A customer has money, wants a product, but you can’t give it to them. This is one of the hardest parts of business. Not only because you feel the pain of lost revenue, but also because demand is fickle.
Your business can plan for seasonal demand, such as a boost in Christmas tree sales in December. But some demand surges are a result of unforeseen situations even the most optimized supply chain cannot anticipate.
This year a video of a mom wearing a Chewbacca mask went viral with 54 million views in a day. The rush to buy that mask consumed all the inventory at Kohl’s, Wal-Mart, Toys R Us and Amazon.
Admittedly, few products have this type of market demand, but every business should protect itself from running out of stock from regular demand. Peter Drucker, legendary management consultant, said: “What gets measured gets managed.” Knowing the right measurements will give you the information to ensure you maintain sufficient inventory.
What Causes Product to Go Out of Stock?
There are many reasons why product will go out of stock, and these reasons range from things you can’t control to those you can.
First is increased market demand. An event, like the Chewbacca mask for example, can increase demand to a point where the supply simply can’t keep up. A negative market position of a competing product can also increase your product’s demand. Take for example, Method, the producer of natural cleaning products, which became popular when regular cleaning products were found to be hazardous.
The second reason your product might go out of stock involves shipping issues, which are largely out of your control. Weather and political issues are common factors in getting product across borders. Hurricane Katrina caused massive disruption to southern manufacturers and ports. Postal service was halted completely when there was an anthrax scare.
Manufacturing delays are common. Smaller businesses may be less profitable for third-party manufacturers and may find they are pushed to the back of the line occasionally.
And finally, incorrect purchasing. This is due almost entirely to poor inventory control and inefficient automation technology. Finally, something you, as a small business owner, can control.
Here’s more about how to prevent out-of-stock items and reduce losses when they do happen.
How to Prevent Out Of Stock Situations
To prevent an out-of-stock situation, you must start from the very beginning of the process.
First, rank your inventory. Not all inventory is the same. The Pareto Principle says 80 percent of the revenue comes from 20 percent of the inventory. For example, a gym equipment manufacturer’s most profitable items are the large racks. They can be five times the cost, but require a fraction of the effort to sell. The rest of the inventory is a mechanism to capture more of the customer’s business and prevent competitors from gaining a foothold.
Take a look at all products sold in the past month. When you multiply the Quantity Sold by the Margin, you’ll quickly see which products are adding the most to your business’s bottom line.
Do you see any that surprise you?
Categorize Your Items
Using A through D rankings, categorize your items:
- A items are the top performing 10 percent of your inventory
- B items are performing between 10 and 20 percent
- C items are performing between 20 and 50 percent
- D items are the lower 50 percent of your inventory
With a clear idea of the items that are most profitable, you can decide which items to invest capital in.
Create a Safety Stock
A safety stock is an inventory minimum of sorts. It’s the smallest amount needed on hand for the vendor to re-supply you with the product before you’re completely out of a product. For example, if it takes five days to get the product from the vendor, and you sell 20 of that product each day, you will need 100 (20 qty x 5 days) on the shelf or you will face an out-of-stock issue before your next shipment of product arrives.
Assign a safety stock number to every item and review it quarterly or semi-annually. Markets fluctuate with seasons and those numbers may change regularly.
Calculate Minimum Stocking Levels
Your item rating system shows the importance of your products, and a safety stock shows the absolute minimum you must have on hand to not run out of stock. Once you have these two pieces of information, you can decide where to invest your cash into inventory based on the risk you’re willing to take for an item.
Every business is different, but let’s assume each product sells 20 per day and can be replenished in five days via UPS. Here is a sample plan for the inventory of a printer store based on ranking.
- A items are critical, so minimum stocking amount would be 200 (twice the stocking time) to hedge against any potential delays. The bulk of the margin is here. And customers will come in for this item and potentially pick up other items in the same trip.
- B items, like paper, are important, so the minimum stocking amount would be 150 (1.5 times the stocking time), just in case.
- C items, like printers, don’t have as much volume or margin, so the safety stock of 100 should be enough. Managing with recommended alternatives or drop ship is acceptable here.
- D items might be specialty items with some stock, but are potentially special order, so none should be purchased unless there is a customer order.
Once your inventory plan is in place, schedule regular reviews of your rankings and your preferred risk threshold since these change over time. In the case of an unpredictable shift, having back-up infrastructure in place goes a long way in protecting your bottom line and customer relationships.
Managing Exceptions in Ecommerce
Customers lose faith in a company when they can’t buy the product they are looking for. And sometimes managing inventory and purchasing the ideal amount of all your products just doesn’t pan out right. Here are some of the features many ecommerce platforms have to help customers and shop owners complete a sale.
- Every product should have a “recommended products” feature configured to lead customers to alternatives. This way, if the product they’re looking for isn’t in stock, they’re led to another product that might fill their need.
- Set up stock level alerts to show the buyer when stock is low. This creates a sense of urgency for the customer to buy, a strong conversion tool.
- Allow customers to back order. This means you can still collect the sale, but the customer will know before they buy that there might be a delay in delivery. Coordinate a drop ship to get the product to the customer quickly. The incentive of a discount will encourage the customer to buy even though a product is listed as out of stock.
- If a customer is interested in a product that is not currently in stock, encourage them to opt in to receive a notification when the item becomes available. This lead capture is sometimes more valuable than a single sale.
- And finally, if a product isn’t available, you can use a 301 Redirect to a category or search result page to highlight other potential products on your website. This will allow you to hide the fact you are out of a particular product without losing the SEO value you have built for that product.
Prevent out-of-stock situations as much as possible to maximize your profit. Purchasing correctly is within your power.