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What is Inventory Shortage? Everything you Need to Know in 2024

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In this article, we will explain exactly what Inventory Shortages are and how to manage them to optimize your inventory and improve profitability. Read on to learn more.

inventory shortage
Source: cbsnews.com

What is Inventory Shortage?

Inventory shortage is the situation where a business lacks an adequate quantity of products to meet customer demand. It often leads to unfulfilled orders and disruptions in operations.

Example: XYZ Company is an electronics retailer. There was demand for 1,000 units of their latest smartphone model during the holiday season. However, they only had 700 units in stock. As a result, 300 potential sales went unfulfilled due to the inventory shortage.

inventory shortages
Source: 123rf.com

Causes of Inventory Shortages

Inventory shortages can arise due to a number of factors. We have listed some of the most common reasons below:

Lack of Working Capital: When a business grapples with insufficient funds, it hampers its ability to uphold optimal inventory levels, creating vulnerabilities in meeting market demands.

Errors in Inventory Data: The presence of mistakes in tracking and recording inventory can lead to discrepancies that, if not rectified promptly, contribute to shortages and operational inefficiencies.

Unreliable Forecasting: Inaccurate predictions of customer demand can be a substantial contributor to inventory shortages, disrupting the balance between supply and demand.

Demand Variability: The challenge of managing frequent and unexpected changes in customer orders poses a constant threat to maintaining stable inventory levels, necessitating agile and adaptable inventory management strategies.

Supply Chain Issues: Delays in receiving inventory, exacerbated by factors such as port congestion, can lead to interruptions in the supply chain, causing inventory shortages and potentially affecting customer satisfaction.

shortage inventory
Source: smartcorp.com

Impacts of Inventory Shortage

There are a number of impacts from inventory shortages for a business. Below are some of the most common:

Lost Sales Opportunities: Customers may turn to competitors when products are unavailable.

Customer Dissatisfaction: Frustrated customers may not return.

Financial Loss: Missed sales and increased costs can impact profitability.

Brand Reputation: Consistent shortages can damage a company's image.

Supply Chain Disruptions: Inventory shortages can ripple through the supply chain, affecting suppliers and partners.

shortages inventory
Source: vardells.co.uk

10 Steps to Manage and Prevent Inventory Shortages

Apply our 10 step process to both manage and prevent inventory shortages for your business.

1. Demand Forecasting

Use historical data and market trends to predict future demand. For example, if sales of a particular smartphone model increased by 10% in the last quarter, it's likely that trend might continue.

2. Regular Inventory Audits

Conduct weekly or monthly physical counts of inventory to ensure records match actual stock. If records indicate 500 units of a product but only 400 are found, there's a discrepancy that needs addressing.

3. Safety Stock Establishment

Maintain a safety stock to cater for sudden spikes in demand or supply disruptions. If the average monthly demand for a product is 1000 units, keeping an extra 100 as safety stock can prevent shortages.

4. Vendor Relationship Management

Build strong relationships with suppliers to ensure consistent and timely deliveries. If a toy manufacturer can trust their raw material supplier, they can better manage production schedules.

5. Use of Inventory Management Software

Implement an advanced inventory management system to track stock levels and predict shortages. A system might alert managers when a popular shoe size is running low, prompting a reorder.

6. Flexible Supply Chain

Develop a supply chain that can quickly adapt to changes in demand. For instance, if there's an unexpected surge in orders for winter jackets due to an early cold snap, suppliers should be able to respond promptly.

7. Diversify Suppliers

Don't rely on a single supplier for critical items. If one supplier of laptop batteries faces a disruption, having a secondary supplier ensures continuity.

8. Monitor Sales Trends

Regularly analyze sales data to spot trends that might affect inventory. If summer hats start selling rapidly in spring, it indicates a potential high demand in summer.

9. Employee Training

Ensure staff is trained on inventory management best practices. A well-informed salesperson can, for instance, suggest alternatives to customers if a popular item is running low, preventing lost sales.

10. Feedback Loop with Sales Team

Encourage open communication between the sales team and inventory managers. If the sales team hears rumblings of a soon-to-be popular trend (like a new fashion style), the inventory team can prepare in advance.

inventory shortage example
Source: mdm.com

Example

SunnyShades Co. is a top sunglasses retailer renowned for their distinctive designs. Their rapid growth and new product releases have caused inventory issues. To address this, they are adopting a structured framework.

1. Demand Forecasting

Analyzing the sales data, SunnyShades Co. notices that their Aviator 360 model sold 25% more units in summer compared to spring. They use this data to anticipate a potential surge in sales the next summer.

2. Regular Inventory Audits

Every month, they manually count their inventory in their main warehouse and find discrepancies. In July, they had records indicating 5,000 RetroRound units but found only 4,800 during the physical count.

3. Safety Stock Establishment

For their bestseller, the BeachView Classic, they keep an additional 500 units as safety stock. This helps cater to unexpected surges during peak beach seasons.

4. Vendor Relationship Management

SunnyShades Co. maintains a strong relationship with two major lens suppliers, ensuring that lens deliveries for the SeaBreeze Reflectors are always on time.

5. Use of Inventory Management Software

They use SunTrack, an inventory management system that sends alerts when stock for a particular model, like the UrbanSleek, drops below a set threshold.

6. Flexible Supply Chain

When they launched the limited-edition MountainVue model, the demand exceeded expectations. Their flexible supply chain allowed them to ramp up production quickly in response.

7. Diversify Suppliers

For their frames, they source from both FrameTech Inc. and StyleFrame Co. This dual sourcing ensured a steady supply when FrameTech faced production issues.

8. Monitor Sales Trends

The sales data from May indicated a 40% increase in sales for the Polarized Pinnacle model. They used this insight to predict a similar or greater demand for June.

9. Employee Training

Store associates are trained to suggest the newly launched DesertDusk model as an alternative when the popular CityChic shades are running low.

10. Feedback Loop with Sales Team

The sales team gave feedback about the rising demand for sporty sunglasses like the Runner's Ray model. This intel allowed the inventory team to stock up in advance.

By integrating this framework into their operations, SunnyShades Co. aims to meet the growing demand for their products while maintaining high customer satisfaction levels.

We hope that you now have a better understanding of what inventory shortage is and how to effectively manage this to avoid shortages in your business.

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