Have you ever wanted something to snack on really bad, so you jump up head to the store and when you get there they are fresh out of inventory? Have you ever made the decision to purchase a new vehicle and you go to the dealer and the vehicle you want isn’t there so you go home and order it online? Inventory stock out costs. These are both examples of inventory stock out costs. Stockouts occur when the inventory you have on hand is not enough to fulfill the customers demand needs. Likewise a stock out might be when there is inventory, but the inventory is not what you wanted.
As you can tell, one of the biggest costs of a stock out is lost sales, frustrated customers and damage to your reputation.
How do you quantify this?
This can be difficult. For example in the case of lost sales in a period, it's not just the sales. You need to quantify the lost sales for that period, plus all of the work that it takes to create, track, monitor and eventually deliver your back ordered items. But wait, it doesn't stop there. Let’s say the customer is really frustrated with your stock and they turn to another supplier. Now, your marketing of the product is waste, the space you set aside to store your inventory is waste and you may trigger a massive bullwhip effect trying to catch up with your out of stock items. As you can see the effects of stockout costs can really compound. They can also have a long term effect on businesses as well. If a business is always out of stock and they can not replenish in a timely manner to support the demands of a customer then they begin to develop a reputation for always having stockouts and this will turn a lot of customers away. Worse yet, if investors get wind of frequent stock outs they may hold back on funding which will ultimately lead to tight funds and a companies inability to scale against competition. It seems pretty clear that stock outs, especially on the external environment, have a huge impact on an organization.
What is the impact to an organization internally?
When a company experiences frequent stockouts of materials, subassemblies or components internally, production is usually delayed. This can cause bottlenecks, increased lead times and layoffs when a company doesn’t meet internal goals. In addition to this oftentimes in an effort to contain these stockout effects companies use additional resources to try and speed up the process as well as spend astronomical amounts of time setups, changeovers and tear down of machines. This makes it all the more critical for an organization to control stockouts.
There is a fine line between carrying too much inventory and never having enough. Continuous improvement strategies like lean and educating employees in inventory management techniques and education can help an organization control the impact that frequent stockouts can have on a company.
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