Stock is the lifeblood of your business. And you don’t want that blood to stop flowing.
When demand outpaces supply or you fail to hold enough inventory, you could face a stockout. This frustrates customers when they can’t buy what they want — and frustrates you when you lose their business. Stockouts also cost you sales, which erodes your profits. In 2022, North American retailers saw up to $349 billion in stockout-related losses across industries.
Here’s how to make sure you’ve got goods on hand when people visit your store or place an order on your website.
What is a stockout?
A stockout occurs when a business runs out of a particular product. When this happens, customers won’t be able to order or purchase the item in question, leading to lost sales. While being out of stock or inventory is normal for any business, keeping tabs on items and communicating low inventory before it becomes a problem makes commerce smoother for everyone involved.
“Stockout” and “shortage” are often used interchangeably, but they’re not quite the same. A shortage usually points to a broader supply chain issue preventing replenishment. For example, you might face shortages due to supplier delays, logistics disruptions, or insufficient raw materials.
Stockouts, on the other hand, happen at the point of sale. The item customers want to buy is unavailable because of depleted inventory. You may have simply forgotten to reorder on time or underestimated demand. Or, a shortage may have caused the stockout — you ordered the items you needed, but your supplier couldn’t fulfill the order, so you can’t restock.
To determine whether you have a stockout problem, you can calculate your stockout rate:
Stockout rate = Number of out-of-stock products / Number of in-stock products
This measures how often stockouts occur. A lower percentage means they’re rare, while a higher percentage means worse inventory performance.
Effectively navigating stockouts requires close attention. When your business doesn’t have a particular product, you need to update the item’s availability status on your website to avoid accepting an order for goods that you don’t actually have. To keep customers happy and product flow running, put the right systems in place beforehand to spot low stock before it becomes a problem.
8 common causes of stockouts
Keeping tabs on logistics, suppliers, and cash flow keeps stockouts from majorly affecting business. Here’s how.
1. Inaccurate records
Human error is the most frequent culprit behind stockouts. Inventory miscounts or clerical errors when updating spreadsheets cause you to think you have more items than you actually do. By the time you discover the error, it’s usually too late.
Shy away from manual inventory counting processes. Instead, adopt inventory management tools that maintain real-time stock data and alert you to potential issues before you even notice — like Fishbowl. Fishbowl Inventory features convenient QuickBooks integration to help you keep your inventory levels where they need to be and your costs in check.
2. Delivery and logistics problems
You can do everything right — track inventory levels, reorder when your calculations tell you to, and stay in contact with your supplier — and a stockout can still happen. Logistical or delivery problems are often out of your control.
For example, severe weather or a mechanical breakdown could lead to delivery delays, leaving you without the items you need to keep store shelves fully stocked and ready for purchases.
3. Miscalculated forecasting
Inventory forecasting helps you align your strategy with consumer demand, and a miscalculation can lead to stockouts or overstocks. Overstocks increase your inventory holding costs, create inflexibility in your warehouse, and diminish liquidity. Stockouts cause shortages and make it difficult to meet customers’ needs. Solid inventory forecasting is all about balancing the two.
4. Poor cash flow management
Poor cash flow management can leave you without the resources you need to reorder items on time. Cash flow issues happen when you over-order or hold too much of the wrong inventory, so you’ll need to offload that inventory with sales or deals.
5. Supplier delays
Suppliers are sometimes late delivering materials or completing orders, which can lead to stockouts. That’s why it’s important to have a diverse supplier network and be able to pivot quickly if your go-to supplier doesn’t meet your needs.
6. Manufacturing issues
Problems on the production floor become inventory problems. If equipment failures or labor shortages interrupt manufacturing timelines, your stock may run out before replenishments are ready. If a batch has quality issues, you may be forced to discard the affected units, creating unexpected gaps in availability.
7. Unexpected increases in demand
Sudden surges in demand can empty your shelves faster than your supply chain can respond. These kinds of stockouts are difficult to predict. They may be driven by unpredictable factors like viral trends or seasonal spikes that exceed your typical sales patterns.
8. Processing capacity
If the system you use to process orders is outdated or poorly integrated with your inventory tools, you may sell more items than intended. Overselling quickly depletes your inventory, resulting in stockouts that disrupt sales. This is especially damaging if you don’t have enough inventory to cover the sales you’ve already made.
Stockout costs for businesses
While your business can survive the occasional stockout, recurring shortages eventually take a toll on your reputation, bank account, and customer satisfaction. For a small or up-and-coming business, stockouts can even be devastating. Here’s what could happen.
Bad reputation
You don’t want to become a brand that never has adequate inventory. Customers might be willing to forgive the occasional shortage, but some might leave negative reviews when they can’t get the products they want, tarnishing your brand reputation and creating a vicious cycle that costs you future business.
