Inventory Stockout: Definition and Prevention
Inventory stockout is bad for businesses. In this article, we’ll discuss what it is, what causes it, and how retailers can prevent it.
It DOES really happen. Be it a small specialty store or an e-commerce giant with large inventories, retailers, from time to time, go completely out of stock, particularly on items that sell out fast.
What Is an Inventory Stockout?
An inventory stockout occurs when a product is not available for purchase. This usually happens when a business or warehouse runs out of a product or when all of the products in stock have sold out. The said term can be applied to brick-and-mortar stores when they are short on a certain item, as well as to online merchants when they are completely out of a certain product. In either situation, both types of businesses run the risk of letting their customers down because there isn’t always a clear timeline of when an “out of stock” item will be available again.
Inventory Stockout vs. Overstocking
Insufficient stock on hand to fulfill customer demand results in stockouts. But when demand is low and stores have more inventory than they can sell, the outcome is an overstock. Your problems can pile up quickly if you continue ordering an excessive amount of a product that won’t sell or order an in-demand product in less quantity.
Financial Impact
Overstocking ties up capital in unsold inventory, leading to financial strain due to higher storage costs. You’re also inadvertently forced to offer discounts to clear the excess stock, which ultimately reduces your profit margins. In contrast, an inventory stockout results in lost sales and revenue as customers turn to competitors to meet their needs.
Operational Challenges
Having too much inventory on hand introduces many operational challenges, such as the need for additional storage space, which increases warehousing costs and logistical complexities. There is also a higher risk of products becoming obsolete or damaged over time. Conversely, an inventory stockout disrupts the store’s ability to meet customer demand, causing delays and backorders. This leads to increased administrative costs as staff scramble to manage shortages and expedite replenishments.
Customer Experience
From a customer experience standpoint, overstocking can result in frequent sales and promotions aimed at clearing excess inventory, potentially eroding the perceived value of the products and the brand. When more and more customers begin to expect to see discounts, you may never be able to sell at full price ever again. On the other hand, an inventory stockout can significantly impact customer loyalty, as dissatisfied customers may switch to competitors who consistently meet their needs.
Pro Tip: You can avoid both stockouts and overstocks by implementing an ecommerce inventory management software. It will help you find patterns in stockouts and eliminate one-off sales spikes from your historical analysis. With this information, you can make better demand forecasts and use them to guide your company’s future moves.
What Are the Disadvantages of an Inventory Stockout?
A Harvard Business Review study of over 600 retail outlets revealed that stock-outs are far more expensive than most businesses think. An inventory stockout can result in a substantial loss of capital and brand reputation, as we’ve just determined. But there are more risks that could have far-reaching consequences for small businesses.
Customer Churn
Customers already detest receiving the incorrect item in their shipment. Imagine the uproar they’ll cause when they visit your store to purchase an item, only to discover it’s out of stock—not once, not twice, but three times consecutively. To give you some perspective, according to one McKinsey survey, 7 in 10 customers change brands when their desired product is “temporarily unavailable”. Only 13% stayed loyal to their brand and waited for the item to be restocked.
Negative Word of Mouth
Research also shows that negative reviews dissuade 40% of potential customers from transacting with a business. Simply put, one bad review about your frequent stockout situation can cost you hundreds of thousands of dollars in revenue.
Increased Operational Expenses
When you’re running low on stock, your operational expenses inevitably rise because you spend countless hours contacting third-party warehouses for any possible unused inventory and locating vendors that are flexible enough to accommodate your requests at a short notice. You may even have to bear the additional expense of air cargo to expedite delivery.
What Causes an Inventory Stockout?
As there are many moving parts involved in transporting a product from a manufacturing unit to your company’s fulfillment center or retail store, your business will face inventory distortions at some point.
Let’s take a look at five common causes of an inventory stockout.
Inaccurate Demand Analysis
During the COVID-19 pandemic, the demand for face masks and hand sanitizers surged dramatically. Similarly, a sudden cold snap or early onset of winter weather often leads to a sharp increase in demand for winter clothing. A piece of clothing or accessory worn by a celebrity or Instagram influencer, too, can quickly become a highly sought-after item. In short, customers’ willingness to buy changes with changing environmental circumstances, seasons, and fashion trends.
But despite this being general knowledge, many retailers fail to plan ahead for sudden changes in their customers’ buying patterns. In addition, mistakes in data inputs or forecasting models can lead to ineffective demand management and inadequate stock levels. No wonder, it’s not uncommon for a store’s most popular products to have frequent and nearly inevitable stockouts.
Inaccurate Records
A second common reason for stockouts is incorrect inventory counts. Most of the time, these discrepancies are the result of human errors. For instance, warehouse personnel manage the inventory manually and either count the wrong items or type in the wrong quantity. Another example is when people lose count of the items they unload from a warehouse. One more scenario that could possibly impact product count is if a company’s inventory numbers don’t update in real time across all of its sales channels. All these discrepancies in item counts can lead to an inventory stockout.
Limited or No Visibility
The third main reason for stockouts (and, by extension, for overstocks) is a lack of visibility into a company’s inventory. It is very difficult to maintain enough inventory levels to fulfill customer demand if you are unaware of your current stock levels.
Limited visibility into the specific location of an item in a warehouse, too, exacerbates operational inefficiencies. It results in longer picking times, delays in order fulfillment, and increased labor costs. This lack of stock trackability can lead to misplaced items, difficulty in managing returns, and reduced overall productivity.
