What Is Out of Stock Inventory?
As a seller, a businessperson works with inventory of his choice. Inventory generally is in stock, meaning that the seller actually has physical possession of the merchandise. However, sometimes inventory must be classed as out of stock. This has ramifications for both the seller and the buyer. Out-of-stock inventory does not necessarily indicate that a seller is doing poorly, and in fact, it can be a good sign for the business if inventory is managed well.
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Definition
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Inventory is any item that a company has but has not sold yet. Usually inventory is available for immediate sale; in these instances it is called stock. Occasionally, however, a company may offer a product but not have it immediately on hand -- this is out-of-stock inventory. An example might be if a company ran out of handmade purses and had to wait for the creator to make more. Out-of-stock inventory is sometimes called backordered inventory if orders are placed for an item before the new inventory supply arrives.
Why It Happens
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When a seller orders a product, she has to estimate the number of units she will sell based on the current market. Sometimes these estimates are off, often simply because the product is new and the seller doesn't know for sure how consumers will receive it. If the seller's estimate is lower than the actual demand, she may not have enough inventory to meet all requests. She will need to list the product as out of stock or backordered until she gets more. Out-of-stock inventory also sometimes happens because of business or manufacturing problems regardless of the market. For instance, a bad snow storm might delay a shipment or a robot on an assembly line might break down.
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Advantages
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An advantage of out-of-stock inventory is that it allows the seller to continue doing business even if he physically does not have the item he is selling. For instance, he can alert buyers of the out-of-stock status and then let them purchase the item on backorder, provided he knows he can get more of the item. This can save a seller money, because he does not need to reprint advertisements; instead of removing and adding every out-of-stock inventory item on a website, he can just note the change in status. Having out-of-stock inventory sometimes means that a seller is doing well, as he is able to sell all the inventory he has on hand.
Disadvantages
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Handling out-of-stock inventory can complicate the inventory tracking process, as customers may continue to place orders for items the seller has yet to receive. The seller also has to deal with inquiries about the out-of-stock items, such as when the seller expects to have more of the item. Additionally, listing an item as out of stock sometimes costs a seller a sale, as buyers opt not to backorder and simply go to another vendor who does have the item readily available.
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References
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