It’s difficult to work with what what you don’t have, especially on a production floor. Predictive measures such as stockout calculation and shortage forecasting help solve potential problems before they happen.

How to Calculate Stockout: Essential Methods for Inventory Management

Calculating stockouts is an essential part of continuous inventory management that helps businesses understand the frequency and impact of running out of stock.

A stockout occurs when a product is not in inventory at the time on a production floor or a customer wishes to make a purchase. This can lead to several negative outcomes including lost sales, customer dissatisfaction, and potential damage to a brand’s reputation.

Understanding how to assess stockout situations is crucial for retail and manufacturing businesses to ensure that they are able to meet customer demand and maintain service levels.

To accurately calculate stockout costs, you need to consider both the direct and indirect expenses associated with not having products or raw materials readily available. This involves analyzing lost revenue, potential market share reduction, as well as customer trust and future sales opportunities.

Knowing these figures enables you to take informed actions to minimize stockouts by adjusting safety stock levels, improving demand forecasting, or refining inventory replenishment strategies. Proactively managing your inventory in this way can enhance the resilience of your supply chain and the overall health of your business.

Key Takeaways

• Stockouts can be directly measured by analyzing inventory against demand.
• Accurate stockout calculation includes assessment of lost sales and intangible costs.
• Effective inventory management strategies reduce the likelihood and impact of stockouts.

Understanding Stockouts

In this section, you’ll gain a clear understanding of what a stockout is and its significant effects on your business operations, as well as the main reasons they occur.

Defining Stockout and Its Impact

A stockout happens when your inventory is depleted, and no products are available to continue production. This undesirable situation often leads to lost sales and can severely harm customer satisfaction due to production delays. When customers encounter a stockout, they can’t purchase what they need, which might prompt them to seek alternatives, potentially affecting your revenue and business reputation negatively.

Causes of Stock-outs

There are several key causes of stockouts that you should be aware of to prevent them effectively:

• Supply Chain Disruptions: Issues with suppliers or logistical hiccups can lead to unexpected delays in restocking your inventory.
• Inaccurate Forecasting: Not correctly predicting customer demand can result in inadequate stock levels.
• Overwhelming Demand: Sometimes, a surge in customer interest can outpace your stocked inventory, particularly if a product goes viral or is seasonally popular.

By understanding these causes, you position yourself to address stockouts proactively and maintain a steady flow of business operations.

What are Stockout Costs: Assessing the Financial Impact

When calculating stockout costs, your focus should be on both immediate and long-term financial repercussions. Understanding these impacts allows you to quantify the tangible and intangible expenses resulting from inventory shortages.

Costs Associated with Stock-outs

Stock-outs can lead to a variety of direct costs such as expedited shipping charges, additional manufacturing runs, and the cost of discounts used to appease dissatisfied customers. Indirect costs include the administrative effort to handle backorders and the resources spent to address the shortage. Calculating the cost of consequence is vital: it encompasses the long-term effects of unsatisfied customers moving to competitors.

• Direct Stockout Costs:
  • Expedited shipping fees
  • Additional production costs
  • Discount offers for delayed orders
• Indirect Costs:
  • Administrative labor for handling backorders and stockout situations
  • Lost goodwill and potential future customer churn

Effects on Sales and Revenue

When stockouts occur, lost sales are the most immediate hit to your revenue. Each lost sale is a direct loss of revenue and, by extension, profits that you would have realized. The ripple effect can also lead to a disruption in cash flow, impacting your ability to invest or cover other operational expenses. It’s crucial to quantify loss of revenue not just from a single sale but also from the perspective of lost future sales due to negatively affected customer relationships.

• Immediate Revenue Impact:
  • Revenue not received from current sales opportunities
• Long-Term Revenue Impact:
  • Potential decrease in repeat business due to customer dissatisfaction
  • Compounded effect of negative word-of-mouth publicity

In calculating stockout costs, it’s important to understand that the true financial impact extends far beyond the immediate loss. Your analysis should incorporate both direct and indirect costs to fully capture the consequences on your financial performance.

Inventory Management Strategies

Effective inventory management strategies help you minimize stockouts and maintain smooth operations. Precise management of inventory levels through safety stock and reorder points ensures that you’re well-equipped to meet customer demand without excessive investment in stock.

Maintaining Safety Stock

Safety stock acts as a critical buffer against stockouts. Calculate your ideal safety stock level by considering the lead times of your suppliers and the variability of your demand forecasting. Here are the key steps:

1. Assess your average sales to determine usual demand.
2. Evaluate lead time for receiving products from suppliers.
3. Determine the maximum sales you might achieve and the maximum lead time it could take for products to arrive.

Combine these figures using a safety stock formula to find the right balance that will prepare you for unexpected demand surges or supply delays.

Implementing Reorder Points

Reorder points are essential to replenishing your inventory at the right time. To set effective reorder points, you’ll need to:

• Understand your sales velocity: How quickly your inventory sells over a specific period.
• Forecast demand: Anticipate future sales based on historical data.
• Account for lead times: Know how long it takes for inventory to arrive after placing an order.

With this strategy, you automate the replenishing process, ensuring that you always have products available for your customers without overstocking. Accurate inventory forecasting can increase efficiency in your supply chain management, reducing the stockout rate and enhancing your inventory management system.

Calculating Stockout Metrics

Effective management of stockouts requires a good grasp of specific metrics that can quantify the impact on your sales and customer satisfaction. Understanding and calculating these metrics allows you to make informed decisions to minimize stockouts in the future.

