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Stockout in Business: What it is And How to Prevent it

Stockouts cost businesses a lot, from lost customers to increased supply chain costs. This blog post shares how to avoid these issues, by preventing stockouts.
 11 mins read

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Empty store shelves illustrating stockout situation in retail

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Stockouts cost businesses a lot, from lost customers to increased supply chain costs. This blog post shares how to avoid these issues, by preventing stockouts.

Stockouts: retail sin or smart strategy?

It may surprise you to learn that stockouts aren’t the be-all-end-all for eCommerce retailers. In fact, a strategic stockout can even help boost anticipation and build urgency when your inventory is back in play.

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But just because stockouts can be your friend doesn’t mean they don’t need smart management. Missing sales opportunities can be the right call in some instances — when you’re prepared for it — but eCommerce sellers must weigh that against the cost of carrying too much inventory and ultimately damaging your margins.

In this article, we’re going to comprehensively breakdown retail stockouts so that we can then explore how to use stockout situations to your benefit without risking the potential of disrupting your sales and logistics pipeline — as well as what you’ll need to support that goal.

What Is a Stockout?

A stockout is a situation where a product is unavailable for purchase, either in-store or online. A number of factors contribute to stockouts such as supplier issues, inaccurate demand forecasting, or poor inventory management. Stockouts are frustrating for both businesses and customers, as they result in lost sales and a negative customer experience.

Causes of  Stockouts

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 of supply chain interruptions, there are several other factors that you can control, such as:

  • Discrepancies in inventory cycle counts
  • Inaccurate data at receiving
  • Poor demand forecasting
  • Lack of communication within tech stack
  • Insufficient restocking
  • Working capital insufficiency

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. If your competitors have the same or similar products in stock, they now have an opportunity to gain that customer and claim 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.

Effects of a Stockout

Image showing negative effects of stockouts

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.

Beyond losing sales, stockouts erode trust, lead to rushed restocks that compromise quality, and increase costs with emergency shipments.

In this section, we’ll dive deeper into the 7 most common effects a stockout can have on businesses.

1. Missed Customer Acquisition Opportunities

If a customer encounters a stockout on their first interaction with your brand, it can be difficult to bring them back once you’ve re-stocked. Even if you pump marketing dollars into targeting them with re-stock notifications, they may have already turned to one of your competitors.

To learn more, check out Ware2Go’s latest eBook which explores how these approaches can help prevent stockouts and keep your business running smoothly.

2. Increased Operational Costs

Attempting to correct a stockout can lead to additional costs like rush orders from suppliers, increased marketing costs to re-engage lost customers, and more.

3. Inconsistent Product Quality

Stockouts often force businesses to place rush orders or switch to unvetted suppliers to meet demand, increasing the risk of receiving substandard materials or products. The pressure to accelerate production can also compromise quality control processes, leading to inconsistent or defective goods..

4. Customer Dissatisfaction

Stockouts, especially if they occur after a customer has made an order, can lead to disappointments and dissatisfaction. Especially if your products are consumables, shoppers will be frustrated to encounter stockouts when they need to replenish.

5. Poor Brand Image

If stockouts happen frequently, shoppers can become frustrated and may see your brand as being unreliable.

6. Increased Customer Churn

Ultimately, the frustrating experience of regularly finding products on your site out of stock will lead customers to turn to a competitor if they’re certain they will always have the products they’re looking for available.

7. Supplier Relationship Strain

Frequent stockouts caused by supplier issues can erode trust and collaboration, leading to strained relationships or even contract terminations. Over time, unreliable fulfillment may prompt businesses to seek alternative suppliers, disrupting operations and increasing costs.

How to Manage a Stockout: 5 Tips

How you handle a stockout depends on your risk tolerance and product margin. When faced with an imminent or current stockout, quick action is essential. Here are five strategies to mitigate the impact:

1. 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.

2. 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 the highest pockets of demand will help you profitably serve your customers there.

3. 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.

4. 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.

5. 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 starts  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 catalog  are most profitable and therefore the 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.

How to Prevent a Stockout

Image outlining strategies to prevent stockouts

Prevention is always better than cure. Implement these seven strategies to minimize the risk of stockouts:

This section will discuss 7 ways to prevent a stockout.

1. 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 your inventory management and further decreasing your risk of stockouts.

2. 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.

3. Keep Safety Stock

Safety stock acts as a buffer against unexpected demand spikes or supply chain disruptions, ensuring you have extra inventory on hand to prevent stockouts. It’s important to determine your risk tolerance to know how much safety stock you want to carry.

4. Keep Accurate Inventory Records

Accurate inventory records ensure your digital records accurately reflect your physical stock on-hand. Regularly updating records through audits and automated systems can reduce backorders and improve procurement strategy.

5. Diversify Every Aspect of Your Supply Chain

Diversifying your supply chain by working with multiple manufacturers and suppliers reduces dependence on any single source. This flexibility minimizes the risk of stockouts caused by delays or disruptions in one part of the supply chain.

6. Keep Eyes on Inventory Replenishment

Monitoring inventory replenishment ensures timely restocking, avoiding gaps in supply. Use tools like reorder points and lead time tracking to know exactly when to place orders and how long it will take for inventory to arrive, keeping your stock levels optimized.

7. Identify Stockout Patterns

Analyzing stockout patterns can help pinpoint root causes, such as seasonal demand surges or supply delays. Addressing these underlying issues proactively reduces the likelihood of future stockouts and improves overall inventory management.

Frequently Asked Questions (FAQs)

Below we’ll address some frequently asked questions about avoiding and handling stockouts to keep your business running smoothly.

How Do I Avoid Going Out of Stock?

Prevent stockouts by maintaining accurate inventory records, keeping safety stock, and setting clear reorder points. Using inventory management software and monitoring demand patterns also ensures timely replenishment to meet customer needs.

How Could We Prevent the Cost of a Stockout?

Minimize stockout costs by diversifying suppliers, forecasting demand accurately, and implementing contingency plans like rush shipping or substituting similar products. Proactive inventory management reduces disruptions that can result in lost sales and damaged customer trust.

How Do I Manage Stockout Situations?

When a stockout occurs, communicate transparently with customers about delays or alternatives. Expedite replenishment orders, adjust marketing strategies to focus on in-stock items, and analyze the cause to prevent future occurrences.

What Can Cause Stockout in My Business?

Stockouts can result from poor demand forecasting, supplier delays, inaccurate inventory records, or sudden demand spikes. Supply chain disruptions and insufficient safety stock are also common causes. Identifying these risks helps mitigate their impact.

Make Stockouts More Manageable With Ware2Go

Whether a stockout negatively costs you or strategically supports your sales by actually boosting demand is ultimately based on how well you manage the overall logistics and operations of inventory stocking vs. fulfillment.

Smart retailers, whether in-store or eCommerce-based, will understand that using stockouts to actually increase customer anticipation and, potentially, boost sales comes down to deciding on your risk tolerance and balancing that against long- and short-term goals for profit margins.

In either case, the best way to approach stockouts strategically is to partner with a dedicated fulfillment partner like Ware2Go, with access to a team of supply chain experts who can guide your fulfillment and inventory management plans.

Ware2Go’s Warehouse Management System offers deep visibility into supply chain components. When paired with accurate demand forecasting, it’s never been easy to manage and maintain control of how and when a stockout begins — and ends.

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