Stockouts – Out of Stock : What Is It, Causes, Impacts, and How to Avoid?

Editorial Note: We are an inventory management software provider. While some of our blog posts may highlight features of our own product, we strive to provide unbiased and informative content that benefits all readers.

Stockout or out-of-stock means a store has sold all of its stock of a specific item and is unable to restock it immediately to meet customer demand.

Businesses should effectively manage its inventory levels and balance between supply and demand to avoid stockout. Because of stockout, you lose sales, customers, money, profits, and brand reputation.

CGP Retailers Lost Out On 7.4% in Sales to Stock-Outs in 2021 which equates to $82 billion in missed revenue.

Causes of Stock-out:

 A Study research shows that by May 2020, the frequency of stockouts within the United States had increased to more than 35% — more than double the pre-pandemic level of 14%. 

Stock-outs happen when a store or business runs out of a specific item or product that customers want to buy. A stock-out can happen for a variety of reasons.

Among all, the most common causes are:

1. Over-demand:

Stock-outs can happen when there is a greater demand than there is supply for a certain product. Tracking ability(demands & trends) & capability to restock quickly can help businesses to prevent stockout due to over-demand.

2. Supplier-related issues:

Due to supplier-related issues, stock-outs may happen including being unable to deliver goods on time, the quality of the goods is poor, or suppliers disagreeing to take orders.

This can happen for a number of reasons, including supplier bankruptcy, production problems, or changes in the supplier’s business strategy. Maintaining strong relationships with suppliers and ensuring they can deliver goods on time helps to prevent stock-outs.

3. Logistics and transportation problems:

Logistics and transportation problems can cause stock-outs if goods are delayed or lost in transit. This can occur due to issues such as poor planning, transportation delays, road closures, natural disasters, or unexpected events.

Logistics and transportation problems can also result in damage to goods, making them unsuitable for sale. Ensuring that goods are transported efficiently and effectively can help prevent stock-outs and ensure the supply of products that customers need.

4. Production issues:

Production issues can cause stock-outs if goods are not produced on time, or if the quality of the goods is not enough to sell. This can occur due to issues such as machine breakdowns, power outages, raw material shortages, or production delays.

Ensuring that production processes are efficient and reliable can help prevent stock-outs. This can involve investing in new equipment, improving production processes, and having contingency plans in place to address unexpected events.

5. Inaccurate forecasting:

If the forecasting method used is inaccurate, if consumer behavior changes, or having insufficient data to make an accurate forecast, stock-outs may occur.

Improving the accuracy of demand forecasting helps to prevent stock-outs and ensure the right amount of inventory is available to meet customer demand.

6. Poor inventory management:

Research has shown that around 70-75% of stockouts are caused by flawed ordering and replenishment practices.

Due to poor inventory management, it’s hard to balance supply and demand and optimize inventory levels. As a result, a company does not have enough inventory on hand to meet customer demand.

Stockout can happen by using poor inventory management as a result of issues like not accurately tracking inventory levels, not reordering products on time, or having an inefficient ordering system. Effective inventory management is essential to prevent stock-outs that help to ensure supply based on demand.

7. Lack of warehouse space:

Lack of warehouse space a company is unable to store enough inventory to meet customer demand. This can occur if a company expands its operations rapidly, if there is an unexpected increase in demand for a product, or if the company does not have adequate space planning and management processes in place.

Ensure enough warehouse space to store inventory to meet demand. Lease additional warehouse space if needed, improve space utilization, or invest in more efficient storage solutions.

8. Unforeseen events:

Unforeseen events can cause stock-outs if a company is not prepared to respond to the event. This can include events such as natural disasters (e.g. hurricanes, earthquakes), pandemics, political unrest, or other events that disrupt normal business operations. Having contingency plans in place to address unforeseen events can help prevent stock-outs.

This can include developing alternative sourcing strategies, having backup plans for transportation and logistics, or investing in technology that can help to mitigate the impact of unforeseen events.

Impacts of Stock-out:

In 2023, US and Canadian retailers lost an estimated $350 billion in potential sales due to stockouts.

Stock-outs can have a significant impact on a company’s bottom line, so companies must take precautions to avoid stock-outs and ensure the supplies that the customers want.

Out-of-stock (OOS) occurrences can have a detrimental impact to both retailers and manufacturers in terms of lost sales as well as reduced consumer loyalty.

A stock-out can have several negative consequences for a business, including:

1. Customer satisfaction:

Customers may become frustrated and disappointed if they are unable to purchase the products they want. This can lead to lost sales, negative reviews, and reduced customer loyalty.

