Many software packages include a notification when the on-hand quantity of a stock product is equal to zero, also called a stock-out report. You have no inventory left on the shelf. This type of notification is worthless in your quest to achieve effective inventory management: to “meet or exceed your customers’ expectations of product availability with the amount of each item that will maximize your profits”. In fact, some buyers have told us that receiving an “out of stock” notification just means that they are about to get yelled at, and there is nothing they can do to prevent it.
Receiving a stock out report is really only important when you are verifying that there are no pieces of an item left on the shelf. It should be replaced by a report or inquiry that is much more helpful to achieving effective inventory management:
• A buyer needs to know when the current available quantity (On-Hand minus Quantities Committed on Current Outgoing Orders) is less than or equal to zero. After all, if a piece of an item in stock is reserved for one customer, it isn’t available to be sold to another customer.
• You might be in reality out of an item while there is still a quantity on the shelf. For example, if customers usually request six pieces of an item and you only have one piece in stock, do you have enough on hand to satisfy the customer? Good computer systems maintain a “stock out quantity” which is the quantity required to fill a typical customer order. A buyer should immediately be informed whenever the available quantity of a product drops below the stock out quantity.
• Knowing that you don’t have enough inventory to fill a typical customer order may not prevent a stockout. After all, stock replenishment is not instantaneous. Buyers should be informed when the current net available quantity (On-Hand – Committed on Current Orders + Quantity on Current Replenishment Order) is less than the quantity you project you will sell during the anticipated lead time plus the safety stock quantity. The anticipated lead time reflects how long it will take to replenish your stock of an item. Safety stock is the quantity of a product you maintain as “insurance inventory” to protect you from stockouts due to unusual demand or delays in receiving a replenishment shipment.
In summary, replace your current stock out listing with a more meaningful report that includes all items that meet the following criteria:
• Available quantity below the stock out quantity (i.e., time to panic)
• Net available quantity less than the sum of the anticipated lead time and safety stock quantity (panic is not necessary but immediate action should be taken to replenish stock)
This new report or inquiry will help your buyers be proactive in meeting customer expectations rather than reactive in handling customer complaints.