There’s a big paradox in retail and that is the nightmare between stock out, which means basically that an item is out of stock, and high inventory costs that accrue when a lot of items are kept in stock to avoid stock out. You see where we are getting at here. It seems like one can only make a wrong choice.
This is why retailers need to walk a fine line between the potential of an item to go out of stock and high inventory costs. Instead of looking at different stochastic models and supply chain calculations this article will look at other options to balance these costs. We will also look at how having integrated systems in place, such as CRM and ERP, can help us walk this extremely fine line.
Stock out cost vs. high inventory carrying cost
Let’s start by looking at what effects stock out can have on an order. There are different circumstances. Imagine you order an item and all is well you get the confirmation but somehow somewhere else the production chain breaks and there is not enough of what you ordered. Eventually the brand will work down a list but when they come to you the item is gone. You can choose to wait until the item is back in stock or you can cancel the order. And how will you feel about the brand, how likely are you to shop with them again? In the age of digital commerce losing a customer due to stock out can be the end to the relationship between the brand and a customer.
Let’s look at the other option. You are a brand and you want to make sure you always have items in stock. You will produce more than what you estimate the demand to be just to be on the safe side. But what do you do if you have too much of a certain item? You can dumb the price and try to get rid during sales or you will eventually end up throwing the over produced items away because storage costs play a role as well. But what can businesses do to minimize these risks?
1. Categorize your products in Cyclic, Fast and Slow moving
You need to be able to measure which of your products are popular and which move slow. For this you can use the help of systems such as CRMs and ERPs that let you analyze how much of which product you sold over time. You need to also factor in predictive analytics for cyclic behavior. For example winter jackets will become more popular once the temperature falls. In order to estimate how much of which product you need you can dig into all the data on your customers and their behavior that the systems you use offer you. Custom reports from your eCommerce application be also help in identifying how much and when to stock.
2. Manage expectations
As soon as you know an item is low in stock indicate it. Let your customer know that you are running low. The added benefit to this is that you will help your customer make his buying decision faster because know he starts to get a sort of fear of missing out (FOMO) that the item he wants may be snapped away by someone else. It’s basically a win-win situation. Also if the item went out of stock during the ordering process make sure that you have a system in place that informs your customer immediately and that the item is on back-order. This way he knows you are getting the item back and he just has to wait a little longer.
3. Factor in your promotional activities
If all goes like it should that Facebook advertisement campaign you were running will bring you in more customers. You need to take all activities from sales and marketing into account and you need to ensure that other parts of the company like your production or purchasing department are well aware of them.
4. Automate your Order to Cash as well as Purchasing Cycles
One way to balance between stock out and high inventory costs is to automate your ordering process on both customer as well as supplier’s side. Instead of manually checking up on the amount of product left in stock you can set up workflows that trigger an order from your supplier as soon as the item reaches a specific amount. This way your systems runs for you and you can act much faster than when you do the work manually.
Whatever options you choose to balance between stock out and high inventory costs you need to evaluate also the cost of stock out in relation to the inventory costs. But measuring this exact cost is difficult and that’s why it’s a good idea to control this paradox as much as possible. In order to do this you can use your CRM and ERP systems and the data they provide to help you maintain balance. Moreover, you need to ensure that your different teams know what the other team is doing so that you don’t have unwanted surprises. Balancing between stock out and high inventory cost is a difficult task but modern systems make it easier for you.