While that may sound like an alarmist’s perspective, your reputation is incredibly valuable. Doing what you can to protect it means protecting your inventory, too.
Loss of sales
Unless an item is a limited-edition product or brand exclusive, customers can probably find a comparable alternative somewhere else. Think about the last time you went to a convenience store that didn’t have your favorite snack. Did you go home and wait for a restock, or did you leave and visit another store to satisfy your craving?
Your customers have that same mentality, and it’s especially true if the item is something they want (or need) immediately. Stockouts lead customers right to competitors.
Backorder costs
You can always accept backorders to offset the inconvenience of stockouts. But customers won’t wait around forever. To avoid cancellations, you’ll need to expedite your shipment and communicate constantly. Doing so keeps customers happy, but it also drives up shipping costs and cuts into your profit margins.
Longer lead times
Lead times have a direct impact on customer satisfaction. Short lead times make for happier customers, while longer lead times tend to frustrate people — especially if they have to wait longer than they expected.
Stockouts drive up your lead times and create the perception that your brand is unresponsive or slow to fulfill orders.
Decreased customer loyalty
Product availability has a major impact on customer satisfaction. If customers find a similar product when yours isn’t available, they may buy from a competitor or switch brands altogether. What started as a minor inconvenience just cost you a loyal customer.
How to prevent and manage stockouts
Sometimes, stockouts are outside of your control. But that doesn’t mean you shouldn’t aim to prevent them — or at least minimize their impact. Here are a few strategies for doing so.
1. Improve inventory management
Always start by evaluating the quality and accuracy of your inventory management practices. If you rely on manual counts, it’s time to adopt modern inventory management software that reduces human errors and provides real-time insights into item availability. Most solutions also include automation tools to help you save time and be more productive.
2. Optimize forecasting
It’s important to accurately anticipate customer demand to have the right amount of inventory. While no forecast is perfect, modern forecasting tools guide your strategy and significantly reduce stockout probability. You can more easily adjust inventory levels according to shifting consumer demand.
3. Keep an eye on your supply chain
Always monitor your supply chain closely and maintain open lines of communication with your suppliers and vendors. The sooner you know about a potential supply issue, the more time you’ll have to pivot. And if a particular vendor frequently lets you down and delays shipments, it’s time to find a new trading partner.
Don’t wait until a problem arises to seek out new supplier relationships. Put those partnerships in place now so you have clear alternative options during emergencies or when a supplier has let you down one too many times.
4. Maintain safety stock
Safety stock is a surplus of a product that provides a layer of protection against stockouts. For example, imagine you’re currently ordering 1,000 units of a particular SKU per month and selling roughly the same number monthly. Thus far, you’ve been able to avoid stockouts — but an unexpected shipping delay could easily throw a wrench in your ordering strategy and lead to a shortage. Adding safety stock to your order buys some time if there’s a shipping or logistics delay.
Remember, safety stock is for emergencies. Recalculate your reorder points if you’re routinely cutting into your safety inventory. These points reveal when you should place an order for more.
5. Monitor average replenishment times
Make it a point to watch your average replenishment time, which calculates how long it takes to get products on the shelf after placing an order with your supplier. You’ll also need to calculate and monitor your inventory turnover ratio, which measures how many times you burn through stock in a specific period, like a year, a quarter, or a month.
If you know how long it takes to replenish your inventory and how frequently you use or sell your entire stock, you can optimize reordering schedules to minimize risk. Even if a stockout happens, you’ll have a good idea of when the products will be available again, and you can share this information with customers to reduce frustration.
6. Implement PAR level controls
Periodic automatic replacement (PAR) levels are the minimum number of inventory units needed to operate smoothly. Set PAR controls for each product, and when inventory dips below this minimum, reorder automatically to prevent stockouts.
7. Conduct routine inventory audits
Regular inventory audits help you catch the kinds of errors that contribute to stockouts. By doing physical counts and comparing them to your records, you can spot discrepancies early and correct them before they disrupt operations.
Maintain healthy stock levels with Fishbowl
The first step to preventing stockouts is modernizing your inventory management system — and that starts with Fishbowl.
Fishbowl offers unparalleled inventory management, allowing you to optimize stock levels and ensure seamless operations every time. You can also elevate your resilience with Fishbowl Inventory, which gives you up-to-the-minute insights. Want to further enhance your operations? Fishbowl Warehousing offers automated purchasing, vendor management, and order approvals, all from one platform.
Fishbowl’s warehousing and inventory tools unify your data and expedite decision-making with powerful insights and reporting. Schedule a demo to learn more.
