Essay Example on Stock-outs: The Biggest Nightmare for Companies

Introduction

Stock-outs normally subject companies to the face of the 'biggest nightmare', and for some good reasons. Such situations are not only associated with low sales, but worst of all is that customers feel unsatisfied and they eventually lower their levels of loyalty to the company. Customers normally feel that they are disappointed when a company becomes unable to provide them with the product they want (Radasanu, 2016). Essentially, the last thing that a company may think of is to make its customers feel disappointed. For this reason, this paper will attempt to illustrate issues about how companies, particularly those that are expecting some new opportunities like the Stone Horse Supply Inc. owned by John and Michael.

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Reasons for Controlling Inventory by Stock-Outs

According to Ogbo, & Ukpere (2014), one of the fundamental reasons for controlling the inventory through the use of stock-outs is to make sure that costs associated with the holding stocks are completely minimized, while at the same time, ensuring that there are adequate stocks in a company to meet the needs of its customers. Even though this proposition may appear to be a simple task, it ought to be noted that this is a very complicated task due to demand fluctuations; which are usually unpredictable.

The stocks of an ongoing task may be held purposely to allow for flexibility of how the machinery is utilized, whereas holding finished products in the stock permits consumer demand pattern variations. To some extent, it can be pointed out that the demand for certain goods, for instance, may subjective to weather conditions. An unexpected hot spell or cold may significantly influence demand patterns and as a result, companies producing such goods may find themselves completely short of stock or otherwise have surplus stock hence are likely to face the difficulties associated with keeping the products or costs associated with storage.

Costs Associated with Stock-Outs

The simplest stock-out scenario is when a product to be used for some specific customer order is not available in company stock at the very time it is required by a customer. Though if the product was required for the manufacturing purposes, the company could change its schedule in order to fix the deficiency, however, if the product was required by a customer, then it becomes a 'nightmare to the company since its customers will be disappointed and may not come back to shop (Mikkelsen-Lopez et al., 2013). Such a scenario always comes with some associated costs as discussed hereunder:

Back-Ordering Costs

In case a consumer is not willing to wait for the company to fulfil their order, the company can back-order the item required by the customer, meaning that the vendor will have to incur some additional costs as a result of stock-out. These include the additional costs charged for processing the order since the order will have to be amended purposely to set a new and suitable delivery date as per the customer demands. Furthermore, Kariuki, & Rotich (2019) found that if in case the order was part of some large delivery, then some additional shipping costs may be charged because a special means of transportation will be required. Since the desire of a company is to ensure that its customers are always satisfied, it may offer free or discounted transportation.

Cost Related to the Cancelled Customer Orders

Sometimes a customer may decide to cancel the order that they initially made as a result of stock-out. This may mean that the customer has found an alternative company to supply them with what they want or they have just decided to let go. In most cases, consumers ensure that they not only rely on a single source of supply but as many supply sources as possible, especially for their major items. For this reason, a customer can choose not to wait for the completion of the order once he/she realizes issues of stock-out, and may order the same item from another company to avoid disappointment.

On the other hand, the initial company that faces a canceled order would have lost profit as well as a strong customer base (Mikkelsen-Lopez et al., 2013). Also, the company may incur some additional costs in its attempt to limit the extent of customer dissatisfaction by giving out incentives persuading them to continue purchasing their items from them or just to maintain the reputation of the company since some customers may go as far as posting negative things about the company.

The Cost Associated with Losing Customers

Perhaps, this is the most dangerous of all. Losing customer(s) is the worst thing that can happen to a company since it makes the vender to suffer huge costs such as lost revenues, low sales, and low profits. If a customer chooses not to place an order with a company, every order becomes a cost that is worth consideration. Maybe, the lost customer was a major shopper then eventually cuts off his/her relationship with the company (Kariuki, & Rotich, 2019). In such a scenario, the company may suffer severe costs which may lead to financial problems. Also, the company may suffer the costs of extensive advertisements in its attempt to find new customers to place orders that could have been placed by the lost customers.

