This article is part of a larger series on Retail Management.
A stockout (or out-of-stock) is when you run out of inventory. This may apply to all of your inventory or specific items. Stockouts are costly because they harm the customer experience, while retailers also miss out on sales. Out-of-stocks happen for a number of reasons, many of which are preventable.
Luckily, there are many ways you can mitigate out-of-stocks if you’re willing to be a little proactive.
Conduct Regular Counts
Physical inventory counts involve manually tallying each piece of stock you have in your possession. It’s tedious and time-consuming but often considered the best way to get a real picture of how much you actually have on hand. However, mistakes do happen. And because they’re so time-consuming, many small businesses do physical counts only annually or bi-annually—maybe quarterly if they can swing it.
In addition to your regular annual, bi-annual, or quarterly counts, consider implementing a cycle count system where you audit a small section of inventory each day or week. By breaking up your counts into more manageable chunks, you can cycle through your total inventory on a more regular basis to catch errors or areas where you may be understocked.
To improve the accuracy of your inventory counts, make sure you set a designated cutoff point or perform the counts outside of business hours so that they are not impacted by transactions that are in process.
If employees perform the counts, consider opting for blind counts (so they are only counting the number of products on-hand and not seeing the expected totals) or assigning employees to count in pairs: one for counting and one for recording. Both of these tactics can help prevent human error and guard against theft.
Use Your Point-of-Sale
Your point-of-sale (POS) system contains a lot of data—much of which is tied to your inventory. One way to prevent out-of-stocks is to leverage these features from your POS system. Automated low-stock alerts and demand forecasting reports can help retailers make sure you order the right products when they are needed. Plus, using a POS can make your data more accurate.
Your first step is upgrading to a modern POS if you haven’t already. We’ve created a guide to help you choose the best POS for your business. Some features to look for include:
- Purchase order (PO) generation
- Automated inventory tracking across sales channels
- Custom reorder points and low stock alerts
- Custom low stock alerts
- Barcode and inventory scanning apps
- The ability to perform partial counts
- Analytics reporting
For more resources on a POS system, check out these posts:
- How to Use a POS System to Run Your Business
- How to Set Up a POS System
- Types of POS Systems
- Best POS Inventory Systems
There are many ways you can change your reordering process to mitigate stockouts. For starters, you might consider automating the reordering process—and a POS system can help. Essentially, you set a threshold at which point your POS software automatically generates a PO to reorder an item which has reached that threshold.
You might find you need more lead time—many suppliers have extended their lead times during the COVID-19 pandemic because they can’t keep up with current demand. In this case, set your reorder threshold higher to account for the extra time you’ll need between when an order is placed and when it will arrive.
Invest in More Safety Stock
Safety stock is essentially extra inventory you keep on hand as a safety net against out-of-stocks. But if you find you’re running out of stock and safety stock, it might be time to raise your safety stock levels.
Increasing the amount of safety stock may also increase your inventory carrying costs, so it’s important to evaluate them against one another.
While some retailers choose how much safety stock to purchase based on a gut feeling, keeping 7–14 days’ worth of safety stock on hand is common. However, the exact formula for calculating safety stock has many variables that change for each industry and the types of products you sell.
Check Your Data
With all of your tools, tech, and integrations in place, you’ll have ample information about your business to understand how inventory flows from supplier to you to your customers. Make it a point to regularly check in on your retail analytics—specifically inventory data—to understand what’s going on. You can also use this information to more effectively perform demand forecasting, which can help you optimize inventory levels to mitigate both stockouts and overstocks.
Some metrics and reports you’ll want to pay extra attention to include:
- Inventory turnover ratio
- Market basket analysis (MBA)
- Cart abandonment rate
- Sell-through rate
- Inventory aging report
- Inventory carrying costs
- Sales per SKU
- Sales per category
- Sales velocity
- Customer retention rate
- Reorder point (ROP)/stock reorder report
- Stock on hand
- Inventory change
- Purchase order report
- Lead time
- Forecasting demand
Our guide to using retail analytics to drive sales covers many of these metrics and formulas in detail.
How Stockouts Impact Small Business Retailers
Out-of-stocks have plenty of negative implications for small businesses, namely:
The first and potentially most significant impact is lost sales. Regardless of how many people want to buy an item or how much someone is willing to pay for it, you can’t make the sale if you can’t give them the product. In fact, stockouts are a top reason for abandoned shopping carts on ecommerce sites.
This problem is more costly than you might think too. One analysis found that 2020 holiday retail sales in the UK were 25% higher than the year prior—though this increased demand led to more out-of-stocks. Had these retailers prevented those stockouts, their 2020 holiday sales could have been as much as 35% higher compared to 2019. That’s a big difference!
When customers can’t find the product they want at your store, they may be patient and put it on backorder or wait for a back-in-stock alert. Other times, they’ll look for the same or an alternative item at a competitor.
This has longer-lasting implications than a single lost sale. When shoppers turn to your competitors, they may also lose loyalty to you and—worse—become brand loyalists for the competition.
Stockouts are harmful to the customer experience for several reasons. No one wants to visit a store with the intention of buying a specific item only to find out it’s unavailable when they get there. Customers lose trust and may begin to think you’re unreliable, forcing them to seek other options—backorder, wait listing, shopping elsewhere, etc.
Mistrust is even worse when you’ve advertised a specific item but run out of stock of it. Future ad efforts may render less effective because potential buyers may wonder if it’s actually available. This can also take a hit on your customer retention rate.
When stockouts happen, operational chaos often ensues. You and your team may rush to place last-minute orders, pressuring suppliers to fulfill them fast—possibly paying rush fees along the way. This not only cuts into your profit margins but can also wreak havoc on relationships with suppliers and employees alike. Even backorders have higher associated costs. Plus, when a stockout occurs, you likely need to investigate why it happened. This takes time that you could be spending elsewhere.
The COVID-19 pandemic has exacerbated this challenge with unpredictable warehouse closures, employee outbreaks, supply chain shortages, and other factors outside businesses’ control.
In the News: Stockouts in 2021
- There’s a global shortage of shipping containers expected to last through 2022, Bloomberg reports. This shortage has made shipping take longer.
- A global stockout of computer chips has impacted every industry, from technology to cars. CNET reports the shortages could last well through the rest of 2021.
- Walmart has rebounded from its plague of 2020 stockouts, increasing inventory levels 16% year-over-year, reports Retail Dive.
Stockouts are a costly but preventable obstacle that almost every retail business owner will face at some point or another. With the tips and strategies listed above, you can find stockouts to save lost sales, build customer loyalty, and maintain smooth business operations.