In a previous post we discussed a metric called the customer service level. The customer service level measures the percentage of line items ordered by customers that can be shipped complete, in one shipment, by the date the customer expected the material. The customer service level is a great measurement but it is dependent on two factors that are sometimes hard to control:
• Salespeople will accurately record the promise date for each line item on a customer order
• All customer requests for products will be accurately recorded
One of our clients had salespeople who continually defaulted the promise date on every customer order to the current date even though the firm delivered most orders the next day. Because most orders were delivered after the recorded promise date, their computer system considered nearly every line item late and reported a very low customer service level even though deliveries generally met customers’ expectations. At another company customer requests for products that were completely out of stock were not recorded. For example if a customer ordered 10 pieces of a product and one piece was shipped in the initial shipment, the transaction negatively affected the customer service level. But if the item was completely out of stock and no order was entered when a customer requested 10 pieces there was no effect on the customer service level.
To avoid these problems some companies measure stockouts as an alternative to the customer service level. A stockout occurs when the available quantity of a product (on-hand quantity minus quantity committed on current orders) falls to or below zero. When this situation occurs:
• The number of stockouts for the product is incremented by one
• The date of the stockout is recorded
When a stock receipt for the product is entered into the computer system and the available quantity rises above zero, the date of the end of the stockout is noted and a “days out of stock” for the current month is incremented by the length of the stockout.
It is imperative that both the number of stockouts and days out of stock are recorded each month for each stocked item because they tend to identify two very different problems:
Number of Stockouts: If a popular “A” ranked product experiences many stockouts (e.g., more than two in a four month period) it probably means that its normal reorder quantity is too small. All or most of each replenishment shipment is used to fill orders backorders that have accumulated during the lead time. The standard reorder quantity of the product needs to be increased to satisfy customer demand between the receipts of replenishment shipments.
Days Out of Stock: A situation where the number of stockouts is low but an item has been out of stock for a significant number of days within the past several months (e.g., 14 days within a four month period). This usually is the result of an inconsistent lead time or other vendor problem.
Some companies consider an item to be out of stock when the available quantity drops below the average or typical order quantity. For example, if customers normally order a dozen of a fastener at a time, having only one or two pieces on the shelf may be the equivalent of having none.
The first part of the goal of effective inventory management is to meet or exceed your customers’ expectations of product availability. Accurately tracking stock outs will help you achieve this goal.