According to one McKinsey survey, 71% of consumers said they switched brands or retailers when they couldn’t find their desired product in stock. Only 13% stayed brand-loyal, and waited for the item to be back in stock.

Consumer reactions to stock-outs:

1. Find a substitute of the same brand
2. Substitute a different brand
3. Delay their purchase until the item is back in stock
4. Don’t buy the item at all
5. Buy the item at another store

2. Brand reputation:

Stock-outs can harm a company’s reputation if the companies are unable to meet customer demand. It’s important to be aware to ensure sustainable business success especially for the businesses that rely on repeat customers.

A stock-out can damage a business’s reputation, as customers may view it as a sign of poor customer service and product availability.

3. Sales and revenue:

When a store runs out of stock of a particular item, it cannot sell that product, leading to a loss of sales and revenue.

66% of shoppers use online resources to verify in-store product availability before making a trip.

When a customer is unable to purchase a product because it is out of stock, the company loses potential revenue. This can be especially frustrating if the customer decides to buy a comparable product from a competitor instead.

4. Costs of goods sold(COGS):

If a stock-out occurs, businesses may have to expedite shipping or engage in emergency procurement, which can be more expensive than regular procurement.

Stock-outs can increase costs of goods sold because it may need to expedite deliveries or find alternative sourcing options. This can increase inventory costs including buying costs, carrying costs, and overall Costs of Goods Sold(COGS).

5. Missed opportunities:

Stock-outs can result in missed opportunities for a company, such as the chance to capture additional sales or market share. Stock-outs reduces business capability and competitiveness in the competitive business world.

Impacts Across Industries:

Stockouts, an unfortunate reality for businesses, can have a ripple effect across industries, impacting different players in various ways. Here’s a breakdown of the common impacts across different sectors:

Retail and eCommerce:

1. Lost sales: Empty shelves or unavailable online listings translate directly to lost revenue. Customers go elsewhere, leaving potential profits unrealized.
2. Customer dissatisfaction: Frustrated customers may not return, damaging brand loyalty and leading to negative online reviews.
3. Increased marketing costs: Discounts and promotions to lure customers back can further erode profits.
4. Disrupted supply chain: Stockouts can expose vulnerabilities in sourcing and logistics, leading to inefficiencies and increased costs.

Manufacturing:

1. Production delays: Lack of raw materials or components can halt production, leading to delays in fulfilling orders and potentially penalties from clients.
2. Increased expenses: Expedited shipping or sourcing alternative materials can be costly, impacting profit margins.
3. Damage to reputation: Unreliable delivery can damage relationships with clients and harm the brand’s image.

Healthcare:

1. Patient care delays: Stockouts of critical medications or equipment can delay treatment, impacting patient outcomes and potentially raising legal concerns.
2. Increased stress for providers: Healthcare professionals face time pressure, and stockouts add to their burden, compromising patient care and staff morale.
3. Public health risks: Shortages of vaccines or essential supplies can hinder disease control and outbreak response efforts.

Food and Beverage:

1. Wasted food: Spoilage of perishable items due to overstocking or poor inventory management can be both financially and environmentally damaging.
2. Customer frustration: Empty shelves or limited options can lead to customer dissatisfaction and switching to competitors.
3. Disruptions in restaurant operations: Stockouts of key ingredients can force menu changes, impacting customer experience and potentially leading to lost revenue.

Additional considerations:

• Seasonal fluctuations in demand: Industries like retail and tourism are susceptible to stockouts during peak seasons due to inaccurate demand forecasting.
• Global supply chain disruptions: External factors like pandemics, natural disasters, or trade wars can create stockouts across various industries.
• Impact on smaller businesses: Smaller businesses might have less resilience to handle stockouts and their financial consequences compared to larger corporations.

Overall, stockouts have far-reaching consequences, impacting not just businesses but also customers, patients, and even broader societal concerns. Implementing robust inventory management practices, diversifying suppliers, and utilizing technology for demand forecasting can help mitigate these risks.

Cost of Stock-outs:

Stockouts are more than just empty shelves; they represent a significant hidden cost impacting your revenue, reputation, customer loyalty, and overall business health.

A 2023 IHL Group study revealed that inventory distortion (including stockouts and overstocks) will cost retailers a staggering $1.8 trillion, equivalent to Brazil’s entire GDP!

