This month we continue our discussion of evaluating your inventory investment. The goal of effective inventory management is to “meet or exceed customers’ expectations of product availability with the amount of each item that will maximize your net profit or minimize your total inventory investment”. But how do you know if you are meeting or exceeding customers’ expectations of product availability?
A lot of companies measure customer service with anecdotal information. That is the number of times they receive a complaint. But there are problems with this approach:
- Do all customers complain if you don’t have what they are looking for? How many simply leave your store or hang up the phone and proceed to check the stock of your competitor?
- Will you tend to focus on the needs of your most vocal (though not necessarily your most important or profitable) customers?
When you stock a product you are making a commitment to have that product available in reasonable quantities for immediate delivery. If you don’t have a product on the shelf, it is a customer service failure. How often did you experience stockouts last month? That is a very important question you need to have the answer for. How?….
For each product line consider maintaining the following chart:
|
Months with Usage |
Products |
Stockouts |
% of Stockouts |
|
1 |
1870 |
280 |
15.0% |
|
2 |
1750 |
140 |
8.0% |
|
3 |
450 |
150 |
33.3% |
|
4 |
420 |
100 |
23.8% |
|
5 |
460 |
140 |
30.4% |
|
6 |
240 |
50 |
20.8% |
|
7 |
330 |
80 |
24.2% |
|
8 |
250 |
70 |
28.0% |
|
9 |
210 |
30 |
14.3% |
|
10 |
210 |
10 |
4.8% |
|
11 |
170 |
30 |
17.6% |
|
12 |
220 |
90 |
40.9% |
|
Critical Items |
580 |
140 |
24.1% |
|
Total |
7160 |
1310 |
18.3% |
- Months with usage: the number of months the product has been requested within the past 12 months.
- Stockout: when the available quantity [On-Hand minus the Quantity Committed on Current Outgoing Orders] of a product falls below zero (or the normal order quantity if the item is sold or used in quantities greater than one piece).
- Critical items: designated by salespeople to be crucial for maintaining outstanding customer service. Management has committed additional funds to maintain extra safety stock to avoid stockouts of these important items.
It is obvious that the buyer responsible for these products has some work to do.
1. The Buyer must focus on stockout rates of the most important items:
- designated critical items and
- those items that have had sales in all 12 of the past 12 months
2. The Buyer must determine:
- how accurate are the forecasts future demand of these products?
- are the anticipated lead times for replenishment shipments accurate?
- do our system parameters accurately reflect how often we normally receive a replenishment shipment from our supplier?
For example, if we only receive a shipment every three months, do we order a minimum of a three month supply?
It is usually important to avoid stockouts of critical products or those that are frequently requested than those that only have activity in one or two months each year. In fact you might purposely stockout of products that are only sold once or twice a year. That is when you sell the one piece on the shelf, you’ll buy another one. By focusing on the most important items, we will make the most dramatic improvement in customer service in the shortest possible length of time.