The Cost of A Stock Out

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Imagine this scenario: It’s 5pm in the afternoon and you’re a production planner in a manufacturing company. You just received a call from your main buyer asking if a product ordered from you will be delivered on time. You review your production schedule and verify that your material resources are matching within your plan. As far as you know, it will be delivered on time. You walk along the shop floor and check with a co-worker about the status of the product. Unfortunately, you’re quickly told that one of the key components needed to produce the product has a defect. As a result, you are forced to stop the production line. You know that the next batch – defect free, hopefully – has been ordered already but you aren’t sure when it is going to be delivered. So, you get back to your desk and call your supplier but they are off for the day. As result of this, you have lost half a day of on your production, which could delay the deliver of your product to your buyer. This, in turn, can have a big impact on your customer service and service commitments.

If you have worked in manufacturing, then you are probably very familiar with this situation. You probably recall running around asking the buyer or the shipping department if that key material has arrived yet. A lot of time can be wasted in these activities. Delivery times are often not communicated clearly, and delays can happen, which result in unexpected late deliveries.  This can cost companies a significant amount of money due to stock-out situations, which in turn result in production down time for manufacturers or missed sales opportunities for retailers.

Within many organizations a communication gap is often found between the company and their suppliers. This gap can be  due to physical distance, unavailability, or in extreme cases…  just avoiding a problem with the hope that it can get solved quietly behind the scenes.

So how do we avoid this gap without it taking a lot of time and effort? Often, we rely on over-the-phone communication and although it is very important to have this communication, there are many cases where you can replace this with a much more effective method. The good news is that there is software available that can provide a communication portal between the buyer and supplier, which serves this purpose perfectly.

The just-in-time methodology for stock replenishment is great and can be cost effective, but keep in mind a safety stock is also very crucial for continuous production. You never know when you may encounter situations like a product defect or a sudden change in demand, which could end up costing your company. Finding the right safety stock without killing your carrying cost is key.

One final tip: taking the time to review your product’s bill of material and stock based on its importance to your company will also help balance your carrying cost as well as keeping your company safe from a stock-out!

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About Author

Kenneth Loi

Kenneth is Chief Operating Officer and Founder of Procurify and oversees several business divisions including Operations, Product Management and Customer Relations. Kenneth's vision is to assemble the dream team to help build an enterprise product that helps solve critical business problems yet is intuitively easy to use.

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