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What are stockouts? A stockout is challenging for any business, whether retail or eCommerce. Avoiding one is of the utmost concern to any business as it hurts sales and destroys any attempt to gain consumer loyalty. The most considerable effect that a stockout can have is how it can alter the growth of a business.
Stockouts occur when a business runs out of inventory for a given item. The loss of revenue & customers, and increased backorder cost, directly result from a stockout. Due to delays, shrinkage, human error, or other factors, stockouts happen daily in the business world. It’s critical to be proactive to prevent a stockout.
Understanding stockouts and their crippling nature are important to the success of any business. Our guide below will detail what causes stockout and what can be done to prevent them.
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A stockout can occur as a result of a business’s inventory of a select item running out of stock. When this happens, fewer products are put on store shelves to be purchased by customers, and profits drop. A preventative measure is to calculate inventory days on hand and put a safety stock plan into effect. The root cause of a stockout can occur in a few ways:
A lack of production or availability can be truly devastating for the supply chain. In this article, you will find a complete outline of how to identify a stockout and calculate the cost of a stockout.
Stockout prevention is critical not only to a business’s bottom line but also in ensuring that consumer loyalty remains key to the business.
There are various reasons why a stockout might happen. No matter how it occurs, a stockout can prove to be devastating and hurt your business in both the short and long term. It is necessary to take every precaution to avoid such a situation.
The following are various ways an incorrect data set can cause a stockout:
A lack of inventory management will undoubtedly result in a stockout. Having an up-to-the-minute view of the active inventory and how that inventory translates to consumer demand is key to stockout prevention.
Visualizing and anticipating delays, lack of raw material and shrinkage are essential aspects of inventory management. Also, minimizing errors, whether technical or human, must be a chief concern.
The supply chain represents the entire fulfillment and distribution process from start to finish. Stockouts can happen at any point during this process. If a delay occurs during procurement, operations management, or retail fulfillment it would be a direct result of supply chain stockout.
There are various stages of a supply chain; a stockout situation can cause delays at any point during this process.
Whenever an issue in the supply chain happens, delays are likely to occur. Ultimately, delays translate into less available or no active inventory. There isn’t a cut-and-dry way to deal with supply chain delays. Thankfully though, there are proven methods that can properly address a delay based on the specific situation. Through regional distribution and consistent sourcing, you will see better results in avoiding delays.
Manufacturers require raw materials to mass-produce goods for retail. A lot can happen before and after the manufacturing process. When a retailer orders goods through supply chains that are direct from manufacturers, they expect their order fulfillment promptly.
Unexpected delays can happen when resources run dry, miscalculations are made, issues occur during transportation, and for many other reasons that are hard to calculate. Some common results from a lack of raw materials are:
There is a real need to anticipate any delays resulting from the lack of raw material for production processes. By properly instituting predictions based on data, the anticipation of peaks in consumer activity, and the life cycles of products your raw materials are needed for, this concept reduces future potential stockouts
When shrinkage occurs, it is primarily due to loss through theft or product damage. If a product has been stolen or damaged and not reported, it will remain in the available stock category. This lack of information may not seem like a big issue, but it can have harmful effects.
When orders are placed and there is nothing to fill the requisition, it will lead to an avoidable stockout. In 2020 alone, well over 15% of major retailers in the United States declared they had an inventory shrinkage report of 3% or higher.
Types of Shrinkage that can cause a stockout are:
Shrinkage is a significant problem related to active inventories, especially when it comes to eCommerce. When there is shrink in an inventory, there is an inaccurate representation of what is available.
For example, a consumer is looking for a particular polo shirt on a website. When the customer sees that the retailer has one left in stock in their size, they click the buy now button. If this shirt isn’t available as a result of shrinkage, a frustrating situation takes place.
The item suffers from miscalculation due to loss, and the consumer and the retailer have no idea. This occurrence will lead to a loss in the sale, consumer loyalty, and lost revenue for the company in trying to figure out what happened.
In 2022, most warehouses utilize a software-based inventory management system. However, technical issues in the computer system can bring forth drastic consequences. When an error occurs in computerized inventory management, stockouts can and will occur.
Some areas where technical errors can create a stockout include:
The utilization of computer systems have their own risk/reward, and the upside far outweighs the potential downsides. Highly skilled software engineers and technicians mitigate the likelihood of issues occurring. While the chances of these issues are minimal, they still happen. Having a well-trained team is essential to combating these issues.
Human errors can present themselves in many ways, just like technical errors do. When an error occurs, it can have a devastating effect on inventory availability. As the saying goes, "We are only human" mistakes are bound to happen. Some areas where technical errors can create a stockout include:
In this case, manual inventory management opens the door to numerous possibilities for mistakes. Using warehouse automation for example through a warehouse management system (WMS) will take the “human error” element out of the equation.
