Fixing the Out-of-Stock Problem

[First Published in BusinessWorld, also posted on LinkedIn]

An out-of-stock situation happens when customers place an order and there is no available product to serve the order. This constitutes a lost opportunity for the firm as customers canít buy whatís not there. Out-of-stock normally indicates an effective Sales and Marketing program, i.e., superior understanding of the customer and establishing the proper channels to reach target customers. This would also indicate a supply chain that is un-synchronized and un-responsive to customer requirements if out-of-stock is a perennial occurrence. Executives would perceive the sales & marketing strategy is working but the supply chain isnít.

Fixing an out-of-stock problem provides the firm a huge opportunity to increase revenue and improve customer satisfaction. Surveys have shown that many customers complain about incompleteness and late deliveries more than they do about high prices.

As strategies and supply chains vary from firm to firm, some approaches to fixing the out-of-stock problem have recurring themes:

Understanding Demand Patterns. Products, especially fast-moving consumer goods (FMCG), usually have regular consumption patterns. Consumers, for example, donít generally use more laundry detergent from one week to the next. The buying patterns, however, do vary, more so if products arenít readily available and the same consumers start to speculate, that is, they buy more in one week if they fear unavailability in the next.

Companies that tailor their supply chains to respond to regular consumption are making a step in the right direction. Supply of product, in this sense, becomes steadier as deliveries replenish what consumers only need. Out-of-stock incidences would lessen. Does this work for non-FMCG items? The answer is yes, as even if buyers of items may not have as much a steady usage, the demand can still be predictable through understanding of the needs of individual customers.

Develop a Reliable and Responsive Supply Network. Bringing products to the market requires a network of suppliers, manufacturers, logistics providers, distributors, and retailers, which firms normally refer to as the Supply Chain. The goal of managing the Supply Chain is to ensure items are available for the firmís customers when they need them.

For many firms, achieving this goal is a daily challenge. It requires synchronization throughout the network and dealing with internal and external issues, from equipment breakdowns to heavy road traffic. All players in the network must have a high degree of reliability in their systems and must have systems that are responsive to changes in demand patterns. This also requires a better-than-average level of collaboration between network players. Activities such as planning, sourcing, and delivery should be cross-functional.

Establish Data Visibility

Key to a responsive supply chain starts with information systems that successfully make visible actionable data throughout a firmís supply network. But it doesnít end there.

The purpose of any information system is to make visible data throughout the corporation not only within the supply chain but also to stakeholders in finance, sales, marketing, and even to vendors and customers. When stakeholders have access to impending out-of-stock data, they can help the Supply Chain formulate quick-reaction strategies to avoid them. These can come in the form of shifting selling allocations and in faster approvals of adaptive operating expense budgets.

Define the Right Inventory Policy.

Customers behave differently when the products they order are out-of-stock:

1) loyal customers wait until the products are available;

2) less loyal customers temporarily source alternative items from competitors but would order back again from the original firm when products become available;

3) least loyal customers permanently shift to alternatives from competitors.

How loyal customers are and how they eventually behave when products are out-of-stocks determines a firmís inventory policy. Products with high demand but with high supply variability would require a higher level of inventory to buffer against out-of-stock. Firms should weigh the cost of keeping how much inventory against the revenue to be gained from out-of-stock avoidance and the degree of loyalty to be gained from the market.

Most companies try to drive growth via increasing product offerings and expanding sales channels. Fixing out-of-stock problems is one more way to increase revenue and build market share. Having a Supply Chain that understands demand, that is reliable and responsive, that has wide data visibility to stakeholders, and that has the right inventory policy would be closer to making out-of-stock a thing of the past.

Mr. Jovy Jader is a Supply Chain Advisor and Regional Speaker on Supply Chain Management. He has directed and implemented Supply Chain Management projects both local and international which have resulted to company-wide improvements in revenue, working capital, total cost, and service levels. Mr. Jader is the co-author of the book Speed Kills Ö your Competition: Driving Growth Through Supply Chain Excellence Ė a book on Supply Chain Insights and Best Practices. Should you have questions or comments, please e-mail them to jjjader@prosultsconsulting.com.

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