Inefficient/Delayed Restocking
Oftentimes, problems with sourcing raw materials or delivering components to manufacturers cause stockouts at any stage of the supply chain. Consequently, production delays and stockouts may follow. If that is the case, it’s about time you improved your restocking workflows.
Delivery Issues
Logistical issues, such as inadequate courier performance, incomplete paperwork, postponed customs clearance, and natural calamities, can cause shipments to arrive late. Vehicle malfunctions or accidents, too, can cause delivery delays, and mechanical issues can also cause production schedules to be delayed. Since you typically have no influence over most of these unforeseen circumstances, it’s best to be ready than sorry.
Signs You Might be Heading Towards an Inventory Stockout And How You Can Prevent Them
Managing inventory effectively is crucial for any business, especially those dealing in physical goods. As we mentioned above, a stockout can have severe consequences on customer satisfaction and net revenue. Recognizing the warning signs early can help businesses take proactive measures to avoid stockouts. Here are some key indicators that you might be on the verge of running out of stock:
Decreasing Inventory Levels
One of the most obvious signs of an impending stockout is steadily decreasing inventory levels. Regularly monitoring your inventory and keeping track of stock levels can help you identify when items are getting low. This involves:
Regular Audits and Inventory Checks: Perform inventory audits frequently to stay on top of the current stock levels. Consider using inventory management software to automate this process and extract actionable insights from real-time data.
Historical Sales Data Analysis: Analyze past sales data to predict future demand. If your sales have been steady, you can estimate when you’ll need to reorder stock. However, you should also take into account any sudden spikes in sales or seasonal trends.
Setting Reorder Points: Assign reorder points for each item to ensure you replenish stock before it runs out. This point should be set higher for fast-moving items and lower for slow-moving items.
Safety Stock Levels: Maintain a buffer or safety stock to prevent inventory stockouts due to unexpected demand or supply chain disruptions. Consider lead times and the variability in demand and supply when calculating the right amount of safety stock.
Increased Backorders
An increase in backorders is another clear sign that a stockout is fast approaching. Backorders occur when orders cannot be fulfilled due to insufficient stock, leading to delays in delivery. The best way to manage and interpret backorders is to track the frequency and volume of backorders and identify patterns to predict future stockouts. An increasing trend in backorders is a telltale sign your inventory levels are not meeting customer demand.
Delayed Shipments from Vendors
Vendors are a fundamental aspect of inventory management. Delays in shipments from vendors can quickly lead to stockouts. Take the following steps to mitigate this risk:
Vendor Performance Monitoring: Regularly evaluate vendor performance based on delivery times, order accuracy, and communication. This helps spot unreliable vendors and take corrective action.
Multiple Vendors: Depending on a single vendor increases the risk of stockouts if that vendor faces disruptions. Diversify your vendor base to reduce overreliance.
Lead Time Reduction: Work with vendors closely to reduce lead times. This might involve negotiating faster shipping methods, improving order processing times, or collaborating on inventory management practices.
Strategic Partnerships: Form strategic partnerships with key vendors to ensure priority treatment and negotiate better terms, such as shorter lead times and more flexible order quantities.
Rising Customer Complaints
Customer complaints about stock availability are a direct indication of inventory issues. Rising complaints can damage your brand’s reputation and lead to lost sales. Addressing these complaints proactively is essential.
Customer Feedback Channels: Establish multiple channels for customers to provide feedback, such as surveys, social media, and direct communication. Analyzing this feedback will give you valuable insights into inventory problems.
Complaint Analysis: Categorize customer complaints according to their type, frequency, and impact. Make a list of the most common and critical issues that affect your user experience. Now, figure out their root causes and prioritize corrective measures accordingly.
Customer Service Improvement: Train customer service teams on how best to handle stockout situations empathetically. Provide them with alternatives like suggesting similar products or offering backorder options.
Transparency and Communication: Keep customers informed about stock levels, estimated restocking times, and alternative options to manage their expectations and reduce dissatisfaction. Transparency is pivotal for maintaining customer trust.
Frequent Emergency Restocking
Frequent emergency restocking is a reactive approach to inventory management that reflects poor planning and forecasting on your part. This practice can be costly and inefficient, leading to higher operational costs and potential stockouts. To resolve this issue, consider:
Inventory Planning and Forecasting: One way to reduce the occurrence of having to restock in a rush is to forecast demand accurately. This involves using a good demand forecasting software that is equipped with more sophisticated tools and techniques, like machine learning algorithms, to predict future demand more accurately.
Automated Replenishment Systems: Implement automated replenishment systems can streamline the restocking process. These systems use real-time data to trigger orders when inventory levels reach predefined thresholds, reducing the need for emergency restocking.
Regular Inventory Reviews: Conduct inventory reviews regularly. Analyze inventory turnover rates, lead times, and demand variability. This will help you identify potential stockout risks and address them before they become critical.
Take Control of Your Inventory. Choose Mile!
Preventing inventory stockouts requires a proactive and strategic approach to inventory management. Our delivery management software has an integrated inventory management module which will help you:
- monitor inventory levels
- analyze backorder trends
- manage vendor relationships
- address customer complaints
- reduce the need for emergency restocking
So, if you want to lessen the risk of stockouts and ensure a steady supply of products for seamless order fulfillment, contact us today!