Top 5 biggest Supply Chain pain points - #5 Out of Stock Items
Introduction
In a series of five blog posts, we are going to do a deep dive on the top 5 biggest supply chain pain points, experienced by the business. How did we came up with this top 5? By researching the Internet to look for articles that describe current pain points and keep score of the number of articles. And by the interactions we had with our customers, we listened to the issues they brought to the table.
The top 5 of the biggest supply chain pain points:
1. Lack of end-to-end visibility
2. Rising supply chain costs
3. Demand volatility and forecast accuracy
4. Shortage of raw materials
5. Out-of-stock items
In this blog post we’ll do a deep dive on the pain point ‘out of stock items’, what is the impact on the business if not addressed and how it can be solved.
Why are out of stock items an issue?
Simply put: items out of stock cannot be sold. So with every item not available, you loose the option to sell it. So out of stock means lost sales for a lot of companies. And the impact of out of stocks items can be huge, as will be detailed below.
Out of stock occurs when the demand is higher then stock levels can supply. The demand is 100 items, but you only have 80 in stock. So you could have sold 100 items but had to turn down 20 items requested by customers and lost the sales. Out of stock happens in a number of cases:
- Unexpected high demand: somehow the demand spiked during a period of time out of the normal demand pattern and you were not able to foresee this. This can happen if all of a sudden a product becomes a trend for example. Kids want to have a latest toy and demand is much higher then anticipated. Difficult to forecast, difficult to manage.
- Bad planning: in some cases, the plans did not foresee the increased demand and not enough items were produced to fulfil demand. This is a human error and can be solved by improving the planning processes as well as the automation of the planning process.
- Promotions: most promotions are not hard to predict, you probably had many likewise promotions in the past and you ‘know’ how customers are going to react on the different types of promotion. But sometimes the expected customer behaviour is completely different then anticipated. You expected an uplift of 2, but instead experienced a much higher demand resulting in an uplift of 5. Promotions are hard to predict if it entails a complete new product (which cannot be compared to a likewise product). The forecast is an educated guess and can fall short. Difficult to predict, difficult to handle.
- Shortage of (raw) materials: when you know you need to produce 100 items but the (raw) materials for 50 items are available due to shortages (or bad planning), you can only produce and deliver 50. Improving the planning process and automate this process where possible can help reduce out of stocks.
What is the impact of items being out of stock?
Out of stock can have a huge impact on your organisation. Not only will you loose the initial sale, but the long term impact can be much bigger. With an out of stock item, a customer has a few options:
- Wait until the item is back in stock (delayed sales).
- Buy a substitute (lost sales).
In case the customer waits until the item is back in stock, you will make the sale, only later. The customer wants to wait because he loves the product (loyalty) or there are no substitutes. If the customer is in need and buys a substitute, you have a lost sales (sales is done by a competitor) and in the long run you might loose the customer. If he liked the substitute better (better product quality, better prices, …), he will not buy your product anymore. And we all know that it is much harder and more costly to gain new customers compared to sell to existing customers.
Not taking into account the bad press you might get by running out of stock. If customers start to complain to others, they might influence others behaviour as well, resulting in a slow decline in sales.
How to deal with out of stock items
Out of stocks will be part of life, you will never have full availability at the time of demand. Most companies do accept a service level that is lower then 100%, meaning they will not be able to fulfil all the customer demand. To decrease the out of stocks can be done, but some measures will come at a costs. So what can be done to reduce the out of stocks?
- Update safety stock settings: once in a while it is important to look at your current safety stock settings. Are these still valid given the changed demand? Has a product moved from a high runner into slow runner in your assortment? Has the product portfolio undergone some major changes? Looking at your safety stock settings (and I assume you do not have one setting for all your products) on a periodic base and update these settings can help reduce the number of out of stocks.
- Increase inventory: the easiest way to reduce out of stocks is to increase inventory. That, as mentioned before, comes at a cost. The costs of additional storage space, the costs of costs stuck in the product itself, the possible cost of the product becoming obsolete. So more stock can solve your out of stock issues, but has a hefty price attached to it. You need to answer the question what service level you want to achieve with your (different type of) customers. The outcome of this questions can be translated in your safety stock settings and your required stock levels.
- Improved planning process: another way to reduce out of stocks is to improve the planning process. Improving the planning process can be done to look at your current Demand-, Supply-, S&OP- and Executive S&OP meeting schedule. Who are present at these meetings, at what interval are these meetings held, do we take the right decisions? Making sure this process is further professionalized will increase the quality of the outcome and reduce the out of stocks.
- Automated the planning: as humans we are sensitive and emotional creatures. Anyone involved in the planning process will add this emotion to the process, introducing flaws. By automating the planning process by using a system generated forecast, in most cases the forecast accuracy will increase. Allow planners only to override for the known exceptions and the forecast accuracy will increase. And the time spent by planners in this planning process will add more value. With the introduction of AI, the system generated forecast will even further improve.
Conclusion
Out of stock will occur from time to time. But you want to minimise these out of stocks as much as possible. Automating and improving your planning process, increasing inventory and updating safety stock setting are just a few options to reduce the out of stock and increase your sales. Other options like diversifying your suppliers and hedging are not mentioned, but could help in this area as well.
A happy customer will promote your product to others, which is free publicity. An unhappy customer will also share his feelings and experience, which could result in the loss of customers and a decline in sales. It is a fine balance of planning, production and setting the right service level you want to achieve, which makes our work so exciting every time.
In this blog series we covered the top 5 of the biggest supply chain pain points:
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Out-of-stock items (this blog post)
We hope you enjoyed it and gained some insights. If you want to do a more deep dive on any of these topics, let us know, we are here to help!
