When are You Really Out of Stock?

By Matt and Jon Schreibfeder

A frustrated distributor contacted us last week. Salespeople were receiving complaints from customers that a lot of products they needed were out of stock. Yet the distributor’s computer software showed there was available stock in the warehouse. After an examination of their system, we found that they could still have some inventory in the warehouse, yet for all practical purposes be out of stock!

The reason: The available stock of the troubling products was less than the quantity customers normally purchase. For example, an automotive service center may sell one or two tires at a time, but customers most often ask for a set of four. This is referred to as the “typical transaction size”. If fewer than four pieces of a particular brand/model/size of the tire were in stock, the customer would have to choose another option (if available), wait for the distributor to replenish inventory, or go elsewhere to find a supplier who could meet their needs.

To solve this problem, we added another replenishment parameter, the “Stock Out Quantity” to their system. The Stock Out Quantity is equal the mode or median average sale quantity recorded over the previous 12 months:

  • The mode average: The most common sale quantity.
  • The median average: The “middle” sale quantity. If we sort transaction sale quantities lowest to highest to lowest what is the value in the middle. We will use the median average quantity of a product for the Stock Out Quantity when there is no mode average.

When the Available Stock Quantity (On-Hand – Committed on Current Outgoing Orders) of a product dropped below the Stock Out Quantity, we record a stock out. Meaningful analysis requires that stockouts be recorded several ways:

Times out of stock – If an item is frequently running out of stock, say two or more times in a three-month period, there is probably something wrong with the forecast, anticipated lead time, order/review cycle or some other replenishment parameter determining when to reorder the product.

Days out of stock – If a product is out of stock for a prolonged number of days, say more than seven days in a three-month period, you probably have a problem with your vendor. Work with the supplier to receive more reliable shipments or look for an alternative source of supply.

Any Stockout of a Critical Item – A critical item is one that both you and your customers always expect to be in stock, no matter what extraordinary circumstances occur. An example is hamburger meat at a fast-food restaurant. Any stockout of a critical product should require an investigation and a report of what caused the stockout and what can be done to prevent future stocking problems.

Stockouts disappoint customers and have a negative effect on your profitability. It is critical that you accurately record stockouts and perform a comprehensive analysis of them at least once a month. These actions will help ensure your company achieves effective inventory management.