Just how much can a stockout cost your organization?
The answer of course depends on a wide number of factors, but it’s important in understanding all of them and the impact on a business in both the near term and short term.
The most obvious is the cost of a lost sale should a customer not be able to purchase a product that is out of stock. That is probably the easiest to gauge and can be calculated using a fairly simple formula. The cost of a stockout equals the number of days out of stock multiplied by the average units sold per day at the locations where items are out of stock multiplied by the price per unit. It gets a little more complicated when dealing with raw materials or subassemblies. In that case, the cost of consequences can be added and would factor in issues like the cost to shut down a production line while the business waits for the product required or penalties or discounts that would be paid to a customer in the event of a stockout.
The Impact of Stockouts on Customer Satisfaction and Customer Loyalty
There are generally three outcomes when a customer encounters a stockout.
The customer waits for the item. This is sure to impact customer satisfaction and, in a time of social media reviews and the ease with which customers can make their displeasure known to others, the impact can reach beyond a single customer.
The customer places the item on back order. While the sale is still made, businesses may need to sweeten the deal with a discount or free shipping. Customer satisfaction is impacted.
The order is canceled. In this case, the sale is lost and a potential customer is lost. Loyal customers might be more understanding of a one-time or infrequent stock out. A new customer, however, might not ever come back. Organizations that have a clear understanding of customer lifetime value and their ability to turn first-time customers into loyal, lifetime customers have a much greater understanding of what that stockout could mean.
The Internal Costs of Stockouts
Stockouts also impact internal processes and staff.
Time costs. Stockouts require staff to spend time planning orders, scramble to process and fill back orders that take time and would be better spent elsewhere.
Loss in productivity. Wasting time working processing and filling back order that could otherwise be done automatically.
Inventory loss. Poor planning and stockouts often result in lost goods.
Preparing and Coping with Stockouts
It’s also important to realize that stockouts do happen. The one sure way to ensure that a stockout never happens is to carry excessive amounts of inventory. That of course carries its own costs and is a far from ideal solution.
So, if a stockout is going to happen, it’s important to ensure that when it does, it has a minimal effect. That requires prioritizing every item in inventory against how important it may be to a customer, how important that customer is to the business and the cost of stocking that inventory. For example, a plumber would be shocked and upset if their plumbing supply distributor ran out of half-inch copper couplings, but might be more understanding of a special faucet not being in stock. And, since the cost of carrying those couplings is low, then that can become a high priority item. Conversely, if a distributor’s largest customer depends on a specific item or piece of equipment to run their business and stocking out of that item would mean a loss of that customer, that too should be given a higher priority even if it’s an expensive item.
Finally, businesses need to have a grasp of how responsive the supply chain is. An out of stock item that can be replenished in a day or two may cause some scrambling and frustration but not be as costly to the business that an item that takes weeks to procure would be.
The Role of the Inventory Control System
The good news is that there are inventory control systems that can provide the answer to all of these questions and challenges. An inventory control system can catalog the location, cost and count of every item in inventory and update it in real-time through scanner and barcode technology. What’s more, an inventory control system that is integrated with the Customer Relationship Management (CRM) system can help to identify how stockouts are impacting customer satisfaction and customer loyalty and track how often individual customers confront a stockout. Finally, an inventory control system integrated with ERP or other financial applications can go a long way in answering questions like how much stockouts are costing by measuring customer lifetime value, inventory churn, the cost of each item and the responsiveness of the supply chain.