Balance Just-In-Time with “Just-In-Case” to Navigate Inventory Stockouts

Inventory stockouts: A short history of supply chain disruption

The Covid-19 pandemic generated a ripple effect across supply chains, leading to massive disruption from 2020 onward.

• Initial Covid-19 lockdowns in 2020 triggered a brief freefall in consumer spending, and manufacturers shut down factories.
• Then consumer spending surged, primarily via eCommerce. Retailers and brands clamored for inventory while also pivoting to eCommerce or omnichannel fulfillment. They adopted strategies such as curbside pickup and buy online, pickup in store (BOPIS) to safely meet customer demands.
• eCommerce sales grew through 2021, making up 20.9% of total sales—26% higher than original projections.
• Prominent manufacturing countries like China, South Korea, and Vietnam maintained lower labor forces amid lockdown waves. In Vietnam, port workforces dropped by roughly 50% through August and September 2021.

Retailers ran out of inventory—continuously. Per Adobe’s 2021 holiday report, out-of-stock messages increased 172% in 2021 versus 2020, and an astonishing 360% versus 2019. Consumers noticed, and they changed their shopping behavior, switching brands. According to a recent McKinsey survey, 70% of consumers planned to switch retailers or brands to avoid stockouts.

The consequences of inventory stockouts

Retailers face both short- and long-term consequences due to inventory stockouts.

The immediate cost: Lost direct sales

The first direct consequence of inventory stockouts? Lost sales. In the amount of $1 trillion across sectors. In 2021 alone, U.S. retailers lost $82 billion in CPG sales due to out-of-stock items.

Rising inflation dented consumer optimism and deflated spending in December 2021, and retailers are at risk of losing more sales in a tenuous new year. Six out of 10 consumers are still “very concerned” about rising costs. Sales velocity is a key contributor to stockouts, but sales will likely slow as a result of inflation. As shoppers become more judicious about spending, however, reducing stockouts becomes even more important.

Regardless of consumer sentiment, logistics failures will continue to be the primary driver of items being out of stock. If companies cannot optimize their supply chain functions to meet consumers’ needs, retailers and brands may lose increasingly important shoppers who, deterred by stockouts, go elsewhere in search of alternatives.

The long-term cost: Decreased customer loyalty

Customer loyalty is fragile. More than 75% of consumers changed buying habits since the beginning of the pandemic. A major factor: Inventory stockouts.

From value to quality to convenience, retailers and brands have always competed for consumer loyalty. However, the unprecedented rise in stockouts gives consumers more reasons to abandon carts, switch brands, and try something new.

There are no simple solutions

There are no one-size-fits-all solutions for current supply chain disruptions.

Every organization encounters different risks and benefits, depending on the sector and existing supply chain infrastructure. But one path forward is increasing safety stock and implementing replenishment solutions to make sure inventory hits shelves at the right place and time to avoid stockouts.

Safety stock: from just-in-time to “just-in-case”

Just-in-time (JIT) manufacturing emphasizes lean principles in supply chain management. Historically, organizations adopted JIT strategies to prioritize cost management and streamline supply chains. These strategies face substantial, sustained problems in the wake of the Covid-19 pandemic.

Today, just-in-time strategies impede supply chain resilience for many organizations. When retailers face persistent, acute inventory stockouts, JIT strategies will need to meet a just-in-case mindset via safety stock.

“If you look at the inventory-to-sales ratios for U.S. manufacturing in the 1950s and 1960s, there was a lot more inventory on hand,” said Dr. Kevin Dooley, PhD, professor of supply chain management at ASU at the start of the pandemic. “In the early 1990s, right around the peak of the lean manufacturing movement, there was not [safety inventory]. Since then, inventory levels have come up a bit, but not to where they should have been to offset the impact of Covid-19 or create any sort of supply chain resilience.”

Now, two years into the pandemic, current inventory levels reflect a shift to safety stock. Inventories rose to 61.6 in December 2021, per the Logistics Managers’ Index (LMI), a monthly survey measuring transportation, warehousing, and inventory levels. An LMI reading of 70 represents significant expansion. The index read 56.8 in December 2020 and 42.3 in December 2019, indicating a substantial increase in safety stock over time. Supply chain professionals expect the number to climb into the 80s in 2022 as companies reinforce inventories.

Accelerate supply chain network speed to prevent stockouts

Safety stock creates an inventory buffer, but successful fulfillment depends on how inventory is allocated, held, and shipped within brands’ distribution networks.

Brands can optimize their distribution networks to accelerate inventory replenishment and delivery. Inventory replenishment strategies require these considerations:

• The location and addition of distribution nodes
• The technology requirements to accelerate replenishment

The location and addition of distribution nodes
Retailers and brands can reassess their warehouse nodes and inventory allocation. An optimal network footprint positions goods close to retail intake centers and high-demand customer locations, reducing stockouts. Replenishment solutions place fast-moving SKUs close to retail locations in order to replenish low inventories within 24 hours.

Organizations can also consider adding new nodes to logistics networks that open and expand markets to accelerate distribution through better inventory allocation over time. But, new nodes mean new risks. Building or leasing new warehouses may not be cost effective for many brands.

Traditional logistics strategies navigate complex, interconnected technology platforms and processes. They work across multiple contacts and separate, disconnected locations and services. The result: Slower replenishment and less scalable solutions. Instead, brands can look to new partnerships with flexible logistics providers.

The technology requirements to accelerate replenishment

The future of effective, rapid replenishment requires investments in the right supply chain technologies.

The industry is shifting towards advanced technologies. In a McKinsey survey of supply chain professionals across industries, 77% of respondents plan to prioritize technologies to improve supply chain visibility, with 73% investing in end-to-end planning technologies.

For inventory replenishment, retailers and brands may need to consider technology solutions integrated and accessible across the distribution network. Technologies that streamline inventory planning, allocation, and transportation can accelerate and place inventory where it’s needed—fast.

Successful technology selection and implementation requires good decision-making about tech. The right solutions are different across firms and sectors, depending on existing capabilities, available capital, and pre-existing infrastructure.

External partnerships impact technology investments. After all, some logistics service providers (LSPs) leverage their own technology solutions, expediting successful implementations while reducing upfront risks.

Conclusion

Empty shelves and out-of-stock messages signal danger for retailers grappling with uncertainty and increased customer expectations. Inventory deliveries continue to be unreliable, leaving companies in difficult positions.

There’s no panacea for these challenges, but just-in-case safety stock and rapid replenishment solutions protect organizations in the new, uncertain year.

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