Stock Out Measurement (I)
What are the methods of stock out measurement? What are the main methods of stock out measurement?
Posted: Nov 2009
Stock Out ( Out Of Stock - OOS ) is situation when the product is temporary unavailable on the shelf or in the warehouse. The stock out is occurring from time to time on almost all SKUs. The stock out shows up as a result of the gap between the stock planning and actual sales demand. In some cases it can appear as a result of production breakages or extremely prolonged supply lead time.
In order to track and control the appearance of out of stock, it is necessary to establish the measurement system. Once the stock outs are tracked and categorized by cause, it is possible to control it and keep it at acceptable level. What are the methods of stock our measurement?
Numeric Stock Out is the measurement of absence of certain SKUs, regardless of their volume. If the one SKU out of ten SKUs is not available, than the Stock Out is 10%. The logic can be applied to daily basis, different sales regions, etc.
Volume Stock Out takes into consideration sales volume. The volume stock out is measured as OOS vol = Sum ( SKUi OOS Days x SKUi Avg Daily Sales ) / TOTAL Period Sales (%)
Value Stock Out follows the similar logic as volume stock out. The only difference is that the value is taken into account, instead of volume:
OOS val = Sum ( SKUi OOS Days x SKUi Value of Daily Sales ) / Total Value Sold ($)
Basically all three methods are important, since they measure the stock out from different perspective.
Although there is no doubt that stock out is not welcomed and should be avoided, still it should not be avoided by any cost. Conditionally, it can be said that low percentage of stock out can be accepted. This may sound as non-profitable attitude toward major business objectives, but if we check the stock out nature more deeply, we can understand that this can be true true.
The stock out appears as the result of supply shortage. This shortage can be based on lack of capacity. It can be that production capacity is limited to cover the peaks of the season. The distribution capacity can be limited for certain period of the month, e.g. month end. The warehousing capacity can show up to be a bottle neck for regular supply. So what is the solution? To increase the capacity? Of course, the increase of the capacity is the most obvious and the easiest solution. But every increase of capacity requires investment. Every investment requires return on investment ( ROI )of certain rate, within planned period of time.
If the investment on capacity increase is much more expensive than the gain that it may bring, than it may sound reasonable to continue with occasional stock outs. If there is no certain return on investment, than it does not make sense to make capital investment only to cover occasional stock outs. This can be the case with the company that is in harvesting phase on the market. If the company have required share and sales volume, if the market is not significant, than the decision of conscious allowing occasional stock out can be the reasonable decision.
Still, stock outs should be avoided if that is possible, since it directly influences the sustainable competitive advantage of the company. The stock out can increase dissatisfaction of consumers in case that it lasts for longer period of time. After all, the product is not the only thing that customers requires. The customers also requires a good service. Regular supply and no stock outs are the part of the good service.