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Identifying the top 3 hidden costs of stockouts

by Nicole Brennan

The costs of inventory stockouts has been well documented and it is no secret that having insufficient inventory on hand can be detrimental to the profitability of a business. In an effort to keep inventory costs down, many businesses have been keeping their inventory lean. While this is a strategy that can be beneficial to the bottom line, if proper measures are not put in place to closely monitor and optimize inventory levels, keeping inventory too light can also result in lost sales.

Being unable to meet the demands of your customers can ultimately affect your entire business. If a customer order cannot be fulfilled, a business obviously loses the profit on that sale, but also reduces the likelihood that the customer ever orders from you again. Here are some of the costs related to stockouts, and how an enterprise resource planning (ERP) system can help your company reduce these costs to a minimum.

1. Revenue Loss

Revenue loss would likely be the most obvious cost related to stockouts. Inventory shortages affect your ability to fulfill customer orders, and the loss of a sale ultimately results in the loss of revenue. Additionally, customers can become quickly dissatisfied with the level of service if an item is out of stock, and can move on to the next supplier. Customer loyalty is important to the success of a business as it often means they will be more inclined to order from you time and time again. However, there are endless options available to customers, as well as an endless amount of information, and if customers are not happy, you may not realize it until it is too late.  

2. Decreased Productivity

If certain business procedures and processes are not automatic, and an order can not be fulfilled due to lack of inventory, businesses have to dedicate specific time to deal with all of the repercussions that can occur. Managers can often find themselves consistently planning orders and taking away valuable time that could be used in other areas. Businesses may waste time on processing orders, and attempting to ensure stockouts do not repeat themselves. With a better planning strategy and an ERP system to help automate certain tasks, this time and energy can be better utilised in other parts of the business.

3. Increased Internal Costs

In addition to the lost revenue from a potential sale, businesses can incur increased internal costs when dealing with inventory stockouts. Higher labor costs, inventory wastage, and production delays all increase when there are inadequate inventory levels to meet customer demands. Production loss can occur when employees have to focus their attention on repairing the situation, expediting shipping, placing additional inventory orders, and so on. Additionally, businesses will sometimes order excess inventory to remedy this. However, this also leads to hidden costs including storage space, inventory services, and risk of inventory damage. To remain competitive in the market, businesses must be able to adequately determine appropriate stock amounts.

The hidden costs of stockouts are far reaching. It is more than losing profit on a sale, it is the amalgamated costs related to every task associated with not being able to fill an order. Stockouts are difficult to manage manually and they are systematic routine procedures that should be automated. Ultimately, without proper systems in place to manage inventory levels, businesses can damage customer relationships, experience operational disruptions, and impede business growth and success.

Implementing an ERP system within your organisation can help mitigate the costs of stockouts and provide your business with real-time access to accurate information. With a full view of your inventory at all times, managers can make informed decisions about inventory replenishment, order processing, and inventory forecasting. An integrated application to help manage your inventory can help optimise process efficiencies and operational productivity, leaving you with happy customers and a more profitable business.

With an ERP Solution such as SAP Business One, companies can refocus their efforts. This integrated software system helps businesses manage inventory across multiple locations and provides real-time information on inventory levels. In addition, SAP Business One supports inventory tracking and valuation, providing employees the ability to track and record stock movements, ultimately better equipping them to make necessary decisions about inventory levels. The software also allows businesses to perform instant availability checks and provides visibility on items “available to promise”. SAP Business One provides quantity details, adjusted to what is promised to customers and incoming purchases, and it fully integrates with inventory and accounting transactions. Therefore, when stock levels are adjusted, inventory is immediately credited or debited, and inventory adjustments are accounted for as soon as stock movement is posted.

Each of these valuable features of SAP Business One provides important insight into inventory and stock levels, allowing businesses to effectively manage their operations.

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