We don’t have it in stock -- now what?

BY SCOTT STRATMAN

Inventory management specialist

Distributors are always faced with the challenge of having the right stuff at the right time and at the right price. When a distributor does not have an item that a customer requests, how does he or she react? What is the best action plan to help solve the problem?

Too often, distributors who are out of stock in one location check their other locations and, if they have the item elsewhere, tell the customer that they will transfer it for them. Sounds like a reasonable response, unless you are doing this for a non-profitable and, possibly, a non-paying customer. You always try to get the product to the customer as quickly as possible, but you need to use a little caution before offering to expend more of the company’s money by transferring it.

Companies with numerous branches might suffer from the classic “inventory on tour” problem. This is inventory that tours your branches but never gets to a customer. You transfer it to one branch, but it does not get sold; then another branch wants it, and it goes there. Customers often solve the problem themselves; thus we have inventory on tour. It can be costly to transfer product. It is more costly to put inventory on tour. We do it, however, because we want to make the sale.

Think before you act

Teaching your personnel to ask a few critical questions before readily offering up the option of transferring the product can help you save bottom-line dollars. Following are a few of those questions:

• What type or class of customer is this? A good customer classification method highlighted in your customer master file will help answer this one quickly.
• Does this customer have a good track record for paying us?
• Am I going to transfer a product that is at or over a customer’s credit limit?
• When does the customer need the product? Most customers want it yesterday, but you need to figure out when they need it.
• Will one of our other products do the job? This is where a full complimentary and substitute item file in your inventory master file is helpful.
• Will the customer pay a premium to get the product the next day?
• If we have a regular replenishment coming in a few days, can the customer wait until that truck arrives?
• If we backorder the product, are we sure the customer will buy it once it arrives? Be careful on backorders of some items -- your customer might find it elsewhere.
• If we pass on the sale will it impact other sales?
• Can we purchase the product from a competitor and still make the transaction work?

Passing on a sale

One of the biggest challenges for distributors is passing on a sale. However, the cost of making the sale must always be taken into account. Let’s look at the case where you are out of stock of a particular product in one location -- the location where your customer called or stopped by to purchase the item. You find out that one of your other branches has the item in stock in another city. Most often, you simply tell the customer that you do not have the item at this location, but that you do have it in another location and will transfer it for them. That is well and good, as long as you know the customer and the cost of making this sale.

If the customer is one who is not great at paying or one who is towards the bottom of your customer classification list (those that do not contribute to net profit) and you transfer the product, the cost of this sale gets substantially higher. You will pay to have it transferred to you, pay to get it out to the customer, pay to re-supply the item at the branch you took it from, and the customer may not pay you. You have increased the gross cost of this sale without adding any dollars to the price. I am sure that you did not ask whether the customer was willing to pay a “premium price” if you transferred the item and got it to them the next day.

In most cases, transferring does nothing to the price, but it adds costs to the transaction and reduces net profit potential. It is, therefore, critical that all of your employees know the difference between a good customer and a “not so desirable” customer. If they are alerted upfront about the type of customer (profitable, good paying, lowlife, etc.) then they can make a smarter decision on how to service that customer when they are out of the item requested. Maybe passing on this sale for this customer is a smarter move!

Stocking issues

We often hear about distributors who struggle with being out of stock. I know that many salespeople complain that, while there are thousands of items in our vault, we never seem to have what “their” customer wants. Is that an out-of-stock issue, or is that a communications issue between the sales personnel and their customers? We could argue that one for a long time, but if it is a consistent gripe, I would suggest that your sales personnel are not setting the right expectations with the customer as to what you carry in stock.

Stock outs are not always a bad thing. What a stock out indicates to you is that people are actually buying what you have decided to put in stock. That is a good thing. Continual stock outs of items that are fast movers is not so positive. This is an issue with your ordering controls and replenishment cycles. However, taking drastic measures when you are out of stock of various items every so often can create a bigger problem down the road.

When you experience out-of-stock situations, look at all the alternatives you might be able to execute other than placing an emergency order to the vendor. When you react in a drastic measure, such as doing a “red label” order to a vendor to solve a temporary stock out, you can actually mess up your next purchase order. If you have items with enough movement to stock them, you should have a strong corresponding replenishment plan that incorporates some safety stock.

If you sell out of an item, stop and take a look at the next purchasing cycle. You might have some coming already; waiting for that order to arrive is a better alternative than transferring stock. You might look to “buy out” a small quantity from a competitor to solve the temporary stock out. You need to look at the next buy quantity to see whether doing an emergency buy now will keep you from getting the best per unit buy quantity on your next buy.

Reacting without looking forward may add costs to this sale and every per-unit cost in the future. Be careful not to overreact when you’re out of stock. Ask the customer all the questions possible to determine how someone in your company will spend your next dollar.

They say that patience is a virtue in life, but, in distribution, waiting might be more prudent in the long run. Waiting for the item to come in via a backorder might be the right answer. Being out of stock is not the end of the world. The best thing you can do is to train your personnel on how to handle an out-of-stock situation based on the customer they are dealing with. Just as a premier passenger on an airline gets a first class seat, a premier customer merits a different class of service and a different action plan when you are our of stock.

Over the years we have worked with distributors to identify which customers deserve a higher level of service. You can find out how to classify your customers by visiting our website, www.thedistributionteam.com. 

Scott Stratman is the founder of The Distribution Team of Colorado Springs, Colo. He consults with distributors on improving their net profit. Stratman has been a guest lecturer at many national and regional distribution industry events. His articles appear in numerous distribution trade magazines. Contact him at 719/597-5978 or e-mail scott@distributionteam.com.