Companies must maintain an inventory of items. But, when the stock runs out of products, it is called Stock Out. It mainly occurs with the most frequently ordered items in many companies. Such goods usually do not have a re-supply date. So, it can get thought of as a sign of increasing sales, higher demand, or poor inventory management. Let us know Stock Out Cost.
Stock Out Cost
The Stock Out Costs represent the financial loss faced by the organization during the stock-out period. This article states the causes of a stock out, the types of Stock Out Costs, curative measures, and calculation formula.
Causes Of Stock Out
A Stock Out can get caused due to human error or uncontrollable issues.
The following are the causes of a Stock Out:
Issues From The Supplier:
The supplier is either causing a delay or refusing to deliver the items. Delay gets caused due to natural calamities, issues with the vehicles used for transportation, lockdown, political issues, lack of raw materials to produce the items, and more. The vendors might refuse to deliver the items due to the end of the agreement, an argument with the company, unpaid invoices, and more.
Changing Customer Demand:
Customer demand for certain items may suddenly increase or decrease due to advertisements, government orders, calamities, and more.
Bad Inventory Management:
The retailers must maintain extra stock of items, especially if they seem to be the most common. They must record the number of items available and required for every brand, their costs, and more. An imbalance in these records might lead to stock out. Similarly, the workers must arrange the products to recognize the risk of a stock-out with ease.
Products with poor quality may result in a product recall. In this case, the organization has a stock of items, but they are not available for the customers due to the bad quality.
Poor Cash Flow:
The organization might be running out of money or considering the products too costly to get ordered. It might also occur if the organization invests more in other products and nothing remains for this one.
Stock Out Costs:
Stock out costs are the amount to get beared by an organization due to the Stock Out. Thus, the organizations must look for ways to avoid a Stock Out. To understand more about the Stock Out Costs, we must look at its types and curative measures.
Types Of Stock Out Costs
The following are some of the effects of a Stock Out that cost the organizations a bit more:
The number of customers buying items of other brands from the same organization is more than those going towards another organization. Losing customers is a common financial threat because they contribute the most to the revenue of an organization. The organization loses more customers if stock out occurs again and again.
The organizations must pay more for the speedy delivery of the stocked-out items. An organization must pay them only if it wants the items to get delivered faster. Some vendors might also charge the organizations for changed delivery dates. Similarly, they must pay more in case of inflation. In this case, the organization knows the approximate delivery date and can assure the customers about the same. Thus, some customers might decide to wait for the delivery, and the organization might not lose them.
The customers might have ordered some items, but those items have stocked out right now. In such a case, some customers might cancel the orders and ask the organization to return the advanced payment they provided. So, the organization must give the amount back.
Inventory loss occurs when the organization has a stock of products but cannot sell certain products because they are obsolete. It results in a financial loss that gets reflected in the balance sheet.
Dealing With The Stock Out Costs
The workers must deal with the Stock Out Costs soon to overcome the impact of the losses.
The following are some of the methods to deal with the Stock Out Costs:
Stay In Touch With The Customers:
It is the most common practice to deal with Stock Out Costs. The organizations ask the customers to provide their contact details to inform them whenever the stock becomes available.
Provide A Stock-In Date
The organizations must provide a stock-in date to the customers in case they want to wait. But, the organizations must make sure that they make a promise that will get fulfilled. It acts as a hope for a possible source of income for the organization.
Order For A Stock:
The organization must immediately order the products that are out of stock. However, these products must be worth it because the organization must be going through financial losses. It can go to opt for speed delivery, but it will cost more than the standard delivery. The organization can also go to another vendor providing more benefits.
Studying The Impacts:
It gets said that one must learn from the experiences. Thus, the organizations must study the causes, effects, and preventive and curative measures related to the Stock Out Costs. It helps avoid and deal with similar issues in the future.
Calculating The Stock Out Costs
Before taking any step when a stock out occurs, the organizations must calculate the related costs. The following shows a method to calculate the same.
Stock Out Cost = (I * P * N) + C
In such a case, an organization must identify the following factors:
Cost Of Consequence (C):
The expenses required for a product or service get compared against the outcome. It gives a detailed view of the costs and their outcomes to help in decision-making.
Average Number Of Items Sold For A Day (I):
One can calculate the average number of items sold per day by dividing the total number of products sold by the total number of days in a period. It does not provide an accurate count for every day.
Price Of Every Item (P):
It depends on the cost required to make an item and the number of products created.
Number Of Days Out Of Stock (N):
The Stock Out Costs revolve around these days when the organization ran out of stock.
Tips To Avoid A Stock Out
An organization can get safe if it avoids a stock out.
The following are the preventive measures to be taken against a Stock Out:
Predict The Requirement:
Inventory management teams from the organizations must predict the number of items required for stocking. This prediction depends upon different factors such as trends, customer requirements, weather conditions, and more. They must recognize understocking and overstocking.
Supply Chain Management:
Supply Chain Management includes the supply of products through the hands of multiple middlemen. It increases the stocking cost. The organizations can exclude the middlemen from taking a commission to reduce the Stocking costs.
The organizations must order enough stock in advance to deal with the stock scarcity. They must make sure that they do not request plenty of products that might get outdated soon. So, the safety stock must be in line with the inventory forecast. It can act as a lifeboat.
Stock management software applications get made to track the supply of products through supply chain management. Similarly, the organizations can use related software applications to get reminded for refilling the warehouses and shelves. Automation also helps in adopting the curative measurements for a stock out.
The larger organizations face more Stock Out Costs, while the smaller organizations face lower. Overcoming the damage caused due to the Stock Out Costs is not easy. Still, the organizations get recommended to be as clever as possible to avoid a Stock Out because it is common to get out of stock. Accordingly, the organization must train the employees, use appropriate tools, and choose the right partners.
Frequently Asked Questions
- What Is Supply Chain Management?
Supply chain management refers to the controlling of the flow of goods right from the beginning to end. The processes get tracked right from the raw materials to the consumption. Thus, an organization must gather the raw materials, convert them into expected products, and transport and sell them. The supply chain managers must track the progress of the products in the chain and update the inventory.
- What Are The Examples Of Supply Chain Management Software?
Some examples of Supply Chain Management Softwares are Oracle SCM, E2open, Highjump SCM, Perfect Commerce, Watson Supply Chain, BluJay SCM, and more.
- What Is Cycle Stock Inventory?
It is a part of an inventory that revolves around several products. These products get used in a continuous cyclic way. Since few items get included in this cycle, it introduces fewer errors in inventory management. It depends on the annual sales cost and average inventory level for the year.
- What Is The Pipeline Inventory?
A pipeline stock or inventory consists of the items present in the supply chain before reaching
the destination. These items might stay for weeks or months to go from one hand to another. This type of inventory depends upon the lead time and demand rate.