Tips For Balancing Overstocking And Understocking
Aligning demand and supply is a problem many businesses encounter, despite the extensive research conducted on the subject. An imbalanced alignment and poor demand planning may cost lost sales on the one hand or excessive inventory on the other. That’s because businesses often regard overstocking and understocking as a binary choice that they must make. However, you can balance them.
What’s Understocking And Overstocking?
From a sales viewpoint, understocking means being unable to earn bonuses, missing sales targets, and retailers having empty shelves in stores because of lost sales. It also includes the risks of paying fines to contractual retailers and businesses offering poor services that make customers move elsewhere.
On the other hand, overstocking means having lots of products in a warehouse to the extent that there’s no more space to keep the product leading to high inventory costs. That may lead to increased renting costs because you may need to hire other spaces to hold the additional stock. Products may also become obsolesce if they have a short shelf life, forcing businesses to give discounts to clear the excess stock. That greatly impacts profitability.
To solve the issues of overstocking and understocking, you need to learn how to balance the two. Here’s how you can do the balancing:
- Know Your Consumer’s Demands
The first thing you want to do if you’re going to balance overstocking and understocking to understand your consumer’s demands. That entails what they need and where they need it. To do so, your company must learn what customers can afford, the products they prefer, and the cultural and environmental factors that impact their behavior.
For example, if the demand for high-end premium products is high in your region or store, it would be needless to overstock products that are cheaply packaged in boxes with unreadable labels. Analyzing historical data will enable you to scan the seasonality and sales trends of goods periodically. Using statistical modeling can take the data and forecast future demand.
- Invest In Your Demand
A good demand understanding isn’t achieved through historical data alone. Instead, you also need to enlist the help of knowledgeable demand and supply planners who know more about categories of product groups and are aware of environmental and cultural factors that may affect consumption. That’s because you can’t find everything in the data.
When creating forecasts, the planners should consider the effect of competitors’ in-store promotions, the background of expatriates within the region, and how culture impacts consumers’ shopping habits. But they need to be trained on how to do this because demand management includes many methodologies, techniques, and nuances unique to specific roles.
Planners must know the forecasting methods for every data set and how to use forecasts to analyze demand factors. They should also understand how to use qualitative judgments to adjust forecasts. That way, they’ll gain a competitive advantage because they’ll realize competitor activities and the impact of promotions better. It’ll also enable them to communicate well with the sales team who do forecasting and have customer information.
Overstocking and understocking shouldn’t be regarded as different planning entities. Instead, businesses should find out ways of balancing the two if they don’t want to experience the disadvantages that come with them.