Demand & Inventory Planning

The True Cost of a Stockout for Your Business

Demand & Inventory Planning
October 2, 2023
8 min read

Learn how a stockout can have a knock-on effect on your business and how to manage stockouts when they do occur.

What Is a Stockout?

A stockout occurs when a product is unavailable for purchase (either in-store or online). A number of factors contribute to stockouts, but regardless of the cause, the customer experience is the same.

Cause of a Stockout

Many brands experience stockouts when there are unexpected supply shortages due to foul weather, a backup at a major port, or a sudden spike in demand. While you as the merchant have very little control over these types supply chain interruptions, there are several other factors that you can control, such as:

Stockout Costs

The consequence of a stockout is a missed sales opportunity. Stockout cost refers to the total expense of an inventory shortage including lost revenue.

A stockout can be especially harmful to your business if the shopper is a first-time customer. In this case, you’ve not only lost a single sale, but you’ve lost the opportunity to acquire a new customer, and if your competitors have the same or similar products in stock, they now have an opportunity to gain more visibility and market share.

Ware2Go’s Director of Business Operations, Jimmy Mitchell, describes how stockouts can have a knock-on effect on operating costs and customer retention.

It’s important to consider the effects of stockouts on your business when vetting potential partners, both on the supply and manufacturing side and on the fulfillment side. Below we’ll outline 3 tips for managing stockouts and discuss how the right fulfillment partner with the right data and technology can help you be more strategic about your inventory planning.

How to Manage a Stockout: 3 Tips

1. Prioritize Inventory Visibility

You can achieve greater inventory visibility through your Warehouse Management System (WMS), which should directly integrate with your shopping cart or Order Management System (OMS). A fully integrated WMS and OMS will give you real-time inventory data including:

  • The level of each Stock Keeping Unit (SKU) in each location
  • Quantity available to be sold
  • Number of items allocated to an order
  • Amount to be inbounded or put away

Seeing this level of information about each SKU and warehouse location will help you catch stockouts before they happen. When inventory reporting indicates that a stockout could be imminent at any location you have to decide what course of action to take. Ultimately, how you handle low inventory levels depends on your risk tolerance and product margin. The most likely solutions include:

Putting in a rush order with your supplier

Whether you decide to rush order to avoid a stockout depends on whether your margins support the extra cost from your supplier. Just because a product is selling quickly does not necessarily mean those sales are profitable. Spending extra on a rush order without fully considering your contribution margin per sale could cause you to sell yourself out of business.

Re-allocating inventory to another warehouse location

If a product is moving quickly on the West coast, for example, and your central warehouse is fully stocked, moving inventory to the West coast will lower your final mile delivery costs to that region. Moving inventory closer to highest pockets of demand will help you profitably serve your customers there.

Tapering down marketing spend

Turning off any PPC marketing campaigns or promotions will save customers the frustrating experience of clicking on your ad only to find that the product is sold out. It will also save you marketing dollars that you can put towards slower-moving SKUs.

Bleeding off less profitable channels

If your fulfillment solution is streamlined through a single outsourced fulfillment provider, you can allow your less profitable sales channels to run out of stock so you have plenty of inventory in stock to fulfill orders on your ecommerce site.

Talk to one of our fulfillment experts about inventory management.

2. Know Your Supply and Know Your Demand

Demand forecasting can sometimes feel out of reach for small to mid-sized businesses. The level of reporting and data analysis required to understand average demand against a product and how demand is affected by seasonality and promotional cycles is time and labor intensive. Often this type of reporting is an enterprise-level function, managed by a procurement specialist, but ultimately, businesses of all sizes need access to demand forecasting capabilities.

This is where a tech-enabled fulfillment provider can step in as a true partner for your business with data analysis that helps you make smart decisions around inventory management. Select providers offer inventory technology that leverages machine learning to automate the process of demand forecasting, giving you a full picture of:

  • What your current demand looks like
  • How demand will change over time
  • When and how much inventory you should re-order
  • If a stockout is imminent and how (or if) you should avoid it

Beyond automating complex processes, machine learning becomes smarter and more accurate over time. When leveraging this kind of fulfillment technology, your demand forecasting will become more accurate each season, increasing your level control over you inventory management and further decreasing your risk of stockouts.

3. Balance Stockout Costs with Fulfillment Costs

This may seem counterintuitive. While stockouts do ultimately add up to lost opportunities, it’s important to know how the cost of a stockout compares to the cost of avoiding it. A deep level understanding of the true cost implications of a stockout start with visibility and the technology to automate data analysis. Good fulfillment data will help you understand:

  • If inventory is low at a single warehouse, is it more costly to have a stockout for shoppers in that region or to incur the extra cost of a long-zone shipment from another facility?
  • Is the cost of missed sales opportunities greater than the cost of moving inventory from one facility to another or placing a rush order with your supplier?
  • Which products in your catalogue are most profitable and therefore highest priority to keep in stock?

At the end of the day, the cost of a stockout will be unique to your business and will even vary on a SKU-by-SKU basis. Having a fulfillment partner that prioritizes data and technology will help you become more strategic in your inventory management, balancing profitability with customer experience.

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