How to Deal With Inventory Overstock And Understock?
What Do Understocking and Overstocking Mean?
In the area of inventory management, different names and terms are attached to overstocking like excess inventory, excess stock or stock surplus. Irrespective of the name you use to define overstocking, it, at the core, refers to an organization that is stocks or inventory or an organization that holds too many stocks. Understocking is exactly the opposite of it. When an organization does not have enough stock to meet the demand.
Why Do Overstocking and Understocking Happen?
When an enterprise goes through inventory problems, it can end up making a few mistakes. In addition to these mistakes, one more factor plays a crucial role in under or overstocking, and that factor is a company’s lack of capacity in implementing technologies or procedures. But you can get yourself off the list of such companies who fail to control and manage their inventories. Before you make sure you manage your inventories successfully, you must know what are the reasons that lead to under or overstocking in the first place:
1. Inaccurate Data
One of the pivotal causes behind overstocking or understocking is an absence or insufficiency of robust data. Stolen inventories, shipment variances, returns, and misplaced stock items, etc affect the needs of your inventory. Without precise and correct data in hand, a company can believe that it is short or excess in the stocks that it actually has. If accurate and complete facts are not accessible, an enterprise may end up ordering too much or too few items than it actually needs.
An enterprise must also predict when it can experience a rise or dip in demand for all or certain items that the enterprise deals in. Accurate data lets you discover trends or patterns in your sales. This data can be used to understand how much inventory can be ordered in order to meet customer demands.
2. Mismanagement of Staff, Technology, and Business Processes
You will need well-qualified and trained staff to sell the items, even if you have great data to help you in keeping the shelves stocked. If your staff fails to keep the shelves stock, you can miss out on sales even if you have enough inventory in the backroom. This is possibly one of the most unfortunate types of understocking any enterprise can even experience as the business holds enough inventory to satisfy the demand but the employees fail to display the stocks on the shelves. Even if you are blessed with competent employees, you have to follow a few standardized processes to get positive results from their workforce.
Read: 8 Essential features Inventory Management Software
These processes make sure that every staff member is aware of his/her duties and hence the business does not have to deal with problems caused when the staff members are unaware of what they are supposed to do, which ultimately leads to unattended shelves. Staff may not know when the shelves are empty.
Your employees must be aware of how to interpret information and use technology. If important employees or team members like managers don’t understand the importance of the data, they can’t utilize it to improve the inventory.
A robust Inventory management software can help you analyze past trends and create a plan for the inventory. As a company, you should install inventory management software that is user-friendly, can be seamlessly integrated into other software and devices, and will offer you a detailed cost analysis.
3. Lack of Funds
Sometimes, understocking is a result of a lack of funds at the business’ disposal to maintain sufficient inventory. If you are facing this issue in your enterprise then you’ll have to find a way to get some funding to invest for the growth of a company. If you are selling a popular product that usually enjoys a consistent market demand, you don’t want to run short on it. Having sufficient funds will help you generate profit.
4. Not Taking Care of Reorders to Arrive in Time
When your staff fails to place a reorder for products in time, it is not possible to get them in time. Many of the companies run out of stock because they fail to proactively reorder the inventories. A reactive approach towards stocking the inventories is crucial.
A proactive approach to reorders allows a company to look far into the future and this is what it takes for inventories to be shipped and arrive at the right time. Predicting inventories’ demand and availability can be accompanied by the understanding of how long it will take to complete the buying process with the wholesaler to process a successful reordering. If you have to place a large purchase order from a manufacturer or wholesaler based in a remotely located country, the arrival time for the product can be stretched to several months. Hence, a company must reorder in time. Failing to do so means the company will have to spend days or months where it will be understocked. To deal with such issues, enterprises are relying on Inventory management software to ensure that the staff is reordering products at the right time after considering the supplier lead times.
5. Bad Supplier Communication
For any business and any department to lead operations successfully, it is important to follow positive and communication practices. If an enterprise does not regularly communicate with suppliers or does not have a positive relationship with them, the business is exposed to a few uncertainties and risks. Poor communication can lead to misunderstandings or delayed orders. All this can cost you a loss in terms of missed sales opportunities.
One important type of bad communication is not documenting transactions or exchanges between the business and the enterprise. When you rely on word of mouth, you cannot hold suppliers accountable for delayed or canceled orders. Not documenting communication means you are exposing your business to loss in the long run.
A lack of communication or lack of rapport with a supplier can mean there is no reason for the suppliers to prioritize your orders. In case you face a situation where your inventories are getting sold faster than your expectations, you might have to prepone the reorder. A supplier who is not having a good rapport with your business and staff may not make an extra effort to rush a shipment.
Problems and Effects with Understocking
Below are some of the notable issues that understocking brings in the company:
Missed Sales: One of the most exceedingly terrible impacts of understocking is dismissing clients since you presently don’t have a product available in the stock. Without appropriate stocking, you can’t furnish clients with the items they wish to buy. Subsequently, a client will be compelled to go somewhere else, and you may lose their business totally.
Paying more for stock: When you purchase early, ordinarily you’ll get more reasonable prices for your stock.
Loss of offers: Buying in mass will frequently offer you the best cost. At the point when you purchase finished products in whole lots, raw materials, and parts, you can expect better prices. At the point when you need to reorder a small quantity of order to compensate for your understocking, items will no doubt wind up costing more.
Uncertain client loyalty: When you lack enough inventory, you are forced to dismiss your clients. By not having sufficient stock, the client will lose trust in your organization’s capacity to address their demands.
Higher transportation costs: If you’re continually placing orders to keep the inventories updated, you’ll need to pay more in delivery and handling costs. You can save the excess delivery and processing costs by getting rid of understocking, and purchasing enough sum for your clients in any case.
Steps to Clean Up Your Inventory Management Processes
You’ll need to choose a good ERP Software for your business. Make sure to search for something that will oversee stocks across different channels and coordinate with different tools you use.
This will help keep up the integrity and accuracy of data. Automation is another vital component for fixing broken stock management measures.
When you have your system set up, you can distinguish and zero in on your trouble spots.
It is important to maintain enough stock in the warehouse to ensure no customer demand goes unsatisfied and the business does not have to incur losses or cut profit ratios while fulfilling this demand.
