The True Cost of Product Shortages & How to Minimize

One of our primary jobs at Omnium is to help clients identify and eliminate inefficient spending, and it doesn’t get much more inefficient than paying for shorts. With semi-fixed production capabilities, CPG manufacturers have to get creative in how they manage inventory across retail partners to avoid over or understocking items.

One way we pay for shorts is through lost sales. Extended out of stocks caused by pandemic-related demand increases and exacerbated by recent global supply chain disruptions can put brands at risk of losing retail distribution. If you get to this point it will likely be without much warning and you won’t get to choose which SKUs are delisted.

The first thing we recommend is streamlining production. Prioritize your core items to maximize line efficiency. Then manage demand through price and promotion. It is much easier to take price than tool up a new production line. Consider eliminating any promotions that would put a disproportionate amount of inventory at any one customer.

Some customers charge fees for shorting. See if you can edit orders before confirming them. Customers have to pay their shipping costs regardless of whether or not you have the product ready to put on the truck and may charge you for those costs - check your vendor agreements to avoid surprises. You can maintain goodwill (and often avoid fees) with frequent, proactive communication and a clear allocation policy. Say what you will do and then do what you say. This is where playing favorites (among priority customers) can pay off.

Finally, make sure you have clearly articulated your strategy and process to your internal team and any supply chain partners. Heroic efforts are okay once in a while, but if make operating under stress the norm, morale will fall. In this tight labor market, you could lose experienced talent.

We remain committed to using all available data, advanced analytical modeling techniques, and our deep and broad CPG and retail experience to help clients make the most informed decisions possible during uncertain times.

We are really looking forward to reconnecting with industry colleagues at Expo West in Anaheim next month! If you would like to chat about your current challenges and opportunities, please contact me directly to arrange a time at colin@omniumcpg.com.