The 7 consequences of understocking
As Christmas approaches, a lot of entrepreneurs are busy trying to prepare for an influx of customer orders. The risk: rapidly encountering stockouts.
So, what are the consequences of understocking and above all, how can you prepare your inventory to avoid finding yourself unable to meet customers’ needs?
Understocking may be a risk, but so is overstocking. Too much of either is bad for a business and shows poor inventory management. The challenge is knowing how to find a balance.
The 7 consequences of understocking
A stockout is when an item is temporarily or definitively missing from your inventory while there is still customer demand. As a result, you are unable to satisfy customer demand, which is a nightmare for any business.
2. Longer delivery times
A stockout means buying an item without knowing if it will arrive on the desired day. That’s a risk that customers don’t want to take.
3. Lower turnover
A stockout results in several missed sales opportunities, which in turn means lower turnover. A factor which undermines the financial stability of a business. Another impact on cash flow to note: costs relating to canceled orders and lost customers, as orders placed could not be fulfilled.
4. Customer dissatisfaction
For customers, finding yourself unable to order in a sufficient quantity or having a limited choice of items can cause frustration: no incentive to buy, disappointment at not receiving the product, and feeling like time has been wasted. As well as representing a shortfall, stockouts can lead potential customers to other retailers who will be delighted to immediately fulfill their order.
5. Damage to the business’s image
We all know that negative reviews proliferate when there is dissatisfaction in the air! And that is very bad for a business’s brand image. Customer reviews have an impact on both acquiring new customers and encouraging repeat custom. And the more frequently stockouts occur, the more the business’s reputation will be affected.
6. Increased storage costs
The more merchandise a business stores, the higher storage costs are. A lot of businesses reduce how much they store to reduce costs. In this scenario, you have room to store inventory, but not enough products to meet customer demand. This therefore causes needless storage costs as you are paying for unused space. These costs could have been invested in other areas of your business.
7. Supply chain chaos
A season like Christmas entails an explosion in market demand. And finding yourself inundated overnight is never fun. Inventory errors, impact on logistics... you need to be able to deal with an increase in returns and a faster work pace, which can affect order processing quality when teams find themselves swamped. When you’re rushing, orders can soon go awry!
What solutions can you implement to protect yourself from understocking?
Now that you’re aware of the problems relating to understocking your merchandise, it’s time to implement solutions. The question to ask yourself is: how can you prevent the risk of stockouts?
Here are the most effective solutions:
- Set up a reorder point: this method involves setting a minimum amount of inventory so you can place orders with your supplier in plenty of time and ensure you never find yourself out of stock. Most inventory management software lets you configure automatic alerts for when this reorder point is reached;
- Put together a safety stock: this method is related to the reorder point and will absorb any stockouts;
- Anticipate sales: keep an eye on market trends using studies, surveys, analyses, personalized reports on specific periods for your business, specialized media, etc. All this will help you determine a provisional sales volume so you can adjust your inventory accordingly. In short: keep an eye on the market and monitor demand;
- Do a stocktake: use inventory management software to check your stock levels regularly and accurately so you can rectify any discrepancies arising from loss, theft, or damage. Inventory checking will help highlight when stocks are in reality too low, and reordering is required. This simple method is time consuming, making it less practical, but it works well for foodstuffs that have expiry dates and need to be tracked with care;
- Automate your inventory management: to do this, equip yourself with specialized inventory management software like Erplain. This software will give you your stock levels in real time, let you set up alerts, and help you identify products that are understocked in the blink of an eye;
- Maintain good supplier relationships: these will be useful for anticipating potential delays or supply problems;
- If, despite everything, there is a stockout, it is better to be transparent to show your business is trustworthy.
Want to find out more about inventory management methods? Read this article!
As you’ll have seen, the real challenge when preventing understocking is finding the right balance!
Today, there are various all-in-one solutions on offer for managing stock in real time, like Erplain, which offers a comprehensive solution with alerts and ways to automate your inventory management operations. Try for free for 14 days!