaining when the problem will be rectified is demotivating and even a bit embarrassing. As a result, many of them would prefer not to be in that situation, which means contact with the customer is less likely to take place.
Potentially salespeople’s earnings can also be compromised if sales incentives are in place in the form of commissions and bonuses. Unless you minimize your stock-outs, you could lose your salespeople to a competitor. They will go wherever they can sell and make money. Remember, people buy from people, so a high staff turnover ultimately affects customer relationships and customer loyalty.
Does senior management have an answer?
In most instances, senior management is none the wiser as the data is most likely not available to provide metrics on achieved fill rates. If an inventory management solution exists, it can provide senior management with information such as:
- Target and achieved fill rates per item
- Sales history
- Forecast of the sales lost as a result of the stock-outs
- List of items that will potentially stock-out in the short term
- Suppliers lead times to enable forecasting
Without an inventory management system, the only metric senior management would have to go by would be the non-achievement of sales targets, and a high level of customer complaints.
Even companies with an Inventory management system in place won’t be able to measure the total impact of a stock-out. A customer may have wanted to buy several products, but because some items were out of stock, the entire sale was lost in frustration.
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 eliminated, make sure that you communicate with your customers and keep them abreast of the situation at all times. Generally speaking, if customers are kept up to date, they will remain loyal. Honesty is always the best policy, so don’t make promises you know you can’t keep. This way, you will maintain the trust relationship and will most likely keep your customer, despite the issue at hand.