Being out of stock is one of the worst positions to be in, from an inventory management perspective. Anticipating this situation when stock is low, and then triggering the right actions, helps keeps your business operating without interruption.
You see, in the past, when inventory ran out, companies would simply issue a back order to the customer while they purchased or manufactured more items. Customers would then have to wait additional time for their products—and sometimes not even want the product by the time it arrived. In most cases, there was little they could do about it.
Things have changed. Today’s consumers expect a higher standard of service. Retailers like Amazon, Zappos, and the like have made 24-hour processing, prompt shipping, and 2-day delivery the norm. And, for most products, there is a huge amount of competition. If your operation cannot deliver the desired item promptly, the consumer will look around and find someone else who will.
In this kind of environment, how does a company manage its inventory to avoid these back order situations?
Know your items’ demand or “speed.” Items in an inventory naturally have a “velocity”—a rate or speed at which they move off the shelves. Some items sell quickly, and some sell more slowly. Once you know an item’s speed, you can represent your stock levels in terms of how long that stock will last. For example, you might know that you have five weeks of smartphone covers in stock. If it takes four weeks to get a new order in, things are fine. If it takes eight weeks, you know that a back order situation is imminent.
Keep trends and seasons in mind. Velocity is not constant, of course. Velocity for items changes over time. For example, ornaments and gifts sell a lot faster during the Christmas holiday season. Barbecue grills and bathing suits sell better when summer approaches. Keep track of sales data over time, year after year, to find these seasonal patterns. This also lets you track trends: If you sell fewer and fewer of those smartphone cases year after year, the demand is waning and you can probably get by with less stock with the next order.
Get low stock reports in a timely fashion. Of course, you can have all the data in the world, but unless that data is collected and understood, it cannot be used. Make sure that you are getting the right reports about item velocity. If these reports are not in real time and occurring frequently, you should also see if you can set up alerts that inform you when items are in a low stock situation.
Trigger reordering when stock levels get low. Ordering new items or parts when stock is out creates back order situations, as I’ve said. So ordering needs to occur in anticipation of running out of stock. If your warehouse (or your 3PL partner’s warehouse) has the right technology, they can track inventory and trigger automatic reorders when items achieve “low stock” status. What that level is should be driven by data about item velocity. We call these Dynamic Reorder points, and they can help organizations get the stock they need just in time to fill demand.
Automate and outsource. The more the above steps can be automated, the better. This cuts down on human error and helps ensure smooth operations.
While there is software that can help with this, many of the best-in-class solutions cost hundreds of thousands of dollars. Even if you spend that money, you will need trained staff and rigorous operating procedures to get everything to work.
For this reason, many small-to-medium-sized businesses outsource these functions to a 3PL. Not all 3PLs are equally good when it comes to monitoring and reporting on stock levels, however. So, when looking for a 3PL partner, be sure to ask about the above elements. A good 3PL will have invested in the technology for measuring stock levels and item velocity, keeping track of inventory in real time, generating reports, sending alerts, automating and triggering reorders, and so on.
And that investment will mean that you don’t have to worry about fulfillment and reordering, allowing you to focus on your business and your brand.
If you would like to hear more about this kind of technology and how modern 3PLs are using it, contact me. We can show you how Materialogic leverages technology to give you information when you want it, and automation when you need it.