Business School - Stock-outs, Overstock and Ports: Inventory Rules When Supply Is Unreliable

BUSINESS SCHOOL  ·  OPERATOR LESSONS  ·  WEEK 8 OF 12

Start here if you sell goods and cash is trapped in the storeroom — or walking out the door as a stock-out.

A late container or a power cut does not care about the sales target. In many African firms this type of choice is simple on paper and painful in the bank account. Order more and cash sits in drums or boxes while the electricity is off. Order less and the clients workshop calls a competitor the day the shelf is empty. Both outcomes cost more than the price of the product. The business that only works when every delivery arrives on the day you expected is not a firm yet.

CleanLine is our made-up packing firm used in these lessons so the numbers stay concrete. The company sells 5-litre drums of cleaning concentrate to workshops and small regional chains. The lowest price it will accept per drum is 165.00. That price covers the concentrate, the bottle, the cap, the label, the delivery in its own truck, the cost of waiting for payment, and returns for leaks or short deliveries. 

Earlier lessons showed how to set that floor and how to collect against it. This week the same firm learns what to do when the concentrate arrives late or not at all.

A worked example: CleanLine counts days of cover before the next container

CleanLine keeps about three weeks of concentrate on the floor under normal conditions. Last month a container sat at the port for 18 days longer than the supplier had promised. The workshops that reorder every fortnight started calling other packers on day 12. CleanLine lost four regular orders worth 42,000 in invoice value. The contribution on those drums would have been about 17,000 after the fully loaded cost. 

At the same time the business had R68,000 of finished drums sitting in the back room because a regional chain had cancelled a standing order two weeks earlier. That stock was not dead, but it was not moving, and the cash that bought the concentrate was not available for the next order.

The founder and the accounts person sat down with three numbers. 

• Days of cover on the concentrate: 9 days at current sales. 
• Value of stock that had not moved in 30 days: R68,000.
• Supplier on-time rate for the last six containers: 3 out of 6 arrived inside the promised window. 

They did not buy a software system to manage stock. They wrote a reorder rule on one page - When cover falls below 21 days (the longest delay they have seen plus a buffer), they place the next order. They also asked a second supplier for a quote on 20% of the monthly volume so one port delay does not empty the floor. The next month they had two stock-outs instead of one, and the cash sitting in slow stock dropped by R19,000 because they stopped ordering the full amount when the chain was late.

Three inventory realities this market will not negotiate away

•      Ports and power are not reliable. A promise of 14 days can become 30. The reorder point has to include the longest delay you have already seen, not the average.

•      Cash trapped in stock is not free. The same money could have paid a supplier who is on time, or covered the wages of the person who loads the bakkie. Overstock is a loan you made to the storeroom.

•      A stock-out does not only lose the sale. It teaches the customer that another supplier exists. The cost is the lost contribution plus the risk that the customer does not come back.

Five steps you can run this week

1. Count days of cover for your top three lines

Take the units you have on the floor today. Divide by the average daily sales from the last 30 days. That number is days of cover. Write it next to the line. If you do not know last month’s daily sales, use the invoices you already sent. Do this for the three lines that bring in the most money.

2. Set a reorder point in plain language

Look at the longest delay you have had in the last six months from the main supplier. Add seven days as a buffer. When days of cover fall below that number, place the next order. Do not wait until the floor is empty. Do not order a full container just because the price looks better. Order what the rule says.

3. Name one second source for the critical input

Ask one other supplier for a price on a smaller volume. You do not have to switch. You need the option so that one delayed container does not stop the line. Tell the first supplier you have the option. Some will improve their date. Some will not. Either way you have a number.

4. Hold a 15-minute stock meeting once a week

Three numbers only. Days of cover on the top lines. Value of stock that has not moved in 30 days. How many of the last six deliveries arrived inside the promised window. The person who loads the vehicle or packs the order can run the meeting. The founder does not have to be there every time.

5. Stop ordering the full amount when a large customer is late

If a customer who takes a large share of one line is paying late or has cancelled, reduce the next order for that line by the same share. The cash stays in the account until the customer is current. This is the same idea as a stop-supply rule on an overdue invoice, applied to the purchase order.

What to measure next month

Days of cover on the top three lines at the start of each week. Target: none below the reorder point you wrote down.

Value of stock that has not moved in 30 days. Target: lower than this month.

Supplier on-time rate. Count how many of the last six deliveries arrived inside the promised window. Target: more than last month, or a second source in use.

The mistake that looks like progress

Ordering extra because the supplier offered a better price on a full container, while the main customer is already late. The discount looks like savings. The cash that leaves the account is not available when the next delay hits. Or refusing to keep any buffer because cash is tight, then losing the regular workshop clients the day the port is slow. Both leave the business reacting instead of following a rule written before the container is late.

If you only do one thing

Tonight, count the units on hand for your three highest-value lines. Write the days of cover next to each one if sales continue at last month’s rate. That single page is the start of the weekly meeting.

Next Tuesday: the family-business operating code — who decides, who gets paid, and what happens when a relative joins the firm.