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Understocking and overstocking are two common inventory issues retailers face year-round, and particularly during the busy holiday season. While overstocking to meet anticipated customer demand can seem like a cautious move, it can lead to unwanted storage costs, capacity issues, and discounts required to move inventory that end up degrading your profit margins. Understocking, on the other hand, or not having enough inventory to meet customer demand, can result in missed sales and customer dissatisfaction.
The good news is that both can be avoided with careful inventory management, an agile supply chain, and creative financing. In this article, we’ll review the steps you can take to address understocking, especially when you need adequate stock the most.
Technology-assisted inventory management
Achieving the ideal inventory levels to meet customer demand while avoiding overstock liability starts with good inventory management. Insufficient inventory levels occur when your demand forecasting is inaccurate due to poor data, miscalculations, or unforeseen market conditions. Unforeseen issues with your supply chain can also result in nonoptimal inventory levels. While you can’t control all external factors, leveraging the correct historical and real-time sales and inventory data will help inform a more accurate demand forecast for your business.
Using advanced inventory management software, like Square for Retail, you can easily forecast your inventory requirements. Using the sales report found in your Dashboard, analyze quarter-over-quarter and year-over-year sell-through for at least a three-year lookback period if possible. This will help you understand your business’s busy periods and products or product categories that are either growing or declining in popularity, so you can adjust your order quantities accordingly. Square for Retail also provides real-time, synced inventory and sales data across all locations and sales channels, so you can stock up based on your current inventory levels and pending orders.
Managing supplier relationships to your benefit
Once you have confidence in your demand forecast, it’s important to communicate with your supply chain partners. Ahead of busy seasons, you’ll want to check in on your suppliers to align on expectations, including required order quantities and lead times, and reinstate clear supply chain key performance indicators (KPIs) that will help identify issues as soon as they arise. With Square for Retail, reports such as cost of goods sold, projected profit, vendor sales, sell-through, and inventory by category will help keep you informed and your suppliers accountable. To avoid sleepless nights, you can also set up alerts for when inventory levels fall below a predetermined threshold using inventory tracking.
Establishing strong relationships with your vendors will help your business respond quickly to unforeseen changes in customer demand. Vendors are sometimes willing to adopt a just-in-time (JIT) inventory approach, which centers around only ordering inventory when you need it in order to avoid both overstocking and understocking. Not all suppliers are willing to adopt a JIT approach, but it can be useful for products which have less historical sales data and more uncertainty around their demand. The downside of a JIT inventory management system is that retailers often miss out on discounts offered when securing long-term vendor contracts and meeting certain minimum purchase amounts. There are also lead times associated with JIT orders that cannot be avoided, even if your supply chain partners are willing to act quickly.
Oftentimes, there can be disruptions in supply chains due to factors that are completely external to your business. Due to supply issues, labor shortages, and even macro-geo-political events, suppliers can take longer than expected to deliver inventory, leading to stockouts. By establishing strong relationships with your suppliers and creating visibility around reporting, you can work together to quickly identify hiccups in your supply chain and mitigate them to the best of all parties abilities.
Establishing safety stock before you need it
When unforeseen challenges inevitably arise, safety stock is a welcome solution. Using your historical sales data, you can identify products and product categories that typically have a high sell-through rate and are good candidates for safety stock. Safety stock ensures that you have high-demand inventory on hand when stockouts do occur. Based on your forecast, you can identify historically busy periods for your business, like the holidays, and only order safety stock during these periods when you know demand will be higher or you plan on running a promotion. When determining your safety stock quantities, you want to be cautious of overstocking, particularly with items that are perishable or are only popular seasonally.
While the correct amount of safety stock largely depends on the business, retailers often use the below equation to help them determine which items to carry safety stock in.
Safety stock units = (maximum daily usage * maximum lead time) – (average daily usage * average lead time).
In this equation, maximum daily usage refers to the maximum amount of the product you can sell in one day based on your historical sales data, and average daily usage refers to the average number of units you typically sell of that product in a day. Maximum lead time is the longest it’s taken to receive the product, and average lead time is the average amount of time it typically takes to receive the product.
Explore financing options
When retailers need to respond quickly to unforeseen understocking challenges, a lack of funds to replenish inventory can often stand in the way. In addition to avoiding understocking with inventory management software and an agile supply chain, exploring alternative financing options before you run into issues can help your business respond quickly. Small business loans and lines of credit are quick and easy to acquire and can be used to secure understocked inventory when you need it most.
If you know a busy season like the holidays is approaching, securing a loan ahead of time in case you do end up needing to purchase more inventory is a smart move. Consider maintaining your credit and business credit scores should you decide to move forward with a loan. If your business is facing cash flow constraints, securing a loan can also assist in purchasing inventory at the best possible price. For example, many suppliers offer discounts when you purchase larger quantities of your most wanted items. Using Square Loans,* you can get loans for your business of up to $250,000 as quickly as the next business day. When it comes to inventory management, retailers might leverage a range of business loans, from equipment loans to inventory loans. These could come in several forms, but would commonly be a general business loan or business term.
Get ahead of stockouts
Understocking can negatively impact your business by losing out on customer acquisition and revenue opportunities. However, by adopting strategic inventory management practices, developing strong supplier relationships and rigor around success metrics, and having the foresight to secure supplemental financing, your business can maximize sales while avoiding inventory liability.
