Understocking

What does understocking mean?

Understocking refers to a situation in which a business holds insufficient inventory or stock to meet customer demand, resulting in stockouts and missed sales opportunities. When products that customers want are not available, they cannot make purchases, leading to lost revenue for the business.

What are the risks associated with understocking?

• Understocking leads to situations where customers visit a business’ store or website, intending to purchase a specific product, but find it out of stock, leading to missed sales opportunities.
• Repeated instances of understocking can frustrate customers who are unable to find the products they need. Unsatisfied customers might decide to shop elsewhere, leading to customer turnover and a decline in revenue.
• Consistent understocking can damage the reputation of a business. Customers may perceive the business as unreliable and not meeting their needs, which can affect customer trust and loyalty, leading to decreased revenue over time.
• Customers facing stockouts are likely to explore alternative sources to fulfill their needs. Competitors with available stock might benefit from this situation and capture sales that would have otherwise gone to the understocked business.

How to avoid understocking?

To avoid understocking a company can implement a combination of strategies and practices:

• Accurate demand forecasting by utilizing reliable data and advanced forecasting techniques to predict customer demand more accurately.
• Main a buffer of safety stock to account for unexpected demand fluctuations, supply chain disruptions, or inaccurate forecasts.
• Determine a reorder point to ensure that new stock arrives before the current inventory is depleted.
• Order products will in advance to account for supplier lead times and potential delays.
• Prioritize products based on their contribution to revenue and criticality with ABC classification which allocates more attention to high-value or high-demand items.