First, let’s define the conditions that a stockout:

Stockouts can only occur for stocked items. When you stock a product, you are making a commitment — a commitment to have a reasonable and defined quantity of that item available for immediate delivery. Every one of your stores, warehouses, stockrooms, or other material storage facilities should have a list of products that should normally be on-hand. If an item is needed that is not on this “approved stock list,” it should only be ordered as needed.

A stockout may not only mean that you have no available stock.  In some cases, you may have some of the item in stock, but still fail to satisfy a customer’s request. For example, car tires are generally sold in sets of four.  Sure, a shop might sell one or two tires due to damage, accidents, etc. But, having less than four will prevent the store from meeting most customer requests. A stockout should be recorded when the available quantity of a product (on-hand – quantity committed on current outstanding orders) falls below the typical order size.

Once you have the list of stockouts, understand that not all stockouts deserve equal attention.  Concentrate on:

• New products
• Items that have experienced usage in more than nine of the past 12 months
• Critical items

The critical stock list is comprised of products you want to ensure are nearly always available. For example, a supermarket probably considers toilet paper a critical item. Customers will be extremely disappointed if it is not available. It might be less important for them to always have a particular brand of anchovies on the shelf.  It is inevitable that “less important” products in your inventory will experience occasional stockouts.

Determine if each stockout was “acceptable.”  That is, you wouldn’t have anticipated having adequate stock to meet the customer’s needs.

Compare the stocking parameters against the sales/usage history. If you are supposed to be maintaining a minimum quantity of 10 pieces of an item on the shelf, monthly usage of seven pieces should not have caused a stockout. Investigate if replenished material arrived on time. If a vendor is habitually missing promised or anticipated lead times, then you may need to manually extend lead times to match reality or start to look for a more reliable source of supply.

Was there unusual demand for the product? Suppose you are maintaining 10 pieces of an item in stock and monthly demand exceeded 100 pieces, should you have had enough of the product in stock to meet this unusual demand? Try to determine if each “spike” in sales or usage is not likely to reoccur, or it is the start of a new trend. Involve your salespeople or users in this investigation. They are probably close to the situation and can provide valuable insight. If indeed it is the start of a new trend, you will want to adjust your stocking parameters.

Set realistic goals. Most of our clients try to achieve a 95% to 97% customer service level.  That is, 95% to 97% of the line items for stocked items are completely filled on or before the customer’s requested date. For critical items, the goal is usually a 99.5% customer service level.  However, keep in mind that customer service level goals are subjective, each organization needs to establish its own objectives.

When reviewing stockouts with salespeople and buyers, it is critical is to keep discussions positive and inquisitive rather than exercises in finding fault. You need your employees’ cooperation and knowledge. Perhaps once a month host a catered lunch to review recent results and discuss how future stockouts can be avoided. It’s highly likely that the meal will pay for itself, if it prevents future stockouts or buyers defensively overbuying out of fear of getting into trouble.

Jon Schreibfeder is president of Effective Inventory Management, Inc., a firm dedicated to helping manufacturers, distributors, and large retailers get the most out of their investment in stock inventory.