Stockout: Causes, Effects, and Recommendations

This document discusses the causes and effects of stockouts in businesses, with a focus on a case study of Target's stockout issues. It provides recommendations to prevent stockouts and improve inventory management.

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One of the worst possible scenarios that can happen in a business is to experience a
stockout (Murray, 2018). In a nutshell, there will be no inventory of a particular commodity,
production has to come to a halt, or an order of a customer fails to get fulfilled. With regards to
an inventory manager, it is a situation that they most dread as it comes with a substantial cost to
the company. It is an optimized supply chain that enables the company to supply customers with
the commodities they want when they need such products and prevent instances of stockout
arising.
Target Canada has been in the limelight by sparking numerous debates recently due to
inventory management that the company is grappling with. There is a good deal of evidence
pointing to bankruptcy and liquidation of more than 100 retail stores as some of the issues that
have stemmed from the inventory management. Target ventured the Canadian market four years
ago (Blog, 2015). However, according to the expectations of many, the launch of Target turned
out to be disappointing. Target’s shelves were not only empty, but the prices were higher than
the anticipations of many, and there was also the issue of lack of a variety. The report will
examine the stock out issue that was evidenced in Target as one of the main reasons behind its
fall.
Target seemed to be grappling with the challenge of managing its inventory. The
merchandize was reported to arrive in the wrong warehouses, and this led to products arriving in
the wrong stores. For some retail stores, they would be served with large shipments for some
products while other goods would never arrive. This led to many shelves becoming empty and
lacked the essential daily items such as milk and eggs.
Data showing stockout at Target
Using Target’s balance sheet, it is evident in the inventories as shown in the table below

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Column1 Column2
Target's Inventories
amount from
inventories
(millions)
Feb-19 9497
Nov-18 12393
Aug-18 9112
May-18 8652
Feb-18 8657
From the above table, it is evident that Target has issues with stockout as in November of
2018 the amount collected from inventory was over 12.393 billion while in February of 2019 the
amount from stock was about 9.497 billion a decline of about 2.896 billion and this is a
reflection of stockout (CSIMarket, 2019).
Inventory turnover is obtained by dividing net sales by inventory. A high inventory
turnover translates to a company lurking in the shadows of a stockout. Also looking at inventory
turnover ratio of Target it is 5.38 which is high means Target is experiencing stockout issues
(CSIMarket, 2019).
Effects of stockout
Stockout leads to four possible impacts
Cost of back ordering
If the client is unwilling to wait for the order to get fulfilled, then they have the option of
back ordering the commodity (Melanie, 2016). This translates to the vendor incurring some costs
associated with the stock out. Such charges may entail but not limited to raising order processing
costs as the staff in customer service rectify the order to establish a new appropriate delivery
date. Also, there may be other additional charges such as shipping costs if the order belonged to

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the larger delivery stipulating the backorder needing specialized transportation. In a bid to
stimulate and provide customer satisfaction, the vendor may consent to expedite the shipping at
their expense or give the customer free shipment.
Costs associated with canceling orders
The decision by a customer to cancel their order due to a stockout may be because they
have found an alternative provider of the commodity (Murray, 2018). Many firms will ensure
that they have several sources of supply for their core items; thus it may appropriate to order
from an alternative compared to having to wait for the order to be completed.
Regarding the vendor, canceling an order may be deemed costly not only due to loss of
profit but also due to the purchase of raw materials that were incorporated in the customer’s
order (Murray, 2018). There are costs associated with trying to reduce customer dissatisfaction
by providing incentives to the customers to motivate them to buy again from the vendor and in
the case of marketing they are aimed at reducing any negative press in platforms such as social
media.
The cost associated with losing a customer
When a customer is lost due to a stockout, this may be termed as the worst possible
outcome and attracts considerable costs to the vendor. When a customer fail to place orders with
a supplier, every order becomes a cost that has to be taken into consideration. If the customer
was a significant buyer of goods, then the cost will be severe and could put the vendor in a
financial crisis. There are other costs such as those of trying to seek new customers to substitute
for the order that would have been placed.
Causes of stockout
Issues with delayed or late delivery