Formula for Stockout Rate

To determine the frequency at which stockouts occur, use the Stockout Rate formula:

Stockout Rate = ( \frac{\text{Total Stockouts}}{\text{Total Sales}} ) × 100

For example, if you have 10 stockouts in a period and 500 sales, your stockout rate would be ( \frac{10}{500} ) × 100, which equals 2%. This means that for 2% of total sales, your customers encountered an out-of-stock scenario.

Determining Lost Sales

Calculating the cost of stockouts involves analyzing production or sales data and average units completed or sold per day. To estimate the impact on revenue, you can use the following formula to understand the lost sales during the period of being out of stock:

Lost Sales = Number of Days Out of Stock × Average Units Sold Per Day × Price or Profit Per Unit

In addition to lost revenue, consider the cost of consequences, which can include customer dissatisfaction and potential long-term impact on customer loyalty. By maintaining accurate sales records and understanding your daily sales velocity, you can calculate these lost sales more precisely and develop strategies to mitigate stockouts in the future.

Keeping an eye on such metrics not only arms you with valuable insights into your inventory’s health but also points towards areas needing improvement in your logistics and demand planning.

Enhancing Supply Chain Resilience

To maintain customer loyalty and protect your brand reputation, enhancing supply chain resilience is crucial. It involves a strategic approach to mitigating disruptions and leveraging advanced tools for demand forecasting.

Mitigating Disruptions

Your operations must be ready to handle unforeseen supply chain disruptions effectively to stay ahead of competitors. Develop a robust backup plan that includes diversified suppliers and underutilized production facilities that can be activated quickly if needed. Integrating automated processes to identify and respond to risks can save crucial time and resources. Here are a few specific steps you can take:

• Identify potential risks: List possible events that could disrupt your supply chain, from natural disasters to supplier bankruptcy.
• Develop a response strategy: For each identified risk, create a plan detailing how your business will continue operations.
• Test your plan: Conduct regular simulations to ensure your backup plans are effective and your team is well-prepared.

Leveraging Forecasting Tools

Accurate demand forecasting forms the backbone of a resilient supply chain. Use sophisticated forecasting software to analyze data and predict customer demand patterns. This will help you keep optimal stock levels without overinvesting in inventory. Steps to improve your demand forecasting include:

• Collect historical data: Gather past sales data, market trends, and seasonal fluctuations to feed into your forecasting tools.
• Implement forecasting software: Utilize modern tools that can analyze vast quantities of data for more precise predictions.
• Continuously refine your forecasts: Regularly update your data and adjust your forecasts to reflect market changes or new trends.

Frequently Asked Questions

When calculating stockout costs and assessing the potential risks, utilizing concrete data and established methods is crucial. This section answers some of the most common questions to guide you through the process of understanding and managing stockouts effectively.

How do you calculate stockout cost using historical data?

You analyze past sales patterns, inventory levels, and customer purchases to determine the financial impact of stockouts on your business. This involves reviewing instances when customer demand was not met and estimating the loss of revenue and additional costs incurred.

What methods are used to assess the probability of a stockout occurring?

Statistical analysis and forecasting models are employed to evaluate the likelihood of experiencing a stockout. These methods include inventory turnover ratios, lead time analysis, and service level targets to predict future inventory inadequacies.

What is the formula for determining the risk associated with stockouts?

The risk of stockouts can be quantified by considering the cost of lost sales, additional shipping charges, and customer dissatisfaction. A basic risk formula might incorporate the potential sales loss multiplied by the probability of the stockout event.

In inventory management, how can you quantify the cost associated with stockouts?

To quantify stockout costs, combine the potential revenue loss from unsold goods with the expenses related to expedited orders or emergency restocking. This gives you a monetary value of the impact stockouts have on operational efficiency and profit margins.

Can you provide examples of how stock-out costs impact business operations?

Real-world consequences of stockouts can range from immediate loss of sales to long-term damage to brand reputation and customer loyalty. Operational impacts may include increased labor cost to manage backorders and inefficiencies in supply chain management.

What are the common causes of stockouts and how can they be mitigated?

Common causes include forecasting errors, supplier delays, and higher than expected customer demand. These can be mitigated through better demand forecasting, implementing just-in-time inventory, and maintaining safety stock levels.

As your business grows and stock levels become too cumbersome to manage in-house, outsourcing makes more and more sense. But exactly how does 3PL inventory management help?

As a small to medium-sized business, you’re most likely already familiar with the in and outs of managing inventory as they pertain to you directly. That is, working with rising and falling stock levels, purchase orders, sales orders, billing, invoicing etc.

But what happens when your ability to effectively manage the intricacies of these daily operations becomes compromised due to growth factors? You may not have the same resources to run a dedicated division as larger companies do.

The Importance of 3PL Inventory Management

This is where 3PL Inventory Management fills the need as a financially efficient option that manages inventory for you. By relieving the strain of trying to fully control all aspects of inventory management of a growing company, resources are freed up which lets you concentrate more on the business of building the business.

With the help of outsourced 3PL management, your company maintains balance by identifying what products need to be ordered and when without over-investing in stock.

3PL Inventory Management Services and Benefits

As mentioned, the size and demands of your business will dictate if you need 3PL inventory management. If you have inventory sitting in a warehouse unsold because of operational issues, you have cash resources tied up that could be used to outsource and resolve the same problem, and move you forward at the same time.

