Managing by Exception – Part III, Monitoring Stockouts
Presented by: Jon Schreibfeder, President, Effective Inventory Management, Inc.
When you incur a stockout of an inventoried item you run the risk of disappointing a customer. Unfortunately, it is inevitable that you will not be able to fulfill every request for any quantity of a product. For example, when demand for a product suddenly increases by more than 1,000% (as we saw with disinfectant products at the beginning of the COVID-19 pandemic) it is doubtful that you will be able to satisfy the needs of every customer.
Many organizations strive to achieve a customer service level of 95%. This means that you can completely fulfill 95% of stock requests from on-hand inventory. It is important to analyze the remaining 5% of stock requests:
- Was the requested quantity of the product far greater than what you should have anticipated selling or using?
- Was there an unexpected delay in receiving a replenishment shipment?
- Were you planning on depleting stock at the end of season or is the product no longer available?
The best practice in performing this analysis is to start by printing an out of stock report at the end of each week or month. Pay particular attention to “A” ranked items (i.e., products that are frequently sold or used) and others that have been designated as “critical” to providing good customer service.
For each of these items determine if:
- The forecast in future weeks or months needs to be increased to reflect an increase in demand
- The anticipated lead time for the item needs to be adjusted to reflect a better estimate of future deliveries or delays you may incur in processing stock receipts
- Safety stock (i.e., reserve inventory) needs to be increased to compensate for unexpected demand or possible future delays in receiving replenishment shipments
- Buyers and inventory planners need is issue replenishment orders in a more timely fashion
- The stockout is acceptable. That is, it is not practical (due to the necessary cost, space or some other factor) to maintain additional quantities of the product
It is an unfortunate fact that stockouts will occur. But that does not mean we cannot work to minimize disappointing our customers and missing opportunities to increase sales and profits.