What Is a Stockout? Causes, Costs, Impact & Prevention

A stockout (or out-of-stock) is when a business runs out of a product in its inventory. Stockouts are best known for occurring in retail stores but can happen anywhere in the supply chain.

When there is a stockout, the product can’t be purchased by customers, which damages the customer experience and causes lost sales. Stockouts happen for a number of reasons—many of which are preventable.

This guide explores the causes of stockouts as well as the resulting costs and other impacts on your business, plus stockout prevention tips.

Stockouts Defined

Stockouts occur when a business’ inventory of a particular item (or multiple products) depletes—making them temporarily unavailable for customers to buy. This happens for various reasons, including supply chain disruptions or failure to properly replenish stock on time.

To operate successfully, retailers have to strike a fine balance between overstocking (maintaining more inventory than needed) and stockouts. Too much inventory can result in excessive carrying costs and reduced cash flow. But when inventory is too low to meet consumer demand, they’re at risk of costly stockouts. This balance relies on factors like accurate planning, data analysis, and effective inventory management.

When a stockout happens, businesses face lost sales, dissatisfied customers, and overall damage to their bottom line. It’s crucial to practice strategies to avoid out-of-stocks and mitigate the impacts if they occur.

Causes of Stockouts

 

There are a variety of different reasons sellers run out of stock. Some cannot be planned for, such as an unseasonal purchasing spike (like the sanitizer and face mask rush during the COVID-19 pandemic). However, there are quite a few causes of stockouts that are preventable. They include:

Inaccurate Inventory Data

Data inaccuracies are one of the leading culprits of stockouts. These usually come from inventory management mistakes, shipment discrepancies, shrinkage, or a combination of the three. Issues with inventory usually stem from miscounts, which often happen during busy seasons in retail stores.

Faulty Demand Forecasting

Insufficient data on how quickly inventory sells (inventory turnover) and sales performance, along with poorly planned seasonal promotions, can also lead to 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.

Poor Stock Monitoring & Replenishment

While most retailers have a system in place for monitoring and replenishing their stock, an inefficient system can lead to stockouts. While stockout reasons can be attributed to both suppliers and retailers, popularly reported research indicates that 70% to 90% of stockouts are caused by poor shelf replenishment practices.

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.

Supply Chain Disruptions

Retailers and suppliers alike rely on a smooth flow of products and materials to meet consumer demand. When any link in the supply chain is disrupted, it can result in stockouts down the line. These problems are often caused by transportation delays, production issues, unforeseen geopolitical events, or natural disasters. Stockouts of this type can’t always be avoided, but the best defense is to develop a strong supply chain of reliable suppliers, carriers, and third-party logistics partners (3PLs).

Cost of Stockouts

Revenue loss is the most immediate effect of stockouts. Take a look at the formula below to calculate just how much your business stands to lose due to stockouts.

For example, say your inventory includes Christmas pajama sets and they go out of stock for seven days during the holiday rush. If you sell about 30 of these units per day during peak season, with a profit of $10 per set, your total loss due to the stockout would be $2,100.

How Stockouts Impact Small Businesses

Aside from revenue loss, out-of-stocks have plenty of negative implications and long-lasting effects for small businesses, namely:

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.

Operational Disruptions

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.

Lost Sales

Perhaps the most significant impact of stockouts 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!

Tips to Prevent Stockouts

Luckily, there are many ways you can mitigate out-of-stock if you’re willing to be a little proactive:

Optimize Your Inventory 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.

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 they’re 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 person for counting and one for recording). Both of these tactics can help prevent human error and guard against theft.

Add Cycle Counts

Because they’re so time-consuming, many small businesses do physical counts only annually or biannually. In addition to your regular 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.

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

Revisit Reordering

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 it varies from seller to seller, keeping seven to 14 days’ worth of safety stock on hand is common. That said, 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 suppliers 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.

Frequently Asked Questions (FAQs)

Here are a few common questions about stockouts.

What is an example of a stockout?

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How do you tell a customer an item is out of stock?

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How do customers react to stockouts?

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Bottom Line

Stockouts are a costly but preventable obstacle that almost every retail business owner faces 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.