A few of the more common situations for retaining 3PL services include:

• You want to expand your company into multiple regions
• The time and cost of in-house inventory management are excessive
• You want to control overhead as you scale up your business
• You want to leverage additional data for insights that make better decisions
• You want to propel growth instead of concentrating on operations

The benefits of 3PL inventory management can be substantive and transformative for a business. By partnering with a 3PL provider who has the resources beyond your current capabilities, you gain an edge over smaller competitors and extend your business’ functionality.

Operational Scalability

Contractually speaking, most 3PL inventory management agreements are based on a pay-as-you-go business model. This makes it easier for your company to scale operations without having to invest large capital sums and suffer additional carrying charges.

These freed up resources also allow you to effectively react to seasonal demand fluctuations and get accurate billing for all transactions.

Expanded Materials Handling and Labour Capabilities

Playing a key role in being able to help you manage inventory, value added services such as packaging, labelling, co-packing and cross-docking are major benefits offered by many 3PLs. By outsourcing specific labour requirements to an experienced third party, your own labour force in effect multiples without the added burden of having to manage the employees yourself.

Real-Time Access to Stock Levels

Many third-party logistics partners offer a managed portal for monitoring the flow of their goods and stock levels in real time. With access to live data and twenty-four-seven transparency, it’s much easier to monitor stock levels and take action when they become excessive or run low.

Furthermore, inventory management software and WMS feedback can supply additional services such as generating client reports and deliver shipping notifications.

A Bigger, Better Distribution Network

Gaining a foothold in other regions or countries requires an established logistics network. This is where your 3PL partner shines through with brokerage connections and carrier relationships.

Your 3PL partner will also have access to the extra warehouse space you need, often of various types such as climate controlled, refrigerated, or even specialty storage depending on your needs.

What is a 3PL Inventory System?

A 3PL inventory system is a cost effective method of outsourcing internal competencies such as transportation, warehousing, packaging and many other services. Combined with a managed warehousing services, offloading inventory management to a third party is an effective solution when you need to make room for expansion.

3PL Inventory Management Software

To help track and trace the flow of inventory, a Warehouse Management System, or WMS software system is employed to track and manage nearly all warehouse activities.

Top 3PL Inventory Management Companies

3PL companies come in various sizes from local or specialized to regional or internationally recognized operations. Some of these major players are tightly focused on certain market sectors and include such names as:

• ShipBob
• FedEx
• DHL Supply Chain
• C.H. Robinson
• Ryder

FAQs

How do I find a good 3PL company for inventory management?

Talk to 3PL clients to get first-hand feedback. Compare a few different 3PL services and choose the better ones then determine whether a specific company suits these shipping and inventory management needs.

How much does 3PL inventory management cost?

The cost 3PL inventory management will be directly related to the specific needs of your company. Some 3PL companies offer a per-hour rate which may cost roughly $30-$70 an hour USD. Others may charge a flat rate anywhere between $70-$300 USD depending on your specific inventory management requirements.

How much 3PL space do I need?

A good 3PL will help you determine the appropriate amount of space you require now, and help plan for further space as you need it. Usually an estimate based on these metrics will be provided to you by the 3PL inventory management service then negotiated for agreement.

How to Find the Best 3PL to Help Manage Your Inventory

A better 3PL partner that is nimble enough to develop custom solutions tailored to your business. They will also have the space, staffing and equipment in place and aligned with your chosen market. Other key factors to take into account include compatibility with your organization’s technology stack, details on warehousing capabilities and locations, automation features, value-added services, pricing and vision for the future.

Of course, one of the best ways to find an ideal 3PL partner is to get first hand feedback from existing clients. As you know, qualified referrals go a long way to making better decisions.

Furthermore, look for a 3PL partner that is growing aggressively. Regardless the scarcity of prime real estate, some 3PL providers are being proactive by actively growing their operational footprint. Brimich Logistics and Packaging for instance, has recently acquired regional warehousing out of Etobicoke Ontario in order to support the growing inventory and distribution needs of its customers.

Unless your business relies heavily on holding large levels of stock at all times, the idea of holding inventory that collects dust just doesn’t make sense. With “want it yesterday” levels of demand and JIT solutions, this is a thing of the past. Still, just in time occasionally requires just in case safety stock to accommodate the ebb and flow of todays supply chains.

Why the Need for JIT Safety Stock?

Recent upsets in global supply chain operations, a pandemic, trucking shortages, inventory shortages, delayed deliveries, international conflicts etc have made a mess of inventory management. These seismic shifts have undermined the ability to count on predictable replenishments of materials required to keep many operations running smoothly.

Under extreme conditions, such as what we saw during the beginning of the pandemic, we see how consumer demand has the ability to eat up existing inventory virtually over night.

The pandemic created extreme stockout Issues

Under “normal” conditions, safety stock would be used as a reliable buffer against calculable, predictable ebbs and flows in the logistics landscape.

Now faced with unprecedented cost increases, a “Great Resignation”, and companies being forced to do more with less, the bullwhip fallout of the pandemic has created voids within supply chains around the world.

In order to fill the gaps, lean manufacturing and Just in Time (JIT) inventory strategies need to be reassessed to adapt to what is essentially the new normal: a highly disrupted and unpredictable flow of goods on a global scale.

Hence the need for a hybridized JIT safety stock.

JIT Inventory Management and the Kanban Process

The JIT method of inventory management relies on the premise that stock can be rotated according to a predictable availability of materials. Unfortunately, this method doesn’t account for the unpredictability of consumer demand. Nor does it account for the ripple effect that occurs when one stage of the value stream suffers from a materials shortage causing previous stages to grind to a halt.

Kanban Principles

In a similar fashion, the Kanban manufacturing process developed by industrial engineer Taiichi Ohno at Toyota, relies heavily on the steady control of work-in-process directly attached to customer demand. As finished goods approach the point of replenishment, the value chain engages to produce inventory to fill the void.

