Managing inventory and predicting sales is a difficult process for every retailer. Customers hate it when an item isn't in stock and they are quick to take their business to another retailer who has the item in stock. A stock-out or an out-of-stock situation can have devastating effects for a retailer. A stock-out can be defined as a situation in which the demand or requirement for an item cannot be fulfilled from the current inventory. They are also known as oversells and out-of-stocks. A stock-out leads to a loss of sale due to not having a product any longer. Too many out-of-stocks can ruin brand trust, decrease customer loyalty and result in increased customer care costs. Therefore, preventing stock-outs ought to be at the top of your list of priorities.
Understanding the causes of stock-outs will put you on the right path, but you’ll need actionable solutions if you want to keep your warehouse well-stocked.
1. Forecast Demand
Stock-outs are caused by inaccurate demand forecasting. AI and machine learning enabled demand forecasting is one of the most promising applications of AI for the supply chain. Apart from AI based inventory management, here is what you can do:
Determine what to measure and how often, for example, the frequency of stock-outs, competitors sales data, POS data, etc.
Integrate data from all of your sales channels, especially if you’re running an omnichannel e-commerce strategy.
Create a regular monthly process that analyzes previous forecasts and compares them to actual market results.
2. Refer a Reliable Order Point Formula
A reorder point formula can tell you approximately when you should reorder stock to minimize stock-outs and maximize inventory turns. Ideally, this occurs when you’ve reached the lowest amount of inventory that you can sustain before you need to order more stock. Instead of falling victim to erratic spikes and slumps in the market, you can plan ahead by using a proven, mathematical equation that helps you consistently order the right amount of stock each month.
For example, you could use the following formula to help you beat stock-outs:
(Average Daily Unit Sales x Average Lead Time in Days) + Safety Stock = Reorder Point
3. Implement RFID Tags
Radio Frequency Identification (RFID) tags can allow you to track every product you store quite easily. It can make your inventory more efficient and allow for faster stocktaking processes. You can swiftly search for and find the products you need to ship. RFID tags can also allow you to scan any product and, find out in real-time how many of those products you still have in stock.
Researchers at the University of Arkansas found that RFID technology can reduce stock-outs by 16%. If you experience regular stock-outs too, then implementing RFID tags can be beneficial for your business.
4. Maintain Safety Stock Inventory
Safety stock inventory is a small, surplus amount of inventory you maintain on hand, to guard against lead times and variability in market demand.
It can help you to add a buffer for longer-than-expected order lead times, compensate for inaccurate market forecasts, protect against unexpected spikes in demand, and ultimately prevent stock-outs.
Here’s a formula to help you calculate safety stock:
(Max Daily Sales x Max Lead Time in Days) – (Average Daily Sales x Average Lead Time in Days) = Safety Stock Inventory
5. Prepare a Hierarchy of Recommended Substitutes
For some classes of e-commerce, customers will accept an alternative or equivalent product when one item is out of stock. In grocery, this can be in the form of suggesting an alternate brand of the product, or an alternate form of the product. For example, suggesting a frozen or canned form when the fresh item is out of stock. This enables a customer to prepare a planned meal without wasting time going to another store or having multiple delivery charges. Likewise, in fashion, a popular or necessary item might be back ordered or sold out, and a competing brand or color might be able for immediate shipment. For example, if it’s the rainy season and the customer needs a new pair of rain boots, they may be satisfied with a different design that is available for immediate shipment. In this situation, a machine learning based recommendation engine can be leveraged to help determine the correct recommendation from the real-time inventory of available options.
Preventing stock-outs won’t be an easy task and neither will it happen overnight. But keeping these pointers in mind and implementing them as part of your inventory management will go a long way in safeguarding against stock-outs. You could always continue to test solutions while paying attention to the market. To do so, we recommend using an AI-based tool that can collect, measure, analyze, discover patterns in and provide accurate forecasts.