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52 FEDA News & Views Months with Usage Products Stockouts % of Stockouts 1 1870 280 15% 2 1750 140 8% 3 450 150 33.3% 4 420 100 23.8% 5 460 140 30.4% 6 240 50 20.8% 7 330 80 24.2% 8 250 70 28% 9 210 30 14.3% 10 210 10 4.8% 11 170 30 17.6% 12 220 90 40.9% Critical Items 580 140 24.1% Total 7,160 1,310 18.3% T he goal of effective inventory management is to meet or exceed customers expectations of product availability with the amount of each item that will maximize your net profit or minimize your total inventory investment." But how do you know if you are meeting or exceeding customers' expectations of product availability? A lot of companies measure customer service with anecdotal information. That is the number of times they receive a complaint. But there are problems with this approach. Do all customers complain if you don't have what they are looking for? How many simply leave your store or hang up the phone and proceed to check the stock of your competitor? Will you tend to focus on the needs of your most vocal (though not necessarily your most important or profitable) customers? When you stock a product you are making a commitment to have that product available in reasonable quantities for immediate delivery. If you don't have a product on the shelf, it is a customer service failure. How often did you experience stock- outs last month? That is a very important question you need to have the answer for. How? For each product line consider maintaining the following chart: Judging from the table above, it is obvious that the buyer responsible for these products has some work to do. The buyer must focus on stock out rates of the most important items—designated critical items and those items that have had sales in all 12 of the past 12 months. The buyer must determine the following: How accurate are the forecasts future demand of these products? Are the anticipated lead times for replenishment shipments accurate? Do the system parameters accurately reflect Do You Know How Often You are Out of Stock? By Jon Schreibfeder jons@effectiveinventory.com Months with usage: The number of months the product has been requested within the past 12 months. Stockout: When the available quantity [On-Hand minus the Quantity Committed on Current Outgoing Orders] of a product falls below zero (or the normal order quantity if the item is sold or used in quantities greater than one piece). Critical items: Designated by salespeople to be crucial for maintaining outstanding customer service. Management has committed additional funds to maintain extra safety stock to avoid stockouts of these important items. how often we normally receive a replen- ishment shipment from our supplier? For example, if we only receive a ship- ment every three months, do we order a minimum of a three month's supply? It is usually important to avoid stock- outs of critical products or those that are frequently requested—opposed to those that only have activity in one or two months each year. In fact, you might purposely stock out of products that are only sold once or twice a year. In other words, when you sell the one piece on the shelf, you'll buy another one. By focusing on the most important items, you will make the most dramatic improvement in customer service in the shortest possible length of time. About the Author Jon Schreibfeder is president of Effective Inventory Management, Inc., a firm dedicated to helping manufac- turers, distributors, and large retailers get the most out of their investment in stock inventory. He is the author of numerous blog entries and a series of books on effective inventory man- agement, including the recently pub- lished Achieving Effective Inventory Management (5th edition) and the National Association of Wholesale Distributors' Guess Right – Best Practices in Demand Forecasting for Distributors. To reach him, call 972- 304-3325.