Each stage of assembly maintains a level of work-in-process inventory waiting to move on to the next link in the production cycle.

The beauty of Kanban is in utilizing minimal JIT inventory counts. The problem is, if there is a disruption in material supply, each operation in turn is affected on down the line.

What is the Key Risk of JIT?

The inherent risk of the JIT method is the potential for the domino effect. Cascading problems happen when the JIT inventory chain breaks down:

1. Delayed Delivery: Shortages or circumstances cause the vendor to be unable to maintain a delivery schedule
2. Stock-Out: Results in lost sales, lost gross profit and damaged customer confidence
3. Inventory Carrying Costs: Lost sales create backups which increase carrying costs from holding inventory

Just as on an assembly line, if a problem occurs at one point along the process, it affects further points downstream. In the context of the supply chain, there are a number of other factors that can easily become points of failure including:

• The pick-pack-ship process
• Transportation
• Port transit
• Customs clearance
• Dependencies on local suppliers

Ultimately, the real crux of the problem though is rooted in the hyper-sensitivity to time itself. In other words, if time was not part of the equation, there wouldn’t be a problem.

Is the JIT Method Still Valid?

Because the alternative to not using a JIT method of production automatically implies holding excess inventory, yes, JIT is indeed, still absolutely valid. But the process itself needs to adapt to remain agile enough to weather the highs and lows of an unpredictable supply chain.

One innovative solution to managing inventory in a hyper-paced market is offered by re-thinking how existing warehousing and transportation fit into the supply chain.

Using bank-based financing at exceptionally low interest rates, inventory is moved off supplier and customer balance sheets through a cost-effective globalized network.

With the ability to fulfill just in time deliveries, the result acts very much in the same way as holding safety stock.

problem: less flexibility through limited supplier dependencies.

JIT Safety Stock and the Global Market

Not every company operates in a linear market where demand is consistent enough to warrant a predictable level of safety stock. Yes, the food industry for one would be an exception. But if you’re attempting to count on a consistent, dependable and timely supply of buffer inventory between North America and China, you may have issues.

Moreover, in order for JIT to be effective, your suppliers should ideally be in your back yard. They should also consider your business a top priority.

In terms of the state of the global supply chain and lean manufacturing methods using JIT, there are no massive upheavals – for the moment.

In a recent article posted by SupplyChainDive referencing a Gartner research report, the response to a poll on increasing safety stock showed a total of 54% percent of respondents were either currently investing in inventory, or were planning to within the next two years.

In other words, JIT manufacturing methods are still very much and accepted by global industries.

Managing JIT Safety Stock

There are a number of key factors that you can use to calculate the amount of safety stock to keep on hand. Main factors include:

• Inventory velocity
• Current demand
• Future Demand
• Sales volume
• Supplier lead times

Generally speaking, an ideal level of safety stock should be inventory quantity consumed per day multiplied by lead time required in days.

But how do you manage safety stock levels when key predictive factors are highly unpredictable? Namely, lead time and customer demand during that lead time.

Safety Stock diagram

Mitigate Points of Delay

Set expectations through visibility. Transparency in every aspect of the supply chain goes a long way. For instance, partnering with dependable logistics providers who use WMS softwares and cloud-based inventory tracking lets both vendors and suppliers keep an eye on material flows.

Knowing where your products are at any given point in time alleviates stress and, in the case of a business owner, empowers them to make informed decisions on how to manage stock levels should they begin to run low.

Adopt a VMI (vendor managed inventory) strategy. If your suppliers are willing to take responsibility for ensuring inventory availability, and can be counted on to deliver, you increase your ability to have stock on hand when you need it.

Partner with suppliers who have a history of dependability. Company cultures stem from the people that control how the company operates. When a supplier has a consistent reputation for delivering the goods on time and in good order, it’s generally a good bet.

Final Thoughts

Who wants to carry excess inventory? Nobody.

Just in Time methodologies in supply chain management offer minimized inventory levels, equalized balances between receivables and payables, and reduced capital costs. What’s not to like?

Does safety stock guarantee continuity and stability? Not necessarily, but if your business does use a JIT strategy, it is possible to find the sweet spot that balances carrying charges against the potential for lost sales. Either way you’re better off with safety stock than without it.

Managed warehousing services provide a new level of inventory control and convenience for both manufacturers and entrepreneurs alike – but is it the right solution for you?

What is a Managed Warehouse Service?

A managed warehouse service allows companies to outsource their inventory storage and shipping requirements thereby streamlining the order fulfilment process. The process includes warehousing a company’s products, picking and packing, shipping and delivery to the end user.

With storage space in high demand, and hyperconnected urban fulfilment continuing to escalate, effectively managing a network of third-party warehouses becomes that much more challenging.

Ideally, better quality warehousing facilities should be in logistically efficient locations.

What are the Essential Managed Warehouse Processes?

Whether you’re new to warehousing or more familiar with traditional inventory management, warehouse processes are essentially the same. Core warehousing competencies include such elements as:

• Receiving inventory
• Warehousing and storage
• Order processing
• Returns processing
• Processing returns (reverse logistics)
• Picking and packing
• Assembling and kitting
• Tracking
• Cross-Docking
• Shipping
• Reporting

What do Managed Warehouse Services Include?

