Stockouts Definition: Understanding the Concept and Implications

As a shopper, it can be aggravating to arrive at a brick-and-mortar store or online marketplace with the intention of purchasing a specific item, only to discover that it’s out of stock. Conversely, as a retailer, it’s crucial to prevent such situations to avoid alienating potential customers and driving them to competitors. In fact, the retail food sector in the United States alone is estimated to suffer a loss of $15 billion to $20 billion in annual sales, or up to 3% of the total industry revenue, due to stockouts.

Despite the challenges involved in managing inventory, it is possible to reduce, or even eliminate, stockouts. This article delves into the details of stockouts, examining their underlying causes and outlining effective strategies to mitigate them.

What Is a Stockout in Business?

In the business world, a stockout occurs when a company exhausts its supply of a particular product. As a result, customers are unable to place orders for the item, and the business must adjust its availability status accordingly. If a customer inadvertently orders an out-of-stock (OOS) item, the company may need to inform the customer, leading to disappointment, or incur additional costs by rushing production and shipping to fulfill the order on time. Stockouts are the opposite of overstocks, which occur when there is too much inventory, low product sales, and the risk of excess inventory that must eventually be written off.

To determine the percentage of items not available for sale, a business can calculate its stockout rate by dividing the number of products not in stock by the total number of available inventory products.

According to the most recent available data from the early 2000s, the global average stockout rate for the retail industry was 8%, and nearly double for advertised products. However, supply chain disruptions resulting from the COVID-19 pandemic are likely to have increased the average rate since then.

Understanding and Managing Stockouts in Business

Stockouts are a common occurrence in business and happen when a product is depleted from inventory, rendering it unavailable for order fulfillment. Ideally, businesses should be aware of stockouts before customers place orders, so they can adjust the availability status of the item on their sales channels to prevent customers from ordering an out-of-stock (OOS) item. If the business knows when the product will be back in stock, it’s essential to communicate that information along with the stockout notice, allowing customers to decide whether to wait or look elsewhere. Advanced inventory management software can provide necessary information and automate some or all of these processes, but proactive reordering before inventory reaches low levels is even better.

If a business becomes aware of an OOS product after a customer places an order, the customer care team should check all locations to ensure fulfillment is not possible from another location or channel. If fulfillment is impossible, the customer care team should notify the customer and determine the best course of action. Ideally, the customer would place their order on hold until the OOS product becomes available, reducing additional shipping costs. Even if the customer wants delivery in two shipments, the business retains the sale. However, some customers may choose to purchase from another company or cancel the entire order, leading to a loss of the sale and potential long-term customer loss.

Stockouts almost always lead to a decrease in customer satisfaction, which is why it’s critical to identify the causes of stockouts and prevent them from happening in the first place.

Understanding the Reasons Behind Stockouts

A variety of factors can contribute to a product being out of stock, with human mistakes and insufficient planning among the primary culprits. However, other factors may also play a role, some of which may be beyond a retailer’s control. Here are some key factors that can lead to stockouts:

1. Erroneous records. Human errors are often the main cause of imprecise inventory counts, which can result in shrinkage, or the loss of inventory. Miscounting or inputting incorrect numbers during manual inventory management can eventually result in stockouts. While less common, technical issues may also impact the total count of available items for sale — for instance, delayed synchronization across multiple channels selling the product simultaneously. Additionally, it’s possible that items were simply misplaced during unloading and stocking in the warehouse.
2. Inaccurate forecasting. Efficient inventory forecasting is a critical component of inventory management and is essential for preventing stockouts. Inability to accurately predict customer demand can lead to overstocking, shortages, or stockouts. Although sudden demand changes due to overnight trending may be challenging to anticipate, having a well-executed forecasting system in place is crucial for minimizing stockouts for the majority of cases, including seasonal products.
3. Production disruptions. A factory shutdown for any reason can result in reduced inventory levels due to production delays.
4. Supplier setbacks. Likewise, suppliers may experience delays in delivering materials needed for manufacturing items, potentially causing the final product to be out of stock.
5. Logistics challenges. Unforeseen circumstances, such as severe weather events, traffic accidents, or mechanical failures, can disrupt the delivery of essential components for a product or the arrival of finished products at a warehouse, distribution center, or retail location. While many of these factors are beyond your organization’s control, it’s important to consider replacing a shipping company if their vehicles are consistently experiencing issues.

The Consequences of Stockouts on Businesses

Stockouts can have varying impacts on businesses of different sizes and stages. While larger, well-established companies may view stockouts as a minor inconvenience, knowing that their loyal customers will likely wait for the desired product, smaller or newer businesses may face more significant challenges due to out-of-stock products.

