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 just to specific items. Stockouts are costly because they harm the customer experience while causing retailers to miss out on sales. They happen for a number of reasons—many of which are preventable.
This guide explores the causes of stockout and the resulting costs and other impacts to your business. It also provides stockout prevention tips.
Causes of Stockouts
There are different reasons sellers run out of stock. Some cannot be planned for such as an unseasonal purchasing spike (like the alcohol and face mask rush during COVID-19). However, there are quite a few causes of stockouts that are preventable. They include:
Inaccurate Inventory Data
Data inaccuracies are the leading culprit of a stockout. These usually come from human error, shipment discrepancies, or shrinkage—or a combination of the three. Inventory management mistakes are often attributed to human error. Miscounts usually happen during busy seasons in retail stores, especially.
Inefficient Demand Forecasting
Lack of data on inventory turnover, purchase sales, and seasonal promotions also bring about stockouts. Seasonal consumer demand can be addressed by knowing how to forecast demand, set up low stock alerts, and automate purchase orders. Inventory management systems can help solve this problem.
Working Capital Shortage
A shortage of working capital is usually caused by poor cash flow management. This results in monthly order limits, which in turn, cause stockouts to happen.
Poor Stock Monitoring & Replenishment
While most retailers have a system in place for monitoring and replenishing their stock shelves, an inefficient system can lead to stockouts. While stockout reasons can be attributed to both supplier and retailer, popularly reported research indicates that 70% to 90% of stockouts are caused by poor shelf replenishment practices.
Costs of Stockouts
In the News: Stockouts in 2022
- There’s a global shortage of shipping containers expected to last through 2022, S&P Global reports. This shortage has made shipping take longer.
- National Bureau of Economic Research reported stockouts reached up to 20% in 2021, compared to an average rate of 8% pre-pandemic. A recent survey showed that 51% of retail and ecommerce businesses attribute stockouts as the biggest challenge driven by the pandemic.
- Walmart has rebounded from its plague of 2020 stockouts, increasing inventory levels 16% year-over-year, reports Retail Dive.
- Seven out of 10 consumers think stockouts are worse than they were during panic buying during the pandemic.
- A survey of 1,000 US shoppers shows that product availability is bad in stores (54%) and worse online (61%).
Revenue loss is the most palpable effect of stockouts. Take a look at the formula below to quantify just how much your business stands to lose because of stockouts.
Stockout Cost = (Number of Days Out of Stock x Average Units Sold Per Day x Profit Per Unit)
For example, you sell Christmas pajama sets and these went out of stock for one week (seven days) during the holiday season. Say, you sell about 30 sets a day during peak season, with a profit of $10 per set.
Your stockout cost would amount to the following:
Stockout Cost = 7 x 30 x $10
Stockout Cost = $2,100
In this scenario, you lost $2,100 for the pajama set stockouts, and this is only for one item. Imagine if multiple items went out of stock in your store.
Aside from revenue loss, long-lasting effects such as waning customer loyalty, lowered brand reputation, and decreased customer satisfaction are worse. We cover these in more detail in the next section.
How Stockouts Impact Small Businesses
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!
Decreased Brand Loyalty
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.
Poor Customer Experience
Stockouts are harmful to the customer experience for several reasons. No one wants to visit a store to buy 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, waitlisting, or shopping elsewhere.
Mistrust is even worse when you’ve advertised a specific item but run out of stock. Future ad efforts may be rendered less effective because potential buyers may wonder if it’s actually available. This can also impact your customer retention rate.
Disruption to Operations
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 exacerbated this challenge with unpredictable warehouse closures, employee outbreaks, supply chain shortages, and other factors outside businesses’ control.
Tips To Prevent Stockouts
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 biannually—maybe quarterly if they can swing it.
In addition to your regular annual, biannual, 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.
For more information on annual and cycle counts, check out our article on organizing inventory for small businesses.
Use Your Point-of-Sale System
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
- 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 that 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 seven to 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.
Use our free safety stock calculator to determine your business’ specific needs.
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
- Forecast demand
Our guide to using retail analytics to drive sales covers many of these metrics and formulas in detail.
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 reduce or eliminate stockouts to save lost sales, build customer loyalty, and maintain smooth business operations.