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Inventory Shortages: Strategies, Causes, and Solutions

sahil bajaj

Sahil Bajaj

Senior Specialist - Marketing @ Shiprocket

February 22, 2024

11 min read

How can you always have everything that you need in your inventory? What happens when you are short of a couple of things? The situation where you lack certain things to produce your final product, thereby halting your assembly line and supply chain processes is known as an inventory shortage. 

Businesses need to make their inventory control robust to prevent disruptions in their supply chain processes. This is essential to avoid hassles and problems that could affect the consumers’ overall experience with the brand. Businesses must ensure that they fulfill their orders on time and keep up with their inventory stock levels.

This article details everything there is to know about inventory shortage, the factors that lead to it, its consequences, the effect it has on the industries, and more. 

Inventory Shortages

Defining Inventory Shortage

When your inventory lacks the necessary stock that is required to finish a specific product, it is known as an inventory shortage. It is an event that occurs when you have a lower number of items on hand or in your retail store when compared to what your records state. 

Businesses that lack proper inventory control tend to experience inventory shortages. They also face issues like high warehousing feeds, product shortages, congested warehouse floors,  chaos, slow movement of on-hand items, errors in pricing, delays in order fulfillment, etc. Lowering overstocks and stock-outs can save inventory expenditures by 10%.

Factors Leading to Inventory Shortage

When speaking about inventory shortages, you may wonder what leads to this situation. Here are some of the most common factors that cause inventory shortages:

  • Insufficient working capital: Inventory is not simply what a business has on hand for sale. It also refers to the amount of raw materials and other supplies they have to produce. Thus, a large portion of the working capital is spent on these materials. When you set aside a larger sum as your working capital, it creates a positive impact on your inventory levels. However, this might be a difficult task for smaller businesses. Hence, they must resort to optimising their cash flow. Seeking investors and funding is another method to increase your working capital. 
  • Mistakes in inventory data: Mistakes in inventory data can result in big blunders. It can even cost you your business. Inventory levels are directly responsible for the number of goods you make and sell. Thus, they control your profits and cash flow. Inaccuracies and false data can mislead you and create trouble for you. Simple measures like regularly counting your inventory, conducting periodic audits, and having automated inventory control solutions can help you avoid errors.
  • Improper inventory forecasting: Forecasting is key to estimating what you need for the near future. They allow you to make the decisions for what is coming. Hence, it is vital for you to not only think of your present situation but also plan for the future. The amount of raw materials you buy is also crucial. If you buy too much, you mess with your cash flow, which can result in deadstocks. When you buy too little, it can result in out-of-stock situations and backorders. Hence, proper forecasting is required for you to make decisions for the upcoming period. 
  • Erratic demands: The demand for certain products is not constant. It changes so erratically and hence estimating your on-hand demand can become quite challenging. This can easily result in inventory shortage. Hence, adopting scalable inventory practices is necessary to keep up with such drastic changes in demand. 
  • Port congestion: The idea might be far-fetched but port congestion is also something that can result in inventory shortages. It is well beyond the realm of control of a business but it is a pressing issue. Bottlenecks become inevitable due to port congestion and this can result in undefinable delays in you receiving your inventory. Hence, planning well in advance is crucial. 

Consequences of Inventory Shortage on Retail Businesses

Mistakes and improper planning have large repercussions in the business world. It can all come tumbling down like a domino. Here is what can happen when your business encounters a shortage of inventory:

  • Loss of sales: When you do not have enough to sell, you lose out on business. Your competitors might grab this opportunity to sell to your clients. Hence, you miss out on sales and the opportunity to gain more profit. This can sometimes stop you from expanding your business. For example, CGP Retailers lost out on 7.4% in sales due to inventory shortages in 2021. This amounts to a total of USD 82 billion in missed revenue.
  • Dissatisfaction amongst your customers: Delivering the orders to your customers on time is what enhances their experience of buying from you. When you fail to keep up with your timelines, it causes your customers to be dissatisfied with your service. It affects the reputation of your brand and they might not return to purchase from you.
  • Disruptions in your supply chain processes: Sometimes when you hit this roadblock of not having enough materials on hand, it can cause trouble to your consumers and suppliers. It halts your processes and theirs. It portrays your business as unreliable, making you lose the market.
  • Reputation: The image of your brand is what ultimately drives new customers to you. The trust you build with your existing customers will determine if you will gain the trust of newer buyers. Inventory shortages can hinder this process of trust building.
  • Financial repercussions: When you are unable to sell, you ain’t getting the cash. This causes you to fall short on money and can even result in financial losses. 

Industries Most Affected by Inventory Shortage

Retailers and eCommerce businesses are generally largely impacted by disruptions in the supply chain. It shifts and changes the manufacturing world and its practices. Although there are a few industries that have been spared, retailers with global suppliers and manufacturers have been specifically impacted. 

Particular domains have seen a substantial rise in demand as well. The fitness world, for instance, has been doing well in the last couple of years. People have begun to worry about health and fitness, making the food, sports, and fitness sectors boom largely. 

The COVID-19 pandemic has brought about a significant twist in the way the world functions and several sectors have seen a substantial decline as well. A well-known bicycle company, Pure Cycles, has suffered largely due to the inability to gain their inventory on time, making them prolong their order fulfillment. 