1. Adverse reviews. Disappointed customers may leave negative reviews about their experiences if they are forced to cancel orders due to stockouts or if they repeatedly encounter unavailable items.
2. Refund expenses. When inaccurate inventory counts result in stockouts after a customer has placed an order, a business may need to issue refunds. These costs can accumulate if stockout errors become frequent.
3. Lost sales. Unless a product is a limited-edition or exclusive item, customers are likely to search for similar products from other sources.
4. Lost customers. Product availability is a critical factor in customer satisfaction. If a customer finds a comparable product from a competitor after experiencing a stockout, they may not return. As a result, preventing stockouts is crucial for maintaining customer loyalty.
5. Back-order charges. If a customer agrees to wait for a product to become available, they can place a back order. While this is preferable to losing the customer entirely, it does come with additional expenses. For instance, if the back-ordered item is part of a larger order, the retailer usually covers the second shipping fee. Moreover, it is common for businesses to expedite shipping for back-ordered products to compensate customers for their subpar experience.

The Positive Side of Stockouts

While stockouts are generally considered an issue to be avoided or resolved, there are instances where having a product out of stock can be beneficial, particularly for products with a limited lifespan. Here are some examples:

1. Fresh produce and perishable goods should ideally have little to no stock remaining at the end of the day in grocery stores, ensuring minimal waste and optimal freshness.
2. For products that undergo distinct “generations,” such as automobiles or electronics, resellers aim to maintain minimal stock levels before a new generation is released.
3. Fashion retailers often clear out their previous collections to make space for new seasonal lines. In this case, they actively pursue stockouts through discounts and sales to liquidate old inventory.
4. Some niche products are deliberately produced in limited quantities, creating scarcity that drives demand for future releases after the initial stock is exhausted.

Even in situations where stockouts are advantageous or necessary, effective inventory management, accurate forecasting, and monitoring a product’s life cycle remain crucial.

5 Strategies for Minimizing or Preventing Stockouts

Although unexpected events beyond a retailer’s control can always arise, there are five inventory and supply chain management practices that can help minimize or even eliminate costly stockouts.

1. Enhance inventory precision. Regular stock counts to track and update inventory levels are crucial for avoiding discrepancies that can lead to stockouts. Inventory management software can automate stock level counts and share this information across all sales channels, ensuring that product availability data remains accurate and current.
2. Refine inventory forecasting. Accurate prediction of customer demand for products is an essential aspect of inventory management. Improved inventory forecasting helps prevent stockouts or excess inventory by maintaining inventory levels near the ideal, based on consumer trends and seasonal fluctuations.
3. Oversee your supply chain. Disruptions in the early stages of production due to delays in raw materials can cause a product to be out of stock when a customer is ready to purchase. Monitoring your supply chain and switching vendors when delays are persistent is an effective strategy for avoiding stockouts.
4. Determine and maintain safety stock. Safety stock is additional product inventory kept on hand as a precaution in case of emergencies that cause stock levels to drop. When stockouts become recurrent, it’s advisable to calculate and maintain a percentage of safety stock. The formula for calculating safety stock requires the maximum and average daily usage (number of products sold daily) and the maximum and average lead time (duration for the product to be shipped from suppliers/manufacturers to the warehouse/fulfillment center).
5. Track inventory replenishment times. Customers may be willing to wait for an out-of-stock product if they know it will be restocked soon. Businesses that consistently monitor their inventory levels and reorder products when levels are low can reduce stockouts and, if stockouts do occur, can more easily inform the customer when the item will become available.

Leverage NetSuite for Inventory Optimization

Effective inventory management software can address many of the factors that contribute to stockouts. NetSuite Inventory Management Systems Software offers visibility into stock levels across various points of sale and fulfillment centers. By automating the monitoring and reporting of inventory levels, the software minimizes the likelihood of inaccurate inventory numbers due to human errors. When stockouts occur at one location, sales associates can potentially salvage sales by utilizing alternative warehouses or fulfillment centers. Furthermore, NetSuite’s reports provide real-time, up-to-date data, which is crucial for precise demand planning. The software enables you to automatically schedule regular inventory counts and generates tasks and alerts when low stock levels require replenishment.

Conclusion

Frequent stockouts can result in lost sales and strained customer relationships. However, retailers and other businesses can take charge of their inventory, supplier, and customer relationships to avert such costly repercussions. Robust inventory management software automates the majority of the workload associated with preventing or minimizing out-of-stock issues, assisting businesses in avoiding stockouts while maintaining positive customer relationships.

Frequently Asked Questions about Stockouts

What are the causes of stockouts?

Stockouts can result from inaccurate inventory records due to human mistakes, delays from suppliers, or insufficient demand planning and forecasting. Unanticipated events, such as theft, adverse weather, or other shipping and logistics issues, can also contribute to product unavailability.

What are the risks associated with stockouts?

Persistent stockouts can harm a business’s reputation through negative reviews. They also increase the likelihood of customers seeking similar products from competitors, leading to lost sales and customer attrition. Stockouts have a significant negative impact on customer retention.

What does the stockout rate represent?

The stockout rate is the percentage of items that are unavailable when needed for sale. It is calculated by dividing the number of items out of stock by the total available items in inventory. The average stockout rate is around 8%, and it increases when products are on sale. A high stockout rate can result in considerable lost sales.

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