The impact of stockouts goes far beyond a single lost sale. Here’s a deeper dive into the hidden costs that can hit your business hard:

1. Vanishing Revenue: Every empty shelf represents a missed opportunity. Frustrated customers, unable to find their desired product, might walk away, taking their wallets with them. This direct loss of sales can significantly impact your revenue and profitability.
2. Tarnished Reputation: Frequent stockouts erode customer trust. Imagine the disappointment of encountering empty shelves repeatedly. Customers might perceive your business as unreliable and turn to competitors who consistently deliver. This, in turn, damages your brand image and reputation, impacting future sales.
3. Scramble Tactics, Soaring Costs: When stockouts strike, panic sets in. You might resort to expensive rush orders or expedited shipping to replenish inventory quickly. These last-minute tactics come at a premium, adding unnecessary costs to your bottom line.
4. Loyalty Fades: Stockouts breed frustration. Customers who encounter empty shelves repeatedly might feel their loyalty fading. They may switch to competitors who offer consistent availability, jeopardizing your customer base and future sales potential.
5. Delayed Gratification: Empty shelves don’t magically refill overnight. Replenishing stock often takes time, leading to longer lead times. This wait translates to further lost sales and potential customer dissatisfaction, compounding the negative impact.

The cost of stockouts can be significant and can have a negative impact on a company’s bottom line, customer satisfaction, and reputation. Therefore, it is important for businesses to have effective inventory management systems in place to prevent stockouts from occurring.

Calculating the Real Cost of Stockouts:

Calculating the real cost of stockouts goes beyond just the immediate loss of sales. It encompasses various direct and indirect costs that can significantly impact your business. Here’s a breakdown of the key elements involved:

Direct Costs:

1. Lost Sales: This is the most apparent cost, calculated by multiplying the unit price of the out-of-stock item by the number of units you could have sold during the stockout period.
2. Expedited Shipping: To fulfill outstanding orders quickly, you might resort to expensive expedited shipping methods, adding to the cost.
3. Order Processing: Processing backorders or returns due to stockouts incurs additional labor and administrative costs.

Formula:

Lost Sales:

Lost Sales Cost = Number of Units Lost Due to Stockout * Unit Price

Expedited Shipping:

Expedited Shipping Cost = Lost Sales Cost * Expedited Shipping Premium (%)

Order Processing:

Order Processing Cost = Number of Lost Orders * Order Processing Cost per Order

Indirect Costs:

1. Customer Dissatisfaction: Stockouts can frustrate customers, leading to negative reviews, brand damage, and lost future sales. Quantifying this cost can be tricky but consider potential lost sales due to customer churn.
2. Inventory Carrying Costs: Holding excess inventory to prevent stockouts incurs storage, insurance, and handling costs.
3. Damaged Reputation: Frequent stockouts can erode customer trust and loyalty, impacting your brand image and potentially affecting sales across other products.
4. Employee Morale: Dealing with stockout-related issues can demotivate staff, impacting productivity and morale.

Formula:

Customer Dissatisfaction:

This one is trickier to quantify due to its subjective nature. You can estimate it based on:

Lost future sales: Use historical data or industry benchmarks to estimate the percentage of dissatisfied customers who might not return. Multiply this percentage by the potential future sales from those customers.
Customer acquisition cost: Consider the cost of acquiring new customers to replace those lost due to dissatisfaction.

Inventory Carrying Costs:

Inventory Carrying Cost = Holding Cost per Unit * Stockout Duration * Average Inventory Level

Total Cost:

Once you have calculated each individual cost, simply sum them up to get the total real cost of the stockout:

Total Stockout Cost = Lost Sales Cost + Expedited Shipping Cost + Order Processing Cost + Customer Dissatisfaction Cost + Inventory Carrying Cost

Remember, these formulas are a starting point, and you might need to adapt them based on your specific business context and data availability. The key is to capture all relevant costs to get a comprehensive understanding of the true impact of stockouts on your bottom line.

Steps to Calculate:

1. Gather Data: Collect information on sales data, unit prices, stockout duration, customer satisfaction metrics, inventory carrying costs, and any additional costs incurred due to stockouts.
2. Direct Costs: Calculate lost sales and factor in any expedited shipping or order processing expenses.
3. Indirect Costs: Estimate the impact of customer dissatisfaction on future sales based on historical data or industry benchmarks. Calculate inventory carrying costs based on your storage fees and holding duration. Consider the potential impact on brand reputation and employee morale, attributing a reasonable cost based on your specific situation.
4. Total Cost: Sum up all direct and indirect costs to arrive at the total real cost of the stockout.

