This article briefly discusses the impact of stock outs in your business and how you can start to manage them based on the service level you want to offer your customers.
For any sales and marketing department within an organisation, stock outs are seen as a disaster. And there is good cause for that. Not only in terms of revenue loss but stock outs give loyal customers a chance to experience a competitor product. This may eventually cause them to switch away from their earlier choice.
However, moving back down the value chain, the supply chain department has to set it’s inventory levels to balance held up working capital, production output and storage space. And to do this, they must look to reduce costs and make the product price competitive. This almost always ends up in a heated discussion between production and sales blaming the other for stock outs.
To resolve this, you need to define the correct service level for which you will supply the product. A 99% service level means that there is a 1% chance of stock out. But this comes at a cost. Inventory costs will rise as you strive to meet that service level. However, depending on market conditions, most companies strive for a 97% service level i.e. 3% chance of stock out.
Once the service level is defined, we can work backwards looking at the variation of both delivery lead time and the customer demand. This allows production to set the following quantities:
- Maximum Stock Level
- Re-order Level/Point
- Safety Stock Level
- Minimum Stock Level
The benefits of this analysis include:
- Optimising your inventory levels.
- Confidence that your re-order point is correctly set.
- Ensure a good understanding between the trade-offs i.e. inventory costs vs. revenue loss
- Reduced friction between sales and production.
Are you interested in understanding more about this topic and how we can help you set the right inventory levels?
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