Computing Inventory Shortage 

Computing inventory shortage can be challenging. For the item-location combination, here’s how you can compute inventory shortage:

  • The perimeter for computing inventory shortage: The shortage computation window is measured and noted. The day when the inventory rebalancing is run, it is added to this window. The working days are considered for the calculation purposes. For instance, if the Shortage Computation Window measure is 4 days, and the plan is processed on Day 1, the shortage computation perimeter will be up to Day 5.
  • Rebalancing measure for inventory shortage: After the shortage computation perimeter is analysed, the following steps are to be done:
  • You must check to see if you have included your safety stock in your calculation of shortages during your rebalancing processes. The safety stock is always subtracted from the projection value. 
  • When the value without your safety stock is less than zero, it represents your inventory shortage. 

Factors Influencing the Calculation of Inventory Shortage

The following factors affect the calculation of inventory shortage:

  • The summation of the processing and pre and post-processing lead times for a specific item location determines the overall accuracy.
  • Lead time multiplier for shortage window and safety stock percentage columns are major contributors to determining the accuracy of the calculations.
  • The basic raw data of inventory level projections, reserve safety, and safety stock, for every item-location pair is another contributing factor.
  • The consideration of safety and reserve stock during calculations and rebalancing calculations play a role in determining the shortage levels. 

Strategies to Tackle Inventory Shortage

You may lose roughly 21% to 41% of your customers to your competitors if you go out of stock. To prevent a situation like that, here are a few most effective strategies that allow you to tackle your inventory shortages:

  • A clear understanding of your demand trends: Understanding the trends in your demand can allow you to plan your inventory levels better. Seasonality, promotions, events, trends, etc., are all factors that contribute to your demand. Retail demand trends are estimated based on past data. A buffer is also considered. When there is no history, consumer feedback is used to understand the patterns. 
  • Streamlining restocking and quantities: Inventory shortages are streamlined to match your required quantities based on estimation and forecast. When your inventory levels reach a minimum, your reorder point will be triggered. The quantity of the reorder will be based on your estimation. To create accurate reorder points and quantities, delivery lead times and rate of order fulfillment are to be well-defined. 
  • Physical counting: You can deploy a cycle counting programme. This method is rather simple, all it entails is regularly counting a part of your inventory to validate its precision and highlight its discrepancies. It can improve precision and visibility while avoiding misplacement and shrinkage. Stock integrity will be maintained via cycle counting. 
  • Inventory management software: Inventory management software can help you avoid inventory shortages. Automation processes can be used to simplify your inventory handling processes. Storing, picking, ordering, packing, and shipping processes can be automated to avoid errors and improve efficiency and productivity. 
  • Enhanced communication with vendors and customers: With effective communication, you will be able to avoid inventory shortages. This will enable you to procure your inventory on time. Moreover, having a good relationship with your clients will allow you to get more flexible order fulfillment dates.
  • Enhance your inventory performance: Your inventory performance can be well-managed through optimisation and streamlining of your ordering, estimating, forecasting, and demand drafting procedures. This will allow you to enhance your SCM processes, thereby avoiding inventory shortages. 

What can be Done to Keep Inventory Shortage at Bay?

Here’s a bunch of things that you can do to keep inventory shortages at bay:

  • Getting rid of uncertainty: Inadequate forecasting and long lead times can be the major contributors to inventory shortages. Faults in tracking and mistaken data can result in inventory shortages.
  • Enhanced visibility: Greater visibility into your inventory can allow you to get better access and control. It allows you to plan better and avoid inventory shortages.
  • Adopt an inventory management system: Warehouse management and inventory management systems can allow you to handle your inventory better. They help you avoid manual errors and possibilities of shortages and overstocking. 

Conclusion

Your supply chain processes have to be robust. It must not encounter a roadblock. This is necessary to ensure that you keep up with your timelines. When businesses do not have good inventory control, they experience higher warehousing prices, congestion in the warehouses, shortages in in-hand products, pricing errors, delays in shipment, etc. As much as you try, inventory shortages are a part of doing business. But you can avoid this by deploying solutions like periodic counting, regular audits, inventory management tools, etc. 

How can retailers deal with inventory shortages?

There are several ways retailers can deal with inventory shortages. These include reducing marketing spend, making agile transitions, adapting to inventory shortages, prioritising customer services, exploring alternate shipping options, etc.

What are the five common causes of inventory shortages?

The five common causes of stockouts include inaccurate records, miscalculated customer demand, supplier delays, logistical disruptions, and manufacturing problems.

How setting reorder points can help prevent inventory shortages?

Setting reorder points will tell inventory managers when to reorder stock before you run out of stock. Reorder points can also be defined as the minimum quantity of any product required on hand at any time. You can use inventory management software to set reorder points and even create alerts.

Can determining lead times prevent inventory shortages?

Lead time is the duration between placing an order and receiving it. It is also important for determining the reorder point. Look for shorter lead times when assessing current or new suppliers. Shorter lead times are also better in situations when goods are selling out faster than you expected.

What is the most effective way for me to prevent stockouts?

Keeping safety stock is the most effective way for you to prevent stockouts. However, too much safety stock may become costly and even result in losses. Carefully calculate your ideal safety stock levels to avoid unnecessary holding costs.

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