Additional Tips:

• Analyze by Product: Calculate the cost of stockouts for individual products to identify areas for improvement.
• Consider Lead Time: Factor in lead times when calculating lost sales to ensure you account for potential future demand during the stockout period.
• Use Software: Inventory management software can automate calculations and provide valuable insights to minimize stockouts.

By understanding the true cost of stockouts, you can make informed decisions about inventory management, optimize stock levels, and ultimately improve your bottom line.

Actionable Strategies to Prevent Stockouts:

Stockouts, also known as out-of-stocks, occur when a business is unable to fulfill customer demand for a particular product due to insufficient inventory. This can lead to lost sales, frustrated customers, and damage to a company’s reputation. Fortunately, there are several steps businesses can take to prevent stockouts and ensure they have the right products in stock at the right time.

Implement robust demand forecasting:

1. Utilize historical sales data, industry trends, and marketing campaigns to predict future demand accurately.
2. Consider factors such as seasonality, promotions, and economic conditions when making forecasts.
3. Regularly review and update forecasts to reflect changing market dynamics.

Maintain optimal inventory levels:

1. Employ inventory management techniques like the ABC analysis to classify items based on their value and demand.
2. Set safety stock levels for each item to account for unexpected fluctuations in demand or supply.
3. Regularly monitor inventory levels and reorder products before they reach critical thresholds.

Leverage real-time data analytics:

1. Utilize point-of-sale systems and other data collection tools to track inventory levels in real-time.
2. Gain insights into customer buying patterns and adjust inventory accordingly.
3. Proactively identify potential stockouts and take corrective action before they occur.

Strengthen supplier relationships:

1. Develop strong relationships with reliable suppliers who can deliver products on time and in full.
2. Negotiate favorable terms, such as lead times and minimum order quantities.
3. Communicate openly and frequently with suppliers to anticipate and address potential stock issues.

Consider alternative sourcing options:

1. Identify secondary suppliers or distributors who can provide backup inventory in case of disruptions from primary suppliers.
2. Consider dropshipping or cross-docking if aligned with your business to reduce inventory carrying costs.

Implement effective communication:

1. Clearly communicate stockout risks and mitigation strategies to all relevant stakeholders, including sales, marketing, and customer service teams.
2. Develop contingency plans to inform customers about stockouts and offer alternative solutions.
3. Proactively address customer concerns and apologize for any inconvenience caused by stockouts.

Here are some additional tips:

1. Track your inventory levels closely. This will help you to identify potential problems before they become serious.
2. Set reorder points. This will ensure that you order new inventory before you run out of the old.
3. Have a backup plan in case of a supplier failure. This could include working with multiple suppliers or having a stockpile of inventory.

By following these actionable strategies, businesses can significantly reduce the risk of stockouts and ensure they have the products their customers need, when they need them. Remember, preventing stockouts is not just about protecting sales; it’s about building customer trust and loyalty, which are essential for long-term success.

Latest Technologies to Avoid Stock-outs:

Here are some of the latest technologies that can help businesses avoid stock-outs:

1. Artificial Intelligence (AI) and Machine Learning (ML): AI and ML algorithms can analyze vast amounts of data, including historical sales data, market trends, weather patterns, social media sentiment, and more. By leveraging AI and ML, businesses can improve demand forecasting accuracy, optimize inventory levels, and proactively address stock-out risks.
2. Internet of Things (IoT): IoT devices can be integrated into supply chain operations to monitor inventory levels in real-time. Connected sensors and RFID tags can track products throughout the supply chain, providing visibility into stock levels and facilitating automated replenishment processes.
3. Blockchain Technology: Blockchain offers secure and transparent supply chain management by recording and tracking transactions in a decentralized manner. It enhances traceability, reduces counterfeiting risks, and allows for more efficient inventory management, minimizing stock-outs.
4. Advanced Analytics and Predictive Analytics: Advanced analytics tools can analyze large datasets to identify patterns and trends that may affect inventory levels. Predictive analytics can anticipate stock-out risks by considering various factors such as seasonality, promotions, supplier performance, and lead times.
5. Robotic Process Automation (RPA): RPA can automate repetitive tasks in inventory management, such as data entry, updating stock levels, and generating reports. By reducing manual work and increasing efficiency, RPA can help prevent stock-outs and improve overall inventory accuracy.
6. Cloud-Based Inventory Management Systems: Cloud-based solutions provide real-time access to inventory data across multiple locations and enable seamless collaboration among different stakeholders. Cloud-based inventory management systems offer scalability, flexibility, and integration capabilities, making them valuable in avoiding stock-outs.
7. Collaborative Supply Chain Platforms: Collaborative platforms bring together suppliers, manufacturers, distributors, and retailers, allowing them to share information, forecasts, and inventory data in real-time. These platforms facilitate better coordination, reduce lead times, and improve visibility across the supply chain, minimizing the risk of stock-outs.
8. Data Analytics and Visualization Tools: Data visualization tools can present inventory data in intuitive and actionable dashboards, allowing businesses to monitor stock levels, sales patterns, and inventory performance at a glance. With clear visualizations, decision-makers can take proactive measures to avoid stock-outs.