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Timing is all that matters in the world of inventory management with the inclusion of
retailers (Murray, 2018). This ranges from promotions that are well timed to just in time
ordering, sustaining the ebb and the flow of merchandise require endeavor.
Everything can get disrupted by only one late delivery. Both the firm and the retailers
could miss out on opportunities since the goods were not provided or availed to the customers
when they need them (Murray, 2018). It also impacts on the decisions regarding what should be
done with stock that is late delivered, how it, might impact future orders and levels of stock and
can negatively influence the perspective of a consumer regarding that particular brand.
The late delivery may be due to an accident or wrong calculations or perhaps due to an
unanticipated event that led to the delivery being behind schedule. It could also arise from the
retailer placing an order late. Irrespective of the kind of catalyst, each case leads to a stockout
when supply was most needed.
Issues entailing product quality
There is nothing that loathes retailers than selling defective or low-quality goods.
Delivering goods that are of poor quality compels retailers to return the commodities, removing
all stock of the merchandise in the retail section costing manufacturers time and finances.
Inaccurate inventory
Information is deemed valuable only if it can be classified as being accurate. Inventory
management is more authentic than any other place as even the slightest error in data can disrupt
the operation of the enterprise (Spring Global, 2019). Some situations such as Phantom stock
where goods are identified as available at the storage premises in the inventory management
software, but in real sense physically they are not available, and this is particularly disastrous.

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An incorrect scan, a missed keystroke or incorrect entry regarding inventory can lead to a
stockout a week later.
Recommendation
The use of modern inventory management systems that works directly with the point-of-
sale systems highlighting several on-demand analytics abilities that archive accurate inventory
records avoiding eventual stockouts.
It is imperative to give top most priority to transparent and honest communications to
partners in both retail and supply chain (Spring Global, 2019). It is also crucial that employees
get empowered to enable them to overcommunicate with partners and clients through sharing
information regarding an order, provide lead times and provide other vital information. A
cooperated and transparent conversation is strategic in keeping all people on the same page
ensuring that the risk of late delivery gets minimized.
It is imperative to keep tracks of both the quantities and associated sales outputs for every
retailer and make such reports readily available for all decision makers in the company (Spring
Global, 2019). However, it is also imperative to invest in artificial intelligence technologies as
they capture data from several sources and employ the use algorithms in making the information
sensible providing a predictable yet prescriptive analytics that precisely gives a future projection
with regards to order quantities and works enabling the retailers to have a plan for orders well in
advance.
It is through mapping out the supply chain that would enable Target to identify and
understand their inventory needs (Spring Global, 2019). The best option for Target would be to
customize its inventory system to incorporate the ERP. Thus, Target would exercise the required
control over its stock. It is through deploying a faster and flexible system that Target could

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concentrate on its inventory control. A system helps to minimize the degree of error. Thus, the
customer service for Target would improve with having the merchandise shipped to the correct
location and at the right time.
In conclusion, business leaders and their partners in supply chain understand that the
central concept to optimizing the goods stock and eliminate instances of stockouts is to acquire
greater visibility into inventory management practices, create and maintain healthy relationships
and promote transparent lines with regards to communication and adopting best practices in their
industry. However, to many, it may sound easier to say than act. Many organizations are still
depending on time-consuming, manual data management practices that are prone to error
characterized by disparate systems that develop siloes and visibility problems.
References

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Blog, 2015. Inventory Management Disasters: Target Canada. [Online]
Available at: https://www.clearspider.com/blog-inventory-management-disasters-target/
[Accessed 26 April 2019].
CSIMarket, 2019. Target Corp (TGT). [Online]
Available at: https://csimarket.com/stocks/balance.php?code=TGT
[Accessed 1 May 2019].
CSIMarket, 2019. Target Corp (TGT). [Online]
Available at: https://csimarket.com/stocks/at_glance.php?code=TGT
[Accessed 1 April 2019].
Lim, V., 2016. How poor inventory management ruined Target Canada. [Online]
Available at: https://www.tradegecko.com/blog/how-poor-inventory-management-ruined-target-
canada
[Accessed 26 April 2019].
Melanie, 2016. Evaluating the Effects of Inventory Stock Outs. [Online]
Available at: https://www.unleashedsoftware.com/blog/evaluating-knock-effects-inventory-
stock-outs-business
[Accessed 26 April 2019].
Murray, M., 2018. Stockout Costs and Effects on the Supply Chain. [Online]
Available at: https://www.thebalancesmb.com/stockout-costs-and-effects-2221391
[Accessed 26 April 2019].
Spring Global, 2019. 4 Causes of Stockouts (And What to do About Them). [Online]
Available at: https://springglobal.com/4-causes-of-stockouts-and-what-to-do-about-them/

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[Accessed 26 April 2019].
SupplyChain Digest, 2015. Supply Chain News: Target Battling Out-of-Stock Issues, Following
Years of the Same by Walmart. [Online]
Available at: http://www.scdigest.com/assets/on_target/15-09-09-1.php?CID=9710
[Accessed 26 April 2019].