Stock-out and Issues Relating To Growth In A Company - Research Paper Example

Stock-out and Issues Relating To Growth In A Company A company can approach and solve its growth issues in several ways. The most popular approach isthe use of inventory control. Inventory control is the process of minimizing inventory costs (Pride et al. 2011). It focuses mainly on minimizing the costs of maintaining an inventory and maximizing service to the customer (Groover, 2010). One thing that can help a company in balancing these two objectives is minimizing the effects of stock outs. According to Collier and Evans (2009), stock out is the inability to satisfy demand for a certain item as expressed by the customer. Some of the effects of stock outs are loss of customer’s goodwill and loyalty, backorders, having your customers shifting to your competitors and having to purchase products and higher costs from competitors. Purpose of stock-out to inventory control Inventory control involves minimizing of the cost of inventory (Groover, 2010). The purpose of stock out in an inventory control is to assist in minimizing the inventory costs. Since stock-out costs and inventory costs are, directly related minimizing stock-out cost would result to less inventory costs. Stock-out costs are costs of sales lost when items are not inventory (Pride et al. 2011). Thus if we undertake many inventories, we can minimize the stock-out costs and thus reduce the inventory costs. If we can be able to minimize stock out costs, we can achieve a minimum inventory cost hence succeeding in our inventory control. Hence, stock-out serves a very important purpose in an inventory control. Costs Associated with using stock-outs In every business, stock-outs are associated with specific costs. One of these costs is transport cost incurred in order to make as much products as possible available as a way of meeting demand. Another cost is the expediting cost incurred to accelerate the supply of products to meet customers’ orders. Another cost associated with stock-out is the cost of buying products from a competing supplier to meet a customer’s order. This cost can be very important in building customers’ loyalty although it can result to a decline in the company’s revenues (Collier & Evans, 2009). Demand for stock-outs A demand for stock outs is the demand of a product when it cannot be found on the shelf. This always shows that there is a need for stock outs in order to meet the orders of the customers. To deal with the issue on demand, various approaches can be use. One of the approaches is to keep a lot of stock available any time the customer needs them. However, this is not always possible due to the costs of stocking and the perish ability of products. Another approach is having orders placed in advance to give the company enough time to avail the products. However, not all customers can be willing to do this especially when they can be able to obtain the same product with the same quality from your competitors. The third approach is buying the product from your competitors and then selling the product to the customer. Although this can negatively affect the revenues of the company, it can have a very positive impact especially in retaining goodwill of a customer and customer loyalty. How to measure product availability According to Farahani et al. (2011), some of the ways of measuring product availability are the product fill rate, the order fill rate and the cycle service level. When using the product fill rate find all the demand of the products or services provided by the company. This can be obtained through analysis of the market in which the company operates. After this, we find the demand satisfied through the company’s supplies obtained through analyzing the supplies undertaken during a certain period and checking whether there was any unsold supply. The ratio of demand satisfied to the total demand is what we are calling the product fill rate and it can be very important in measuring product availability. In the order fill rate, we use the orders instead of demand. In this case, we find all the orders placed by the customers within a certain period. We then find the orders among these total orders filled from the stocks and the ones the company failed to meet. The ratio between the order fill by the company’s stock and the total order are what we call the order fill rate. If the value of this number is large, then it means that you meet much of your orders from you stock but if it is low, it means that you are currently unable to meet your orders and hence something needs to be done. The advantage of this measure over our previous one is that it is easier to quantify order that it is to quantify demand. When using cycle service level in measuring product availability we use the number of replenishment cycles that end without shortages. According to Zylstra (2006), a replenishment cycle is the linkage between the selected buffers and actual customer demand. If the number obtained is very high these would show that product availability is high enough to favor growth. However, if it is very low then it means that you have to do something on factors that influence product availability so that you can improve your product availability. Importance of the level of product availability The level of product availability is very significant in a supply chain due to how it affects responsiveness of a supply chain. It is believed that high levels of product availability can result to an increase in responsiveness in a supply