Stockouts often occur because of unexpected spikes in demand or poor demand planning. Learn what stockouts are and how to prevent them with proper planning and effective inventory management software.
Stockout Definition
Stockouts occur when a business runs out of a specific product. They’re the opposite of overstocks — when your in-stock products far exceed demand. Inventory shortages are frustrating, whether customers journey to a physical store only to see that the milk they want is gone or try and fail to order their favorite hairspray online.
Stockout Causes
Stockouts might result from:
- Poor demand planning: Demand planning encompasses several practices, including ordering enough inventory to meet demand, ordering inventory on time, anticipating seasonal events and interpreting sales patterns.
- Supply chain disruptions: Natural disasters, changes in material availability, transportation delays, cyberattacks and labor issues like union contract negotiations can lead to stockouts.
- Late deliveries: Products getting delivered late could mean not replenishing products before they sell out.
- Seasonal spikes in demand: The holiday season causes spikes in demand, and consumers know it. Around 12% of American consumers are very concerned about seasonal demand causing stockouts, and 28% consider themselves somewhat concerned about the possibility of shortages.
- Unexpected spikes in demand: Online viral trends, natural disasters, influencer activity and other unforeseen events cause demand shocks that affect the supply chain.
- Poor cash flow management: Without sufficient capital to replenish inventory, a business could experience stockouts.
What Businesses Do in the Face of a Stockout
Ideally, you’ll notice out-of-stock (OOS) items before a customer places an order. This way, you can label the item as OOS on your website and other sales channels. You should also list the approximate date that the item will be back in stock. An effective inventory management solution helps automate some or all of these processes. Even better, it allows you to improve your demand planning to prevent stockouts.
You have some options if you overlook the OOS item before a customer places an order. You can check other company branches to see if they have the product or offer an alternative. If you’ve exhausted your options, you’ll need to notify the customer about the situation and offer a solution, such as a refund or expedited shipping when the item is back in stock. Tell them when you expect the item to be back in stock and reassure them that you’ll keep them updated on the product’s status if they wait.
What Consumers Do in the Face of a Stockout
There’s a retail adage that states stockouts can cause walkouts. The best-case scenario when a customer places an order for an OOS item is that they’ll wait for the item to be back in stock. However, in many cases, stockouts result in frustration and annoyance and could affect customer loyalty.
When customers encounter OOS items, they will likely look elsewhere for the needed product. If they’re extremely satisfied with their experience with this other retailer, their loyalty to your business may dwindle, affecting your company in the long term.
Industries That May Benefit From Stockouts
While the negative implications of stockouts are undoubtedly important to consider, some industries and products could see benefits from stockouts:
- Clothing: OOS items signify success for clothing brands that create new designs every season. Companies may offer discounts and sales on old items to make room for new designs.
- Electronics: Electronics companies release new models periodically and aim to get rid of stock before introducing new models.
- New businesses: New businesses that want to create buzz might purposely order a small amount of inventory to generate demand through product scarcity.
- Perishable items: Most customers wouldn’t be surprised at not finding strawberries at the grocery store late at night. The freshness of produce depends on them selling out quickly.
Disadvantages of Stockouts
We’ve talked generally about how stockouts negatively impact a business. Here are some more specifics:
- Lost customers: Customers may look elsewhere if your business doesn’t have the product they need.
- Negative reviews: If stockouts become a chronic problem for your company, customers might leave negative reviews about your business.
- Damaged reputation: Negative reviews and word-of-mouth can damage your business’s reputation.
- Strained supplier relationships: When stockouts result from late deliveries or miscommunications, it could result in strained relationships with your suppliers.
- Increased direct costs: Direct costs are the lost sales you could have had from OOS products. To calculate direct costs, multiply the number of days the item has been OOS by the average units sold per day and then by the price per unit.
- Increased indirect costs: To remedy the effects of stockouts, you may have to offer refunds for canceled orders, incur costs for expedited shipping, place an emergency order with your supplier or take on the costs of switching suppliers entirely. Plus, if your business’s reputation suffers due to stockouts, you may have to increase your marketing efforts to rebuild your image.
How to Prevent Stockouts
The following strategies will help your company prevent unnecessary stockouts:
- Conduct regular inventory audits: Auditing can be tedious, but it’s critical to reduce human errors. Inventory management software helps keep track of inventory and is especially helpful for products that sell quickly or are prone to errors.
- Understand the stockout rate: The stockout rate describes the percentage of OOS products needed for sale. You can determine the stockout rate by dividing products not in stock by the total number of products available and multiplying that figure by 100. A high stockout rate indicates lost sales opportunities and helps explain customer dissatisfaction, while a lower stockout rate indicates a more efficient inventory management strategy.
- Have the right amount of safety stock: Safety stock is reserve stock you’ll save for unexpected demand fluctuations, such as those caused by viral trends. It also helps businesses rebound from forecasting inaccuracies and supply chain disruptions.
- Invest in supply chain management software: Supply chain management software assists with demand planning, replenishment, supply planning and more. You can place orders, ship orders and control stock levels from one cloud-based platform. At Blue Ridge, we tailor our solution to your industry. For example, for food service companies, we offer specialized features like Fresh Product Forecasting and Seasonal Product Forecasting, Intra-Day Replenishment, and Shelf-Life Management.
