Keeping an optimum level of inventory can be a juggling act. Demand can be seasonal, sporadic, and sometimes unpredictable. While being overstocked ties up the cash flow, being understocked means missing out on sales. Here are some proactive measures to guard against out-of-stock situations.
Tips to Avoid Out-Of-Stock Situations
Supplier lead times
Lead time is the time it takes to deliver an order after the supplier receives it. Ask suppliers to forecast lead times for future orders at different times of the year. Understanding lead times allows you to keep stock-on-hand levels low. Typically this number ranges between 10 percent and 20 percent of sales. Ideally, we want to order stock for arrival Just-in-Time for us to do what we need to do with it before shipping to our customer. Reducing lead times allows for a greater chance of collecting money from a client before having to pay the supplier.
Install Inventory Management Software
Inventory management software tracks inventory levels quickly and easily. This software should seamlessly connect the front office with the warehouse. An automated inventory management system will throw up predetermined flags when there is a risk of being understocked or if there is a danger of running out of space in the stores. An inventory management software system will also provide real-time information to the sales team to help them manage customer expectations. A big advantage of the software is that it can identify when to reorder stock.
The minimum stock holding or the level of inventory that you would prefer your stock level not to dip below is called the reorder point. This can be different for each of the products you sell. In fact, each product will more than likely experience different demands and different lead times. Here is the formula to determine a reorder point: (Average daily usage rate x Lead time) + Safety stock = Reorder point. The inventory management software can assist with this calculation automatically.
It is possible to achieve accurate demand forecasting by using historical sales data. Although forecasting is never an exact science because there are too many supply chain variables, it can be extremely close. Start by measuring year-on-year sales per month and per week. Then, look at consecutive quarter-on-quarter and month-on-month sales for the current year to determine the trend in demand, in the current economic climate. Compare these current figures to the year-on-year figures.
Consignment stock is stock that you receive from a supplier in your warehouse that you don’t have to pay for until it has been sold to a customer. Until then, it remains the property of the supplier. If a supplier is willing to supply consignment stock it would be for a limited period only. This is a massive benefit for your cash flow as there is no outlay. Although it might mean sacrificing a discount, it is worth it because there is no risk of being overstocked (which soaks up liquidity). Not to mention, you won’t run the risk of not being able to sell the stock you paid for. In this situation, the risks and the costs are on the supplier.
The best-case scenario is to ship products directly to your customers. The customer would then have to pay you before you need to pay the supplier. By doing so, you would also dramatically reduce warehousing costs. In this scenario, you would only need to buy safety stock to keep on hand.
Additional Reading: Out-of-stock problems for online shopping are getting worse
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