The number of questions we are getting about managing through gaps in inventory and supply chain has been on the rise in recent days and weeks. Certainly, there are plenty of good reasons for this type of concern at the moment. Recently, one of our customers asked us point blank: “We can see a strong possibility of inventory outages, mostly due to disruptions in our overseas supply chain, what can we do to minimize the impact?”
Inventory Outages Cause Pain
There is no question that supply chain interruptions and inventory outages come with stress and pain. Nobody wants to disappoint a customer or miss the sale. However, the reality is, these things will happen. It is inevitable and unavoidable. The dynamics of supply and demand are always in flux, and the overwhelming majority of companies are not going to stock so defensively that they can avoid it.
Managing the pain, in my experience, really boils down to making sure the organization remembers that everyone is on the same team. I have heard that there should be a “healthy tension” between sales and operations in a company. I don’t buy that at all. In my opinion, that is a win-lose mentality, which is seldom good for the internal dynamics of a company. When faced with inventory outages, remember, you are all in it together. You will get through it faster if everyone is pulling in the same direction.
Tools for Inventory Outages
Organizational psychology aside, you still have to actually manage the inventory outages in real time. There is always the temptation to respond with additional purchasing. Sometimes there may be a knee-jerk, emotional decision that tries to fight the immediate fire. Over the years, I have found a few tools that I think can be a benefit for this:
Run Out Report
I have seen many versions of this report, but the underlying principle is always the same. The idea of the run-out report is to project potential outages before they happen. It is rudimentary math, meant to be a quick gut check and a signal that you need to look deeper at an item. The concept is pretty simple: Look at your on-hand inventory, minus anything that is already committed. Now divide that by your average daily sales for the item. This gives you the number of days of inventory you have on hand. Add that to the current date, and now you have a basic calculation on the date you will run out of inventory. Add back to the inventory any Open PO quantities that are expected to arrive before the run-out date, so you can filter out those items that are already covered by a timely PO.
Once you have the report, sort it in ascending order by the projected inventory outage date. I also recommend adding in filters for product groupings, ABC class, and any other valuable way to slice and dice the data. Now what you have is a simple report that gives you exceptions, and that’s what you want to focus on, things that are out of kilter. This will allow you to get ahead of the curve, which is huge in a long lead time situation. A lot of times, my goal in an inventory outage is to turn a 60-day outage into 15 or 20, or maybe 30. Sometimes you can’t get rid of the pain, but you can dampen it a bit.
Inventory Outage Tracker
One problem that can creep into these situations is one-off anecdotes like. “We never have this item”, or “We are always out of X”. Those can be tough to deal with when you already have the burden of the issue on your mind. Inventory Outages are going to happen. I know that is a repeat statement, but it is an important one because it is true. The other reality is, not all outages are created equal. Frequency, duration, and cause are all very important factors for the event. Depending on the driver of the event, a different correction to the plan is needed. In some cases, you may not want to adjust the plan at all.
For instance, if your inventory was perfect and the outage was caused by a one-off sale that jumped up the monthly usage by 300%, then there’s not much you can do about that. However, if you are experiencing short, frequent inventory outages on common items, that is often a sign that your planned lead time is a little too short. What if you have medium-length stockouts that happen a little too often? That may be a case of faulty forecasts or erratic supplier delivery,
The concept of the Inventory Outage Tracker is pretty straightforward. When a stock item runs out, the tracker creates a database record that notes the item, location, and date of the outage. When it comes back into inventory, the record is updated with the date the outage ended. This gives you a dataset that will give you clear insight into the frequency and duration of inventory outages. That will help diagnose issues quickly and accurately.
High Usage Alerts
The last tool I want to talk about is a little more situational. If you are in a situation where you have a product that suddenly comes into high demand, you will want to decide if you are going to sell everyone anything they want, or if you are going to throttle the demand and service just some customers, limit quantities, etc.
In these unusual situations, new and previously inactive customers seem to come out of the woodwork, straining your ability to take care of your loyal accounts. In these cases, it might make sense to monitor new and high usage, especially from customers who do not buy regularly, or buy outside of their normal pattern.
The alerts I would recommend looking into are:
- Customers buying items they haven’t bought before.
- Customers buying more than X% of their average usage over the last few months.
- Customers buying in a larger than normal unit of measure (e.g pallets instead of cases)
The Bottom Line on Inventory Outages
Chances are you cannot always avoid inventory outages. When you are in a situation where you can foresee inventory outages on the horizon, consider the following tools:
- Run Out Report – project the date you will run out of an item.
- Inventory Outage Tracker – gather hard data on the frequency and duration of the stock out.
- High Usage Alerts – when there is a run on your products, set up alerts for customers buying outside of the norm (items they don’t usually buy, high quantities, and larger units of measure)
Hopefully, these tools can help you manage inventory outages and supply chain disruptions with a little less stress and heartache. Good luck!