A well-oiled service requires partnerships with experienced 3PL providers who have access to or control warehouses managed by a team of experts who specialize in:

• Warehouse availability and locations
• Current rates and renewals
• Storage negotiations
• Warehousing insurance types and evaluations
• Contract administration and negotiation
• Material handling operations
• Transportation networks
• Food-grade safety and compliance

Who Should Use Managed Warehousing?

If you’re a relatively small business selling products online, a managed warehouse service is an ideal solution for eCommerce fulfillment.

For instance, you may have limited space to store products, or you may sell products from different physical locations that need to wind up in one order.

Or you may be a medium sized business that’s growing to the point where you must off-load your warehousing processes because you lack the expertise and storage space.

Using a 3rd party warehousing systems allows you to boost profitability by having all your products deliverable from a single warehousing source or network. This expedites the delivery process which in turn creates happy customers.

Order Fulfillment in a Nutshell

Regardless of the size of your business, order fulfillment encompasses all the steps required to send out your orders.

When your customer finishes the payment phase, your 3PL gets an electronic copy of the purchase order which triggers the pick and pack process.

The last step in order fulfillment is transferring the parcel to a carrier for the last mile of delivery to your customer.

Types of Fulfillment Warehouse Services

Fulfillment warehouses can specialize a wide range of individual services. But most provide the essential fulfillment services such as storage, picking, packing, shipping and tracking.

At Brimich, we also offer additional services such as

• Cross Docking
• Co-packing & Assembly
• Rework/ Sorting
• Reverse Logistics
• Quality Checks
• Container De-stuffing
• Shrink Wrapping
• Custom Packing
• Labelling (UPC & Barcode printing)
• E-Commerce Drop Shipping Services
• Providing EDI to Customers (Standard & Customized solutions)
• A broad range of detailed management reports

Knowing what warehouse services are available to you helps add value and profitability to your business. Additionally, an experienced 3PL partner can help you develop a strategy that allows your company to move products intelligently.

The Importance of Warehouse Locations

Strategically significant warehouse locations are the backbone of efficient logistics. A quick drive around the perimeter of virtually any growing community of significant size will undoubtedly have numerous warehousing locations in all phases of development – from established to newly broken ground.

In traditionally dense areas such as the greater Toronto area, every opportunity is taken to maximize the value of real estate when geared towards warehousing – especially when located close to major city centres and transportation arteries.

As older buildings are removed at the end of their life-cycle, newer modernized facilities spring up filling the void in short order.

Even though E-commerce companies can market to consumers anywhere around the world, the three most important factors in warehousing are still “location, location, location”.

The Future of the Fulfilment and Warehousing Market

Driven by consumer demand and emerging economies, the size of the fulfilment market, and by extension the increased need for warehousing services, shows no sign of stopping anytime soon.

The global e-commerce fulfillment services market size was estimated at USD 86,449.97 million in 2021 and is expected to reach USD 96,257.94 million in 2022.

source: https://www.grandviewresearch.com/industry-analysis/ecommerce-fulfillment-service-market

E-commerce Fulfillment Services Market Size

According to this same report, a projected growth rate of 9.5% is expected from 2022 to 2030.

With Complexity Comes Vulnerability

The convenience that a managed warehouse service offers is the result of redefining the logistics system in general. Over time, more layers of complexity are added as the supply chain adapts to the changing landscape.

On the downside, shortages and delays have far more impact on a system that relies on all the parts moving as they should. In other words, even a small wrench thrown into this machinery can bring things to a grinding halt.

But the same could be said for virtually any arm of today’s supply chain as was evidenced by the world wide shortages experienced in early 2022.

Final Thoughts

Managed warehouse services provide by a 3PL partner can help take your eCommerce business to the next level. You benefit from having an experienced warehouse staff without the hassle of hiring workers yourself.

Moreover, strategically located warehouse facilities can reduce delivery times. You also may be pleasantly surprised at the affordability fulfillment services, especially when you factor in the savings from diminished errors and returns.

If you have a business that needs assistance with fulfilment, warehousing, or logistics in general talk to us at Brimich. We’re always ready to help you grow.

Shipping processes can make or break a business, no matter the size. Keeping your shipping systems on track as you grow will reward you with a loyal customer base and the best kind of business – repeat business. Conversely, too many errors in your shipping will destroy the customer experience and leave lasting negative effects.

In this post, we cover the key points of successful shipping processes, highlight where shipping errors tend to occur and examine areas you might improve.

Common Shipping Errors to Be Aware Of

Every business strives for trouble-free shipping processes, but common errors do occur. Knowing exactly what the specific problems are and keeping them in mind will help curb their potential damage before they become a significant issue:

• Items Don’t Arrive on Time – Delivering on time according to customer expectations is a must in and business. If you don’t, customers and clients will be happy to seek alternatives and do business elsewhere. Best practices are to state order processing and shipping times when you take an order. It’s also a good idea to provide your customers with source of information should they experience a problem that is beyond your control.
  

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• Wrong Items Sent – Though less of an issue these days due to improved shipment tracking, it does happen in every business and is almost always the result of human error. For instance, two items may be very similar leading to the wrong item being picked. The item could also be in the wrong warehouse location. Either way, it’s an error that will cost you as you need to retrieve the incorrect item and send out a replacement.
  

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• Wrong Quantity Sent – This tends to happen more frequently with businesses that sell bundles or packs of products. Multi-pack items often cause issues like this, especially if they need to be broken down before being sent out. large bundles of multiple single products can also cause problems. Though send the wrong quantity may not have as severe an affect as sending the wrong item entirely, you’ll still have to deal with the indirect cost of having to manage and adjust your stock levels for accuracy.
  

