Stockouts can be incredibly challenging for both businesses and customers.

Consider a DTC subscription box service that curates monthly boxes of gourmet snacks. 

When a new, highly anticipated box is released, demand exceeds expectations, quickly selling out the available inventory.

If subscribers who anticipated receiving the new box are disappointed, the company loses potential revenue. This means losing immediate sales and facing possible subscriber churn for the business.

​​The total projected cost of inventory distortions in 2023 was $1.77 trillion, as reported by the IHL Group—highlighting the severe impact of stockouts.

In this post, we’ll discuss strategies to avoid stockouts and ensure your inventory meets customer demand.

What is a stockout?

A stockout, or out-of-stock (OOS) event, occurs when a business does not have an item available, preventing customers from completing their orders.

This situation contrasts with overstocking, where excess inventory accumulates without corresponding demand. 

Stockouts are evident in physical stores as empty shelves. However, the impact might be less transparent for online retailers, potentially confusing customers about whether the issue is temporary or the result of a significant supply chain disruption.

Look at how customers react to out-of-stock situations for different FMCG products.

The repercussions of stockouts extend beyond immediate lost sales. Customers encountering consistent stock issues may choose to shop elsewhere, impacting long-term revenue.

The seven most common causes of stockouts

Stockouts can disrupt business operations and frustrate customers. Understanding the common reasons behind these shortages can help businesses implement effective solutions and maintain steady inventory levels.

Here are seven frequent causes of stockouts:

1. Inventory mismanagement

Mistakes in tracking or recording stock levels can lead to unexpected shortages. Accurate inventory management systems are crucial to preventing these errors.

2. Demand fluctuations

Sudden increases in customer demand can quickly deplete stock. Businesses should use forecasting tools to anticipate and prepare for demand surges.

3. Supplier disruptions

Delays or issues with suppliers can affect product availability. Building strong relationships with multiple suppliers can mitigate this risk.

4. Financial constraints

Limited funds may prevent the timely replenishment of inventory. Stable cash flow helps maintain adequate stock levels.

5. Forecasting errors

Inaccurate demand forecasts can lead to misjudging inventory needs. Forecasts should be regularly updated based on recent sales data to improve accuracy.

6. Logistical issues

Problems with transportation or warehousing can delay stock replenishment. Efficient logistics management is essential for timely restocking.

7. Seasonal variations

Changes in consumer behavior due to seasons or holidays can cause temporary shortages. Planning inventory according to seasonal trends can help manage these fluctuations.

Stockout risk formula (with examples)

The stockout risk formula is designed to help businesses assess the likelihood of inventory shortages. This is especially significant as 34% of consumers may switch brands after just two stockouts.

The formula below incorporates lead time, demand variability, and current stock to forecast potential stockouts.

Stockout Risk Formula

Stockout Probability = (Number of Expected Stockouts / Number of Expected Demand Requests) × 100

We’ll understand this better with an example:

During a promotional campaign, a specialty coffee shop anticipates high demand for its best-selling blend.

To manage inventory effectively, they track the number of stockouts that occurred in the past. Previously, they had forecasted 800 customer requests for the blend over a promotional period.

However, due to an unexpected surge in demand, the shop experienced 12 stockouts where the blend was unavailable.

Number of Expected Stockouts: 12

Number of Expected Demand Requests: 800

So, in this case, the stockout profitability will be:

Stockout Probability = (12/800) × 100 = 1.5%

The calculated stockout probability of 1.5% indicates a 1.5% chance that the shop will run out of stock for the blend during the upcoming promotional period.

This means that out of every 100 customer requests, about 1.5 requests could go unmet due to stock unavailability.

While this percentage reflects a relatively low risk, it points to potential customer dissatisfaction and missed sales opportunities.

Stockout costs and impact on business

Stockouts have a range of effects on businesses, often leading to significant financial and operational challenges.

Here are five ways in which they can impact a business:

1. Lost sales revenue

Businesses miss out on potential sales when a product is out of stock. This loss isn’t just about immediate revenue; it can also affect future sales, as customers may turn to competitors.

2. Customer dissatisfaction

Frequent stockouts can frustrate customers, leading to negative reviews and decreased loyalty. Customers who can’t find their desired products may be less likely to return.

3. Operational disruptions

Managing stockouts often requires emergency measures such as expedited orders or last-minute reordering, which can disrupt the normal flow of operations.

4. Brand damage

Persistent stockouts can harm a brand’s reputation. Customers who frequently encounter out-of-stock items may view the brand as unreliable, leading to a loss of trust and potential long-term damage to brand loyalty.