Costs Related to Inefficiency Drive-Ups

Stock-outs are more likely to occur if a company has been enjoying high demand for its products, but has miserable internal planning, and this always leads to several unseen costs. Miserable planning only leads to inefficiencies, which means the company must suffer some costs in its attempt to resolve such inefficiencies, which may as well be significant, particularly in the case where a fully automated inventory management system is lacking (Kariuki, & Rotich, 2019). Lack of automation in all aspects of business means everything will be time-consuming.in such a case, a company's management would direct its efforts towards finding the data perceived to be missing and at the same time, the staff responsible for a company's warehouse will spend hours finding the lost document. Planning becomes difficult and ineffective in situations where some data appears to be missing or cannot be located in time. This may lead to the interruption of a customer's order.

Ways of Measuring Product Availability

Measuring the availability of products may be quite challenging, however, it is the simplest thing if the technique is understood. It can be measured by determining the cycle service level or by determining customer demand fraction and many other techniques (DeHoratius, & Ton, 2015). The discussion hereunder presents three fundamental ways that are essential for a company desiring to know whether it has enough products that will meet the demands of its customers

By Determining the Average/Size of Items per Purchase

In business, goods sold can be used as a rough estimate for the availability of products on the shelves. It is also associated with costs such as transaction time, carrying costs as well as the need for more space. Therefore, a company's point of sale system ought to be in a position to provide its owners with appropriate data. If in case there are low transaction costs, then the number of items purchased would appear to be insignificant, for instance, a carton of milk may be equated to one iPad sold. In the event of high sales volume, it will begin to bring some sense. For this reason, if a company maintains a good average for each purchase, but there is still a rise in the number of goods, it simply means that customers are purchasing cheap goods in bulk.

In this kind of situation, the company ought to revisit its offers on sales, perhaps, something is being overdone! The next time, something strange might happen; customers may no longer purchase some products simply because they have stocked them at home (Herhausen et al. 2015). In a nutshell, if a company experiences a rise in the average purchase, then there will also be a rise in item count. This can be resolved by lowering item count than average sales. The aim of doing business is to make a profit and not anything to do with selling more products.

Through the Average Sale/Purchase Value

Essentially, there are two significant business metrics to look into. Digging deeply into this, companies may be interested in the value of their sales average. This relates to the question; how much do the company's customers spend in the checkout? And to what extent has this value changed over time? A company may have been working so hard to get more customers into its store and persuading them to make purchases as long as they walk into the store (DeHoratius, & Ton, 2015). At this point, the company needs to compute average sales value (average order value), this is usually the point of truth about whether the company has enough stock that can serve the demands of its customers. The average order value can be calculated by dividing the total sales value by the number of transactions. Notably, this is the most powerful way of measuring product availability within the sales system.

By Determining the Customer Traffic (Number of Customers)

The most straightforward metric for a company is the number of customers that it serves. Everyone knows that a business with a high number of customers must be doing well in terms of sales, as a matter of fact, people will always be attracted to shops with a high number of customers thinking that maybe their prices are pocket-friendly, or that they sell quality products. The main source of money for any kind of business is its customers. Actually, human effort adds value to capital and land. Therefore, for a company, the more customers attracted, the more money will be earned as they leave. In this regard, for a company to know about the availability of its products, customer traffic observance plays a significant role.

The Significance of Product Availability Level

A company's productivity can be used in enhancing the responsiveness or as a means of attracting more customers, however, it is important to note that in such a case, large inventories, as well as the associated carrying costs, may be required (Herhausen et al. 2015), the optimal productivity level is always perceived to be one that maximizes the profitability of a company. This is dependent on three fundamental factors as discussed below:

Understocking Costs

Understocking is a business situation where a company's supply of certain goods fail to meet the demands of its customers. For instance, if a customer gets into the company's stores and asks for some product, and eventually find that the product he/she wanted is no longer available. At that juncture, they become totally frustrated and disappointed.in such a scenario, the customer is not likely to come back to such a store.

Overstocking Costs

This is the exact opposite of understocking. It is a scenario where there is surplus goods in a company's stored such that they exceed customer demands. Also, the fundamental reasons why a company may decide to overstock are the same to those that can lead to understocking. When there is a poor planning a company may not figure out the amount of goods required to satisfy the needs of its customers, thereby ending up doing surplus supply

Other factors may include: the type of business as well as stock distribution channels. For example, a grocery is more likely to experience frequent stock-outs because the type of business requires supply just in a few days.

Recommendations

The following recommendations can be made to help John and Michael to utilize the opportunities that their company faces without falling victim of stock-out.

They need to understand their inventory, particularly raw materials as well as their finished goods. If they can manage their...