It’s important to note that technology advancements continue to evolve rapidly, and new solutions may have emerged since my knowledge cutoff. I recommend exploring the latest innovations in inventory management and supply chain technologies to stay up to date with the most recent advancements.

Real-World Examples of Businesses Minimizing Stockouts:

1. Zara: This clothing giant uses advanced demand forecasting based on real-time sales data, weather patterns, and social media trends to predict which styles and sizes will be in high demand. They also have a highly responsive supply chain that allows them to quickly produce and ship new items based on real-time demand. This strategy helps them avoid stockouts and keep their stores stocked with popular items.

2. Amazon: The e-commerce giant utilizes sophisticated inventory management techniques like ABC analysis and safety stock levels to ensure they have the right products in the right warehouses at the right time. They also leverage real-time data analytics from their vast customer base to predict demand fluctuations and adjust inventory accordingly. This data-driven approach helps them minimize stockouts and fulfill orders efficiently.

3. Tesla: The electric car maker relies on strong supplier relationships with key battery manufacturers. They collaborate closely to forecast demand and ensure timely delivery of critical components. Additionally, Tesla implements a just-in-time inventory system for certain parts, reducing storage costs and minimizing the risk of stockouts.

4. Apple: The tech giant is known for its meticulous logistics and inventory management. They collaborate with a limited number of highly reliable suppliers and negotiate favorable terms to guarantee timely deliveries. Additionally, Apple utilizes dropshipping for certain accessories, reducing their own inventory carrying costs and minimizing stockout risks.

5. Nike: The sportswear giant utilizes historical sales data and marketing campaign insights to forecast demand accurately. They also consider seasonality and regional trends when making forecasts. This allows them to maintain optimal inventory levels and avoid stockouts of popular sneakers and apparel.

These are just a few examples of how businesses are applying the actionable strategies mentioned in your text to minimize stockouts. By implementing these strategies, businesses can improve their operational efficiency, enhance customer satisfaction, and boost their bottom line.

Facing Customers During a Stockout:

Facing customers during a stockout can be challenging, but with the right approach, you can minimize frustration and maintain positive relationships. Here are some key steps:

Acknowledge the problem:

1. Be upfront and honest with the customer about the stockout. Don’t try to hide it or make excuses.
2. Apologize for the inconvenience and explain the reason for the stockout, if possible.

Offer solutions:

1. Alternatives: Suggest similar products in stock that might meet their needs. Offer discounts or incentives to make the alternative more appealing.
2. Pre-orders: Allow customers to pre-order the out-of-stock item with an estimated delivery date. Consider offering a discount or free shipping for pre-orders.
3. Rainchecks: If applicable, offer rainchecks so customers can purchase the item at a later date at the original price.
4. Contact information: Provide contact information for when the item is expected to be back in stock or how they can get further updates.

Focus on customer service:

1. Be empathetic and understanding. Listen to their concerns and frustrations without getting defensive.
2. Be helpful and proactive in offering solutions.
3. Be transparent about the situation and provide clear expectations.
4. Be professional and maintain a positive attitude, even if the customer is upset.

Additional tips:

• Communicate the issue proactively: If you anticipate a stockout, inform customers in advance through your website, social media, or signage in-store.
• Train your staff: Ensure your staff is knowledgeable about the stockout situation and equipped to handle customer inquiries effectively.
• Learn from the experience: Analyze the cause of the stockout to prevent similar situations in the future.

Remember, even when facing a stockout, excellent customer service can turn a negative experience into a positive one. By being honest, helpful, and understanding, you can build trust and maintain customer loyalty.

Conclusion:

Stock-outs can have significant negative effects on a business, including loss of sales and revenue, customer dissatisfaction, and a negative impact on reputation.

By adopting effective strategies, such as accurate demand forecasting, efficient inventory management, and diversifying suppliers, businesses can minimize the risk of stock-outs and maintain customer satisfaction.

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