This particular form of a stockout often happens in the eCommerce space. Stockouts generally occur when the amount of product ordered by consumers is more than the available stock.
This form of a stockout occurs when demand exceeds the projection of the forecasted trend. Thus, there is not enough available stock to fulfill all online orders in this situation. Common reasons why an eCommerce stockout may occur are:
To avoid stockouts as an eCommerce retailer, on-demand warehousing (ODW) through third-party logistics (3PL) is an effective solution. It’s no secret that ODW, with the distribution services of a 3PL partner, is one of the best measures against facing a stockout.
Besides the reasons stockouts occur, let us talk about the negative impacts on both the business and the consumer base. When a stockout occurs, it creates a trickle-down effect for all involved. Let’s put the adverse effect of a stockout into perspective:
| For the Business | For the Consumer |
| Canceled order fees | Annoyance with business incompetence |
| Costs of back-ordering | The consumer is forced to back-order |
| Scheduled production changes | Frustration with poor inventory management |
| Losing consumer loyalty to a competitor | eCommerce loyalty can shift instantly |
One key area where a stockout can affect both the business and the consumer before a sale has even taken place is the point of production. If a required material is no longer available during production, the manufacturer has to take action immediately.
Manufacturer issues that can cause a stockout:
The effects of a stockout from a business perspective and consumer perspective are essentially the same. This statement is true because business revenue and consumer needs are interlinked.
The desire to provide a steady stream of readily available products versus the comfort of knowing a business will always have what you need inspires consumer loyalty. That is why a business needs to avoid the potential impact of a stockout at all costs.
When analyzing your inventory to contain costs, keep just enough inventory on hand or improve inventory levels to meet consumer demand, the need to calculate the cost of a stockout is imperative. The effects of a stockout on a single item are harmful enough, but when you factor in multiple items, it could prove overwhelming to a business in terms of lost revenue.
How do we calculate the loss of sales due to stockouts? Fortunately, there is a simple formula to help figure out the loss of revenue due to stockouts. We multiply the days out of stock, units sold per day, and per-unit price. After multiplying all three figures, the result is the stockout cost.
With the following calculation, we can calculate the exact cost of a stockout. In this example, let’s say that we are selling a fictional product called a "Widget," and the demand for the product is high. Let's figure out the stockout cost. Remember the calculation is (DO x US x PU) = SO.
| Days out of Stock (DO) | Units Sold Per Day (US) | Profit Per Unit(PU) | Stockout (SO) |
| 5 | 20 | 50 | $5,000 |
In some cases, depending on the size of your business, a stockout can prove to be catastrophic. The average sales in this example are around 20 units per day, and the profit of each unit sold is 50 dollars. However, you have been out of stock for five days. With this information in hand, you can see that the stockout cost is five thousand dollars in lost profit.
Any business must take preventive measures to ensure that stockouts do not happen. They can have devastating results, not only in the short term but also in the long term. There are several key factors to be aware of.
Each can play a vital role in keeping your business operating like a well-oiled machine and maintaining inventories low but not low to the point of failing to meet demand. Various factors require consideration in each aspect of a supply chain to prevent a stockout situation
Manufacturer
Retail Fulfillment
Consumer Base
It’s essential when calculating stockout cost to identify any weak links in your inventory management or supply chain. Each key factor outlined above serves as a checklist of best practices in managing an active inventory. This focus ensures the steady and accurate flow of goods while minimizing potential losses.
Safety stock is extra inventory held if the demand for products increases. This is used as a preventative measure for a stockout. There are several instances where a manufacturer or retailer would initiate the use of safety stock. While this may sound like a great idea, safety stock does have its risks.
Four reasons you might use safety stock include:
Four potential risks of using safety stock:
A stockout can occur from more than just one of the reasons covered. Sometimes, a combination of factors will affect a stockout situation. It could be a combination of human and technical errors, eCommerce fulfillment, shrinkage, or any number of things.
It’s imperative to exercise proper inventory management with impeccable business practices. A trusted third-party logistics (3PL) partner is the best preventive measure for keeping your business "stockout" free.
Employing the best in services, inventory management, and technological solutions through WMS and enterprise resource planning (ERP), R+L Global Logistics will streamline your business while minimizing the risk of stockouts.
When you think of distribution, there is no reason not to trust the best in the industry. R+L Global Logistics is the gold standard in distribution and fulfillment services. We’re here to serve you and ensure that your business has the best options in both distribution services and warehousing.
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R+L Global Logistics is here to support you, any time and anywhere. Feel free to reach out to one of our friendly experts to learn how to make stockouts a thing of the past (866) 989-3082.