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• Stock Levels are Incorrect – As mentioned, inaccurate stock levels will produce their own headaches. Mismanaged inventory levels can cause problems with missed or late deliveries. Product returns are one of the leading causes of stocking problems and can lead you selling items you don’t have. If you have multiple warehouse locations, keeping your stock levels accurate and up to date will help to keep related problems to a minimum.
  

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• Items Sent to the Wrong Address – It’s common for online stores to ask there are separate delivery and billing addresses before an order is processed. For most individuals, these are the same. Shipping errors can also occur if the item is a gift going to a completely different address. For large shipments, a Bill of Lading (BOL) is supposed to have all addressing information clearly represented to ensure accurate delivery. Again however, errors do occur therefor it’s a very good idea to whenever possible, double check shipping information is in fact correct beforehand.

How to Prevent Shipping Errors

It’s a fact, shipping errors will occur in every business. The key to preventing shipping errors, and keep your customers happy in the process, is to have a strategy in place that both reduces and mitigates the problems from starting in the first place. Here are 10 tips for taking control over shipping errors.

1. Partner with Reliable Shipping Services

Even with the perfect in-house shipping system, some shipping errors can be out of your control. Don’t settle for a delivery service or 3pl provider that will simply “get the job done”. Shop around to ensure you’re getting the best price and service for both you and your customers.

2. Implement an Automated Warehouse System

Several technologies will allow you to automate your warehouse. These include RFID tagging, robotics, cloud computing and on-demand warehousing. Each of these, or useful combination will improve the accuracy of your inventory flow, increase overall efficiency and in some cases, even help to reduce your carbon footprint.

Warehouse Management System

3. Leverage an End-to-End Shipment Tracking Service

Occasionally, deliveries will wind up in never-never land – never to be seen again. Although you might be able to claim on insurance for these missing items, this doesn’t help the customer and adds to your inventory shrinkage. If at all possible possible, employ an end-to-end tracking service to improve product delivery accountability. By sharing the tracking details with your customer, they can see where their order is at all times and make sure they’re available to receive it.

4. Conduct Regular Product and Inventory Location Checks

With picking and stock management, inventory that’s spread across multiple warehouse locations can be the source of significant issues. By choosing warehouses that are strategically located and conducting quarterly reviews, the more accurate stock levels that result can help reduce errors and speed up pick times.

5. Double-Check Order Information

When it comes to shipping errors, inaccurate order information is the seed of all bad things. If you take orders over the phone, the best practice is to repeat back the order details to the customer to verify their accuracy. With online orders, it’s best to use an address validation service to check that the address does indeed exist and has been completed correctly. This will save you sending shipments to a non-existent or incorrect address.

6. Offer Focused Shipping Options

Offering too many shipping methods also increases the likelihood of errors through sheer numbers. In a similar way, they’ll severely complicate matters when you have to account for express and international shipping. As a general rule, avoid using more than three or four shipping methods.

7. Be Smart About Your Packaging

Compared to having to make good on a delivery due to poor packaging, the relatively small cost of a sturdier box or bubble wrap filler is well worth the extra few cents invested. Without robust packaging, not only do you run the risk of having to re-ship the item, you can’t sell a broken product at it’s full margin. If you want to reduce returns, choose to use the most appropriate packing that helps it arrive undamaged.

8. Create a Double-Check Picking System

For full accuracy, you should realize a double-check system at some point in your pick, pack and ship process. You can employ the same person to do it in picking, or engage someone further down the line in packing. Either way, the extra effort will prevent the majority of picking errors.

9. Use a Barcode Scanner

A surefire way to boost your picking accuracy, barcode scanners tell your pick team if they’re picking the right product and in the right quantities. Many scanners also have the capability to update your inventory in real time after a product has been picked thus helping with inventory management accuracy too.

10. Apply a Thorough Returns Process

Returns are a natural part of any product-based businesses. Without a reasonable process of handling them quickly and efficiently, you’re setting yourself up for major headaches. A good returns process will account for stock levels, human resources and have a buffer to account for things like associated packaging. The aim is to get products back into stock, or at least accounted for, and the right product shipped as soon as possible.

Think of Errors as Opportunities

Building and maintaining an accurate shipping process is vital for any business. Time should be spent planning and monitoring each stage for improvements that can be made. Errors may and probably will still occur, but learning from them as to why and when they happen goes a long way towards improving your systems.

What is the difference between a 3pl and a 4pl provider?

The main difference between 3PL and 4PL is that 4PL handles nearly the entirety of a supply chain, while 3PL is primarily concerned with handling just the logistical process.

Third-party Logistics: 3PL

A third-party logistics company handles physical distribution and logistics. 3PL companies do this by using their own resources, such as a network of freight transportation providers and warehouse facilities to help clients ship or store their products to meet their needs.

3PL companies leverage their experience and partner contacts o ensure all steps are taken to keep the client’s products safe.

Still, a third-party logistics company can have many variations depending on their specialties. According to the Council of Supply Chain Management Professionals (CSCMP), the legal definition is: “A person who solely receives holds, or otherwise transports a consumer product in the ordinary course of business but who does not take title to the product.”

In plain language this means that a 3PL company holds or transports a a client’s product (i.e., a product that they do not own).

What Does a 3PL Company Specialize In?

3PL companies tend to specialize in:

• Warehousing
• Distribution
• Order fulfillment
• Cross-docking
• Inbound and outbound freight
• Customs
• Freight consolidation
• Inventory management

The above third-party logistics services are scaled and customized to fit a client’s specific requirements.