chain, which can result to increase in revenue. However, they can also increase inventory level hence resulting to high costs (PE, 2007). To be able to maximize profits revenues must be maximized while minimizing costs. This is only possible through proper understanding of the level of product availability of the company’s products. This reveals that the level of product availability is very significant for any company that aims to maximize profits. Factors that affect the optimal level of product availability Several factors affect the optimal level of product availability. One of these factors is the cost of overstocking. In some cases, the company might find itself stocking more products that it is necessary. This might result to an increased cost to the seller but because the stock is more than required, it will have no gain to both the seller and the buyer. As a result, the product availability would not be optimized. Another factor is the cost of under-stocking of company’s products. Under-stocking might force a company to buy products to another competing supplier thus resulting to unimportant costs that might affect product availability. Another factor that can affect product availability is demand uncertainty. This can cause a company to fail to supply products to the customers especially when they think that demand will be low thus affecting optimal product availability. Delhaize This company has undergone through times of tremendous growth in the past years and has seen the effects of stock outs. It started as one single outlet retail business several years back in Belgium, operating mainly in foodstuffs. Several years after it was formed it has grown to a multi-national retail outlet operating in eight countries of different continents. Currently this company has more than 2760 retail outlets. This company’s major areas of operation are supermarkets, convenience stores, and wholesales. The company has been very successful in its growth process since it always gains an increase in revenue after an expansion despite the odds of doing business in new areas. Its position is in food retailing industry has been built through strong regional companies. These companies have been going to the market in a variety of food store formats with benefits from the group’s global strength and best practices. In my research about this company, I relied mainly on the internet available information (Delhaize, 2010). I found out that this company has been maintaining very low levels of stock outs with very little variation through a period of one week. I also found out that this company has employed the use of stock-out alert system. This is the latest technology that has emerged to facilitate control of inventories. The company has also employed effective merchandising policy that ensures supply of inventories in good time. Moreover, it has a good inventory management system especially in terms of work force and equipment. The stock-out alert system used by this company generates list of sold items several times a day. This helps the management in measuring product availability and helps it in keeping track of inventories. These have actually played a very significant part in controlling the effects of stock-out thus enhancing growth. A good merchandising policy has also helping this organization in avoiding the effects of stock-out. The policy has been ensuring that products are supplied to the stores in good time to meet the customers’ orders. Through this, the company has been able to achieve an optimal level of product availability that has helped it to avoid the effects of stock-outs. The effective management of this group has also played a key role in its growth through effective management of inventories. This has led to low inventory costs resulting to low stock-out cost thus minimizing the effects of stock-outs. Recommendations I would recommend that when you expand your business you adapt the latest available technology for controlling stocks like stock-out alert system. This system would help you in discovering when you are about to incur a stock-out and thus prepare accordingly to avoid its effects. I would also recommend that you formulate a good merchandising policy that will ensure you have continuous supply in the times when the customers need those products. Another recommendation that I would give is that you be analyzing the trends in demand of your products in each of the markets you will be operating as often as possible. This would help you avoid demand uncertainty that might result to stock-outs. Lastly, I would recommend that you design a mechanism that you can use to gain competitive advantage in case competitors emerge this area of operation. References Collier, D. A., & Evans, J. R. (2009). OM2. Mason, OH: Cengage Learning. Farahani, R. et al. (2011). Logistic Operations and Management: Concepts and Models. London: Elsevier Groover, M. P. (2010). Fundamental of Modern Manufacturing: Materials, Processes, and Systems. Hoboken, NJ: John Wiley & Sons. PE. (2007). Supply Chain Management: Determining Optimal Level of Product Availability. Retrieved from: http://www.kmitl.ac.th/~krnuttaw/Chapter%2012%20SCM.pdf. On 1 June 2012. Pride, W. M. et al. (2011). Business. Mason, OH: Cengage Learning. Zylstra, K. D. (2006). Lean Distribution: Applying Lean Manufacturing to Distribution, Logistics and Supply Chain. Hoboken, NJ: John Wiley & Sons. Delhaize. 2010. Delhaize Group. Retrieved from: http://documents.bmc.com/products/documents/71/67/197167/197167.pdf. On 1 June 2012. Read More