For companies, high demand is generally a good problem to have. But if you’re caught unawares and unprepared for an increase in demand, you may be struggling to fill orders quickly enough. Expediting orders from your suppliers, paying your employees overtime, and outsourcing production are expensive options and oftentimes not feasible for anything but your most important orders. Instead, the best course of action in the immediate short-term is to simply concentrate on strategically distributing your remaining inventory among your customers by using one of two main approaches.
Fair share strategy
The first, which we’ve dubbed the fair share strategy, is to distribute your remaining inventory across all your customers, allocating items proportionally according to the size of their initial order. This approach ensures that every customer receives at least some of the items they ordered, which may, in turn, help your customers avoid a stock out of their own. Nevertheless, even though no one customer is left empty-handed, it also means no one is truly satisfied with the situation — an important consideration, especially when it comes to your most valuable customers.
The second approach is prioritization; that is, you would fulfill only those orders you’ve identified to be the most critical. However, be careful how you decide which orders fit this classification. They’re not always going to be from those customers you would traditionally view as the most valuable to your business. For instance, your largest customer overall may not sell many units — or may not do so very quickly — of the particular item in question. Perhaps you have other smaller customers who sell this item in greater quantities or more quickly. In those cases, it may be wise to prioritize the orders of the smaller customers.
Things, however, are rarely so black and white. As Paul Mackie, a supply chain expert at John Galt Solutions, explains, “this is a complex optimization problem that must be examined through a mathematical lens, which would require the help of a software solution with advanced deployment management features. Even so, typically you would use a combination of factors to determine how you prioritize customers in this less-than-ideal situation.” These factors can include how critical a particular item is to the supply chain (either yours or your customers’), how soon an order needs to be filled, whether a customer will accept a substitute product, and whether your customers are simply low on stock or in danger of running out of stock.
It’s all in how you communicate
It’s estimated that companies lose over $630 billion a year in revenue due to stock outs. But while customers grow frustrated when confronted with out-of-stock items and may go elsewhere to make their purchase, how you handle the situation could mean the difference between losing out on one sale or losing out on the entire customer relationship. Thus, regardless of the strategy you employ to fulfill your orders, it’s critical to have a clear communication strategy in place. Immediately let your customers know that you’re running low on inventory or out of stock and that there will be a delay in delivering the item they purchased. Make sure to include an estimated shipping date so that they know when they can expect to receive it. And don’t underestimate the power of small gestures of goodwill, such as offering to ship the item for free or providing a discount.
Take steps right away to avoid future stock-outs
Once you have recovered from the stock out and your inventory levels have been replenished, take some time to assess what went wrong. Common mistakes include basing forecasts off inaccurate or incomplete data, measuring the wrong performance indicators — or not measuring them at all — and adhering to highly manual and labor-intensive processes.
Talk to your demand planners and personnel about their processes and pain points, reach out to your vendors to get their input, and seek the advice of supply chain experts. They will help you determine whether you’re following inventory best practices and can identify other strategies to streamline your supply chain, such as employing software that will help automate tasks and reduce human error and implementing processes that facilitate cross-departmental collaboration in real time. These strategies, in turn, will go a long way toward mitigating the risk of future stock outs.
Ironing out the wrinkles in your supply chain and maximizing efficiency in managing your inventory levels is an ongoing challenge, but one that’s well worth the effort to overcome. Contact John Galt today to speak to one of our Forecast Xperts about how we can help you implement inventory best practices throughout your organization.