One client may not require warehousing, whereas another will, yet another may require temperature controlled warehousing. This versatility and ability to accommodate makes 3PL companies adept at providing different services to different clients.

Fourth-party Logistics: 4PL

The full nature of 4PL is still heavily debated. There are other definitions out there, but here’s one that’s more popular:

In short, a 4PL company doesn’t stop at outsourcing logistics services, but also outsources the management of those same services

4PL companies will generally have no way of transportation or warehousing, but rather use the transportation and warehousing services of a 3PL company. There are of course exceptions to this.

What Does a 4PL Company Provide?

A fourth-party provider will tend to cover (generally through 3PL partners):

• Procurement
• Storage
• Distribution

If we reference the CSCMP again, a 4PL company differs from a 3PL company in the following ways:

1. 4PL organization is often a separate entity established as a joint venture or long-term contract between a primary client and one or more partners;
2. 4PL organization acts as a single interface between the client and multiple logistics service providers;
3. All aspects (ideally) of the client’s supply chain are managed by the 4PL organization; and,
4. It is possible for a major third-party logistics provider to form a 4PL organization within its existing structure.

The CSCMP definition is a “supply chain integrator that assembles and manages the resources, capabilities, and technology of its own organization with those of complementary service providers to deliver a comprehensive supply chain solution”.

This means is that a 4PL company essentially deals with the planning, management, designing, and optimization of a supply chain from start to end, and does so by outsourcing required services to trusted partners.

3PL vs 4PL: Which Logistics Service Is Right for You?

Overall, third-party logistics and fourth-party logistics inherently operate the same way, but consist of different moving parts.

Because a 3PL company arranges freight carriers and warehousing by dealing directly with the service providers, the fewer parts in play may work perfect for your small business.

A 4PL company, on the other hand, may be a good fit if your business is more expansive. A 4PL provider will arrange the same services and employ companies such as 3PL companies, who leverage their warehousing and vast network of carriers.

In the end, the goal of both 4PL and 3PL companies is to provide a client with a comprehensive, end-to-end supply chain.

Despite unprecedented recent challenges, supply chain analysts say many 3PLs qualify as essential critical businesses. Without them, the businesses that rely on their distribution systems simply can’t survive.

Selecting the right logistics partner in a crisis has never been more important. You may even need to consider multiple 3PL partners to mitigate risk if your products are diversified.

The Basics

3PLs receive new inventory from manufacturers before shipping it to consumers. They can also handle retail distribution and returns. Ultimately, they deliver your orders with an out-of-box experience.

When should you enlist a 3PL?

With social distancing forcing some 3PL employees to work remotely, a 3PL partner that is efficient with automation and paperless warehousing is a good bet. Looking for those that began their digital transformations before the pandemic may be in a better positioned to service businesses and deliver your preferred customer experience.

Waiting until you’re overwhelmed by order growth isn’t a smart move. By breaking fulfillment promises you make to customers, you damage your brand. It also prevents you from being wholly focused on growing your business.

These three key questions will help you determine whether you need a 3PL:

Are you fulfilling a significant number of orders per day?

Calculate the costs of a potential partnership with a 3PL to stay fluid. Likewise, estimate the growth potential—opportunities you’re not currently able to pursue–by outsourcing fulfillment.

Are you running out of storage space for inventory?

Sometimes brands forget to include holding costs in their fulfillment expense calculations. Compare your current storage expenses with estimates from 3PLs. See if bundling costs with outsourced fulfillment is a better value.

Can your business’s infrastructure cope with the demand?

If you’re expecting a sustained spike in order volume—not just flash sales or promotions—estimate the costs and overhead necessary to meet demand. Compare with the costs of outsourcing fulfillment.

Types of Top Level 3PL Providers

The size and specialization of your business matters. Some 3PLs may only serve certain segments of the supply chain, or specialize in one or two areas. Larger established firms offer end-to-end execution, integrate seamlessly, but full service comes at a price.

Full-Service 3PL Providers

COVID-19 has made clear the importance of having real-time inventory visibility. The pandemic has also put efficiency in greater focus. Not only is knowing your stock levels a critical metric, so is operational efficiency and logistical considerations – does shipping inventory from the location closest to the customer actually show a cut in shipping costs?

Full service 3PLs offer:

• Inventory intelligence
• Brand the fulfillment experience
• Easy integration
• Same-day fulfillment

Warehouse and Distribution Type 3PLs

Warehouses that distribute are the most common type of 3PL – storing, shipping, and handling returns. Innovative warehouses can help you offer an Amazon Prime-like type of shipping in as little as two days. If you’re expanding aggressively, international warehouses can help build a global supply chain.

The best warehouses act as trusted advisors to their customers by offering product fulfillment workflow best practices. Especially with COVID-19’s impact on order volume.

When considering a warehouse solution, evaluate the following criteria:

• Warehouse network
• Pricing
• Shipping carrier rates
• Insurance
• Daily cutoff time for fulfilling orders
• Delivery service levels
• Management tools

Transportation Based 3PLs

A pandemic will spotlight how crucial it is to have a single point from which you can track orders worldwide, in real time, and automate delivery notifications.

Transportation-based 3PLs move goods between locations in-between locations. As an example, they might transport inventory between the factory and your warehouse, or you and your retail buyer.

Consider the following factors when choosing a transportation provider:

• Origin location
• Destination location
• Timeframes
• Shipping methods
• Service levels
• Pricing and discounts

Specialized May Be Better

Along with these top level types of 3pl services, there are a number that specialize on specific services, and combine select services such as distribution, or shipping and receiving among others.

Depending on the size of your business and unique needs, a specialized provider may be your best choice.