5. Increased inventory costs

Businesses might overstock items to avoid stockouts, increasing inventory holding costs. This excess inventory can become obsolete or require discounting to clear the shelves.

Stockout formula to calculate actual losses

Calculating actual losses from stockouts provides insights into the financial impact of inventory shortages.

It involves estimating the revenue lost due to missed sales and any additional costs incurred from stockout-related issues.

Formula to calculate stockout losses:

Actual Stockout Losses = (Number of Lost Sales × Average Selling Price) + (Cost of Stockout-related Expenses)

To break this down:

• Number of lost sales: This is the number of sales that could not be completed because the product was out of stock.
• Average selling price: The average price at which the product would have been sold.
• Cost of stockout-related expenses: Any additional costs associated with dealing with the stockout, such as expedited shipping or customer compensation.

Imagine a toy store that runs out of a popular action figure during the holiday season. The store estimated it lost 150 sales because the toy was unavailable. 

Each action figure was priced at $25. Additionally, the store spent $300 on expedited shipping to replenish the stock and avoid further sales disruptions.

Using the formula:

Actual Stockout Losses = (150 × $25) + $300 = $4,050

In this case, the toy store lost $4,050, including $3,750 from missed sales and $300 from extra shipping costs. 

This calculation helps the store understand the full financial impact of the stockout and highlights the importance of effective inventory management.

Tips to avoid stockouts

Preventing stockouts involves a strategic approach to inventory management. By employing these tips, businesses can better maintain inventory levels, meet customer demands, and minimize disruptions.

1. Forecast demand accurately

Predicting future demand requires using historical sales data, market trends, and seasonal factors. Accurate forecasting helps align inventory levels with expected sales, reducing the chances of stockouts.

2. Implement safety stock levels

Maintain a buffer of extra inventory to cover unexpected demand spikes or delays in supply. Safety stock acts as a cushion to prevent stockouts during unforeseen circumstances.

3. Centralize data

Integrate all inventory data into a single platform to enhance tracking and decision-making. Solutions like GoodDay can centralize your data, allowing for better management and reducing the risk of stockouts.

4. Optimize reorder points

Set reorder points based on lead times and sales velocity. This ensures that inventory is replenished before it runs out, keeping stock levels balanced.

5. Use automated inventory management systems

Adopt tools like GoodDay to track inventory levels in real-time. Automated systems help maintain accurate inventory records and alert you to potential shortages before they become problematic. 

Before choosing a tool, consider the frequency of stock checks, reorder schedules, and desired safety stock levels. This will help you find the ideal inventory management system for your business.

6. Build strong supplier relationships

Establish reliable communication and agreements with suppliers. Strong relationships help ensure timely deliveries and effective handling of any supply chain disruptions.

7. Analyze stockout patterns

Review stockout instances regularly to identify trends or recurring issues. Understanding these patterns can help address root causes and prevent future stockouts.

8. Implement just-in-time inventory

Adopt a just-in-time inventory strategy to minimize excess stock while ensuring timely replenishment. This approach can help in reducing storage costs and improving inventory turnover.

9. Train staff on inventory management

Ensure that your team is well-trained in inventory management practices. Proper training helps maintain accurate inventory records and handle stock levels efficiently.

10. Monitor inventory regularly

Regularly check inventory levels to ensure they match current sales trends. This helps identify potential shortages before they impact your operations.

FAQs

1. How do you deal with out-of-stock situations?

To manage out-of-stock scenarios, immediately update the availability status across all sales channels to prevent further purchases.

To maintain transparency and customer trust, communicate clearly with customers about the issue, offer alternatives or refunds, and provide an estimated restock date.

2. What is the stockout cost?

Stockout cost is the financial impact incurred when a business runs out of stock.

This includes lost sales, decreased customer satisfaction, potential damage to brand reputation, and additional expenses related to expediting orders or managing inventory disruptions.

3. What does performing stockouts mean?

Performing stockouts means actively managing and addressing instances when inventory is depleted.

It involves analyzing the reasons behind stockouts, implementing strategies to prevent them, and ensuring that systems and processes are in place to minimize their occurrence.

4. How do we solve stockout problems?

To solve stockout problems, enhance inventory forecasting to better align with demand, improve supply chain management, and use automated inventory systems to track stock levels.

Never run out of stock again

Keeping stock always available is essential for maintaining customer satisfaction and business profitability. Effective inventory management and forecasting are key to avoiding stockouts.

GoodDay streamlines this process by unifying inventory data into a reliable retail operating system. This integration simplifies inventory management, enhances accuracy, and minimizes the risk of stockouts.