Inventory Replenishment – What’s the Real Cost of Being Understocked

What’s your company’s biggest asset by dollar value?

What’s you company’s most important asset?

Of all your company’s assets, which one has maintenance costs that can eliminate huge profit margins?

Okay, if you haven’t put together the nature of those questions with the title of this post to come up with the answer, then we’ve failed.

But, however you come to the realization, the fact is that inventory is at once very likely your largest asset, your most important asset (no inventory = no sales = no business) and your most costly asset. So costly, it can start eating away at your profit margins.

Those three facts alone mean that anything you can do to improve how you manage your inventory will likely payoff in increased sales, decreased costs or a combination of both.

While most businesses understand the importance of efficiently managing inventory, if there’s one area of inventory management that is most neglected and/or misunderstood, it is inventory replenishment.

That lack of clarity and/or attention to effective replenishment may come from the name itself.

Dictionary.com defines replenishment as:

“to make full or complete again, as by supplying what is lacking, used up, etc.:

to replenish one’s stock of food.”

But, by that definition, regularly replenishing your inventory can cost you a lot of money in over-stocks, particularly if you keep ordering snow shovels in the spring and items you just took off of promotion.

SearchERP.TechTarget,com offers a better definition of inventory replenishment:

“the movement of inventory from upstream — or reserve — product storage locations to downstream — or primary – storage, picking and shipment locations. The purpose of replenishment is to keep inventory flowing through the supply chain by maintaining efficient order and line item fill rates. The process helps prevent costly inventory overstocking.”

If that’s a good definition, the ‘maintaining efficient order and line item fill rates’ bit is particularly important.

But even this very good definition falls short of highlighting one of the most important (and costly) things to avoid in inventory replenishment. While the definition talks about inventory replenishment process as a way to ‘prevent costly inventory overstocking’, the opposite symptom of poor replenishment practices can be just as costly.

The Cost of Being Under-Stocked

Every business runs out of inventory at some point. It’s natural and is usually just considered a regular cost of doing business. But there are few more potentially costly problems in business.

How You Can Lose More than Just Sales of the Out-of-Stock SKU

Whether you’re a supplier, manufacturer, wholesaler/distributor or retailer, the cost of being out-of-stock in even one SKU goes way beyond the lost sales of that SKU.

Studies have shown that ecommerce customers will often abandon their entire shopping cart if just one item is out of stock. Thinking about that if you’re a B2B business, you must know that your customers are trying to minimize costs like everyone else. They don’t want to issue any more POs than they have to. If they can’t fill an entire order with you, they might just go to your competitor

How You Can Lose More Than Just an Entire Order

Losing an order is bad enough. But when your customer visits a competitor to keep an order complete, you run the risk of losing that customer forever. If your competitor is better at inventory replenishment than you are, your customer will realize that they get better order fulfillment rates with your competition.

Do you know what the lifetime value of a loyal customer is for your business? If you do, then you know how just how costly it can be to be out-of-stock of just a single SKU.