The cost of stockouts and their overall effect on the supply chain and the freight forwarders association
All of the member companies of IFA are aware of the negative effect of a stockout for any business.
A stockout means that the storage and distribution services provided by the International Forwarding Association run out of a particular item, which leads to canceled orders and the impossibility to fulfill them.
A stockout can lead to significant losses for any company.
This is why the European network for transportation is working on optimizing its supply chain services so that the risk of running out of a particular product is minimized, and so that the customers receive the items they want in time.
The overall effects of a stockout
The worst case scenario for any producer, retailer or storage and distribution service is to be left with zero inventory for a particular item in demand, and for the unavailability of a specific product when it is ordered by a customer.
If the item is not available for production, changes in the production schedule and program can be made, but this involves significant unexpected costs because of the changes in resource demands, the preprogramming of the machines, the teardown costs as well as the time and effort needed for implementing all of these changes.
In case a client of the international freight services experiences a stockout, there are four possible solutions and effects which can occur.
- The end customer may agree to wait for the particular item. In case the good is of especial importance to the customer there is the possibility that they could show good will and agree to wait for the item to be manufactured. This no doubt can affect the customer satisfaction level negatively though.
- The customer back orders a product. This is not a good resolution as the first option, but if the customer agrees to wait for the European logistics services and the producers to fulfill the order is still a way to resolve a stockout problem without losing the customer. Again, this will damage the reputation of the producer and the freight forwarders and will lower the overall customer satisfaction level.
- The customer cancels their order altogether. If the customer chooses and is able to get the item in demand from another manufacturer or retailer, or in case the item in question is not needed immediately, it is a common practice for the order being canceled. While there is a possibility that the customer will return later on and order again, but nevertheless the damage to customer satisfaction will be done.
- The customer cancels and chooses not to buy from the same vendor again. This is the worst case scenario in case of a stockout. This can often occur due to insufficient r unsatisfactory communication and information supplied to the customer to explain the situation and to find the best possible solution to the problem.
In case, the customer decides to backorder the missing item from the inventory instead of waiting for it to become available, this can lead to additional significant costs for the vendor. These include the pricier order processing costs incurred due to the fact that the order will need to be re-processed, and also for the vendor and the international freight services creating a new delivery date which is suitable for all sides. Plus, if the missing item is part of a larger order, separate transport costs for its delivery by the international freight forwarders will be incurred as well.
If an order is canceled this may cost the producer the materials and parts which are purchased for the making of the missing item. Also, of course, the profit from the sale will be lost as well.
The loss of a customer due to a stockout is the costliest of all effects. This means losing every other future order, and if the customer is a major one – this can mean losing significant amounts of money as well.