Whatever industry you’re in, maintaining optimum inventory levels has always been, and likely always will be, a challenge. It could be described as a type of juggling act.

When you carry too much stock you risk tying up capital that could be better used for other purposes; being left with obsolete inventory; and increasing your storage and other operational costs. It’s not exactly a recipe for soaring business success. Holding too little inventory also carries various risks, with one of the primary ones being the dreaded stock out.

As the term suggests, a stock out occurs when you run out of a particular product and it’s therefore not available to sell. Viewed from a ‘glass half full’ perspective, a stock out can be a sign that the business has a hot item on its hands because demand for it is high. But there’s also the ‘glass half empty’ viewpoint and how empty it is becomes obvious when you consider the price you pay for running out of a stocked item, for example:

Reduced Customer Satisfaction

customer complaint
It’s frustrating – even exasperating – for a customer when they place a product order only to then discover that their order can’t be fulfilled because it’s out of stock. While the customer may be forgiving over this if it only happens once or rarely, when it’s more frequent than that you run the risk of losing the customer forever as they migrate to your competitors.

Missed Sales

Sales are obviously the lifeblood of any business that sells things. When there’s customer demand for a product of which you’re out of stock you miss out on the revenue you otherwise would gained if you had that item.

Increased Costs of Order Fulfilment

If a business’s policy is to resolve a stock out issue is by restocking the product as quickly as possible, this may attract increased costs when you choose the fastest possible delivery method. Additional labour, picking and packing costs may also be incurred. And when the out-of-stock problem doesn’t come to light until after an order is placed, there may also be extra expenses associated with handling refunds, managing back orders and splitting shipments.

Reputational Damage

If word gets around that your business has a chronic stock out problem, its reputation amongst customers (both actual and prospective) and other important stakeholders may take a damaging long-term hit. Compounding matters is that in this day and age, with the prevalence of online discussion forums and product/company review websites, the collapse of a business’s good reputation can happen frighteningly quickly. When those legitimate negative reviews start to pile up you know you have a serious problem.

Human error is one of the most common causes of a stock out. Someone within your business dropped the ball and didn’t perform a particular inventory management task properly, which led to you running out of a stocked item (for example when products in your warehouse get carelessly misplaced). But even with dedicated, highly competent employees on the job, errors can occur. Perhaps in your most recent inventory count there were inaccuracies that weren’t picked up on at the time. Or someone keyed in the wrong number when entering inventory data into your business management system. Both of these situations can lead you to believe that you have a particular item in stock when in fact you don’t.

There are several other reasons why a stock out might occur, some less within your control than others. These other causes commonly include:

Poor Forecasting Practices

predicting market trends
If your procedures for forecasting demand are inadequate you’re almost certainly going to end up with a stock out problem.

Supplier Delays

At any given time one of your key suppliers could encounter a problem that throttles your ability to receive the deliveries you require. These can include equipment failures, holdups involving a manufacturing vendor, labour shortages, and vehicle breakdowns and other transportation issues. And let’s not forget environmental phenomena – as the recent floods in various parts of Australia have demonstrated, natural disasters can cause lengthy delays in getting goods and raw materials to where they need to be.


When a stocked product is lost or stolen, the loss of that item is not going to be reflected in that business’s inventory management system. There is also the risk (though less of one) of the same thing playing out when goods can’t be sold due to damage.

So what can be done about it?

It may seem like a fairly bleak picture is being painted here about the stock out problem. But it’s not all doom and gloom – there are steps you can take that will effectively minimise the chances that stock outs will be one of your business’s Achilles’ heels. Here are some useful places to start:

Set Reorder Points

The reorder point is the minimum level of inventory for a particular item which, when it’s reached, triggers the reordering process. If the quantity of a specific product falls below the reorder point but does not activate a reorder, the risk of running out of that product becomes very real.

When calculating the reorder points for your products, be sure to factor in the lead times (ie the number of days it takes for your supplier to fulfill your order) required to replenish the inventory.

Improve Demand Forecasting

Calculating future demand for inventory is both an art and a science; demand can spike or drop off for reasons that could not have been anticipated. Nonetheless it’s important to have forecasting as one of your inventory management tools. The most powerful tool you can have is an enterprise resource planning (ERP) system with strong demand forecasting capabilities, including the ability to automatically update stock levels in real time. Ideally employees in your business will have received the training to use this function properly and to its full potential.

Conduct Regular Stock Counts

It’s important to always be sure that the inventory you physically have available matches what’s in your inventory management system. This can’t be achieved unless you routinely perform stock counts.

There are essentially two options when it comes to getting this done – a stocktake or a cycle count. A stocktake typically involves shutting down business operations while each item in the warehouse is counted then cross-checked. The advantage is that the complete inventory count gets done in one hit; the disadvantage is that it can be disruptive to the business and costly in terms of the labour required to perform the task.

A cycle count is where only a particular segment of stock is counted at a time, so you end up ‘cycling’ through your stock until your entire inventory has been counted. It’s a continual process. The advantages with this method are that it obviates the need to halt operations and does not require extra any labour expenses. A further advantage is that a cycle count allows for inaccuracies or systemic issues to be identified and acted upon quickly, rather than remaining unidentified until that time of year when a stocktake is conducted.

Establish Strong Supplier Relationships

The better your relationships with key suppliers, the more attuned they are to your needs and goals when it comes to core areas of your business, including your inventory lead time requirements and other aspects of your inventory management. A close relationship with a supplier will also help you understand that business’s processes and challenges, enabling you to gauge how well-placed they are to meet your future inventory supply needs. Additionally, when you have good a rapport with a supplier that business will be more likely to alert you in advance to any issues they have that may impact their ability to meet your needs.

Invest in Staff Training

It’s not quite enough to know that your employees know how to accurately count stock and enter that data into your inventory management system. It’s also important that staff know to interpret data and use their insights to make improvements to your inventory management processes.

You may want to go a step further by monitoring and measuring employee performance levels and setting maximum permissible inaccuracy points. Continuous improvement is what it’s all about, and when employees have objective goals to aim for they’re more likely to focus their efforts on getting it right.

The Final word...

Unforeseen circumstances wouldn’t be unforeseen if they could be predicted and have action taken in response to them. For that reason stock outs will never be something that you can eliminate from your business entirely. However the risk of a stock out can be largely alleviated by remaining vigilant, training your staff and following inventory management best practices.

But whatever strategy you pursue, it’s not likely to produce the results you want unless you have a robust and flexible inventory management system in place – one that can not only dramatically reduce the incidence of stock outs but can also automate a variety of supply chain functions.

We have some more tips about preventing stock outs in this article

To find out about how the right inventory management system can help you resolve stock out issues while ensuring optimum inventory levels, contact Jiwa today on 02 9409 0700 or email us at jiwa@jiwa.com.au.

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