For inventory management best practices, stock rotation is right near the top. At its core, stock rotation is a strategy that helps you to ease the problem of stock loss. It’s about organizing your stock in a way that allows you to avoid loss through expiration or obsolescence.

There are two main stock rotation or inventory maintenance methods that are worth noting: First-In, First-Out (FIFO), and First-Expired, First-Out (FEFO). Let’s look at the core differences:

FIFO Stock Rotation Method

What is First-In, First-Out?

The FIFO method means you aim to sell the products that arrive first in your store. Slightly older products are placed at the front of the shelf, newer products near the back.

You would expect items in front will be the first items out. That’s especially true if customers are in a rush and want to grab the first product off the shelf.

A well displayed shelf goes a long way to persuading your shoppers that all of your products are worth buying.

What are the benefits of FIFO?

For one, it allows you to avoid the problem of dead stock.

By using a FIFO method, you avoid the problem by selling inventory that arrives first. As you arrange it accordingly on your shelf, you shouldn’t need to worry about facing dead stock.

Secondly, it reduces the impact of inflation.

FIFO reduces the impact because you’re selling your oldest items first. If you assume that inflation is constant, the purchase price of older inventory is lower than that of the stock you bring in later.

Who should use the FIFO method?

When choosing this method, one of the deciding factors is the type of products you sell. It works well if you stock seasonally items, fresh food or have a policy of displaying and selling older stock first.

It also works best if you stock products that have short demand cycles, such as clothes where styles can quickly become outdated.

FEFO Stock Rotation Method

What is First-Expired, First-Out?

While First-in, First-Out is the most common used stock rotation method, a second accepted method is First-Expired, First-Out (FEFO).

FEFO is an approach to dealing with perishable products or those with expiry dates that begin at your warehouse and ends at the store. It’s the expiry or sell-by date that triggers this process.

Instead of immediately putting products at the back of the shelf, you first check the expiry dates. Then place those items with the shortest shelf-life near to the front, if not directly at the front, so customers will tend to buy them first.

Assigning expiry dates to batches allows everyone in the supply chain know what’s happening right up to when your product reaches the shelf. With a robust inventory management system that tracks the information in place, you’ll know exactly when to push stock from your warehouse to the store effectively.

What are the benefits of the FEFO method?

One benefit of following FEFO is that it allows you to guarantee product quality, which leads to customer satisfaction and a boost in reputation.

For example, let’s say you sell Dairy products. Using the FEFO method will ensure that you sell these products either by their sell-by date or before. Your customers will know when they buy your products, they will receive products of high quality.

Similar to FIFO, following the FEFO method allows you to avoid dead stock. While FIFO refers to dead stock at store level, FEFO helps avoid obsolete inventory at a warehouse level.

A third benefit is cost reduction. By following it, you can reduce the cost of stock expiring on your shelf, plus the cost of collateral damage to the brand name.

Who should follow the FEFO method?

The ‘E’ in FEFO – Expired – gives its main purpose away. Therefor it’s best to use the FEFO method if you sell perishable goods, food and beverage industry, or a pharmacy where offering a product past its expiry date can have serious consequences.

You have a business, big or small, and it’s doing great. Your products are moving, and your orders keep growing—but as usual, you wonder, could we do more? The answer is yes, and warehouse logistics can help you expand.

What is a Logistics Warehouse?

Logistics refers to elaborate planning, organizing, and management of materials and products, as well as the implementation of various complex operations. Within several industries, such as warehousing, logistics also extends to define the flow of goods, both physical and informational.

Warehouse logistics encompasses all the details of product and information flow within a warehouse. Some of these details include shipment and receiving of parcels, management of the physical inventory, and the movement of more abstract goods such as time and information.

What is the Difference Between a Warehouse and Warehousing?

Beyond the definition of a logistics warehouse, one separates a warehouse from storage by the external use of each factor. A warehouse, for instance, serves as a commercial building that stores goods and is often used by business people.

Warehouses come in various forms; some can be temperature controlled while others have specialized designs to receive different kinds of goods.

Warehousing describes the function and actions required to ease the storing of goods. The intricate process of logistics within the business chain comes from efficient warehousing.

What are the Objectives of Warehousing?

The main goals of warehousing are:

• Essential storage-warehousing should result in a safe, central location to store your materials and product
• Accessibility -that location should be accessible and suitable for your product
• Better inventory management-increase turnover and decrease shrinkage by tracking your inventory more efficiently
• Shorter lead times-accessible, well-managed storage facilitates shorter lead times, which increases customer satisfaction
• Reduce cost-efficiency in the warehousing process should result in reduced costs

Why is Warehousing Required?

The benefits of warehousing are far-reaching, both in the short-term and long-term. Here are some benefits that are proven from businesses who have consistently adopted a warehouse logistics model and a clear argument of why warehousing is required.

• The inventory counts are real-time and accurate all the time. In a unified system, the warehousing process will calculate the inventory available at any given time, their specific locations, and their use.
• The accuracy of the inventory also means a decrease in return items. In most cases, the goods get checked before being sent.
• The inventory details also mean the stock will always be available. In most cases, the stock levels operate with a required minimum, which, when hit, will trigger the purchase of more stock.
• Warehouse logistics also ensure that space is utilized effectively.

What is Warehousing in Supply Chain Management?

Warehousing forms an integral aspect of the logistics and supply chain management pattern. Put simply, warehousing is the process that makes a warehouse or storage area run smoothly within the supply chain.

The success and expansion of any business largely depend on its ability to perform well in warehousing logistics.