What is a Stockout and How to Avoid It?

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What is a Stockout?

No amount of a sale you make is relevant if the product does not exist in your physical domain. A sudden inventory shortage can turn things upside down and you’ve inadvertently got yourself a disappointed customer.  

Across the US retail market, store managers handle stockout occurrences in various ways and strive to prevent an ongoing systemic deficiency. Nevertheless, stockouts are a serious problem for many vendors throughout the United States. It’s fair to say it’s a veritable retail epidemic. 

So, let’s look at common examples of stockouts, their consequences, and the most practical solutions for how to prevent stockouts in advance. 

What is a Stockout?

The meaning of stockout or inventory stockout is having an item listed as ‘available’ for sale in your store but not having it available or in saleable condition. Being out-of-stock (OOS) on one product or more is a very common problem for online retailers and physical stores alike. 

It’s fair to say that virtually all customers have experienced that situation. You can probably recall at least a single time when you ordered something online and were disappointed to get a follow-up call or message with an apologetic out-of-stock notification.

In so many cases, the frustrating inaccessibility of an item to a shopper is not due to shortages of material or manpower at the manufacturing end of the commercial system. It’s due merely to a failure to monitor and maintain inventory levels at the retailing end. 

Causes of Stockouts

With the many moving parts in the process of bringing a product for sale to your company’s shipping warehouse, of course, there will be occasional issues. Along the way are virtually innumerable external and internal potential causes and contributors to causes of stockouts on a product sold by a retailer. So, even if you do everything right, at some point, your business will face a stockout. Some of the most likely reasons for a shortage are:

  • Ineffective inventory management
  • Inadequate forecasting
  • Disrupted supply chain
  • High demand
  • Warehouse staff shortages 
  • Damaged or outdated stock

As your unsuspecting customers are checking out products from their shopping carts, they are unaware of the reasons why they will not be able to get the items they want to buy from you. Their key interest is in where to turn the item they want or need to purchase. So, they’ll move on quickly to the most viable alternative. 

Your responsibility is to communicate the information about the shortage, delivery delay, and compensatory actions you’re prepared to take (discount for waiting, alternative product, etc.).  

Consequences of a Stockout

In a Harvard Business Review consumer study, up to 25% of survey respondents said they just don’t buy anything in the event of a stockout. Up to 43% said they would go to a different store to buy the item. The rest said they would buy an alternative instead (a different size, model, color, an option with other features, etc.) The researchers determined that large retailers can incur many millions of dollars in annual losses due to stockouts. 

The retail market is, of course, intensely competitive. The merchants who best manage their inventory management systems gain a critical edge over those with less consistent track records. One stockout incident can negatively impact the customer experience, damaging the retailer’s record of reliability. If stockouts happen frequently, the problem can threaten the continued success of an online store. 

What is Stockout's Cost?

The retailer who lets down the customer can expect to begin to fade from favor in contrast to the competitor who came through for the shopper with a rapid turnaround in a pinch. But that’s not all of it. There are actual costs involved in the event of the needed product’s unavailability and even more costs if a customer places an order for an out-of-stock item. 

Some of those stockout costs include:

  • Cost of lost sale Aside from presenting an important lesson on what not to do, losing a sale to a competitor always carries broader negative implications for a retailer’s current margins and progress toward future goals.
  • Cost of lost customer The cost of locating and onboarding new customers is believed to be around 3 times the cost of retaining current customers.
  • Cost of carrying unsold goods – When an item offered at a seasonal sale price leads to a stockout, that naturally diminishes the relevance of a promotional discount that was intended to drive up sales. After multiple customers are confronted with the stockout, a retailer, especially a small business with lower stock turnover, may incur problematically prolonged storage costs and space issues.
  • Cost of brand damage Loss of brand value can be difficult to precisely quantify as it spreads from a negative event. But when left unchecked, it can ultimately lead to the failure of a business. 

The point here is that everything that can be done must be done to achieve fulfillment of the customer’s order or otherwise satisfactorily compensate the valued customer. The overall cost of obtaining a new customer is generally higher than that of taking a financial hit to keep one. Especially, if you factor in the cost of lost word-of-mouth marketing value and loss of direct referral business.

The entire effort to retain a customer in a stockout incident may entail a discount for awaiting delayed delivery, a discount on a similar item, or a coupon on a future purchase. It may even include making a special order and providing special delivery to the buyer to cure the stockout condition — at a loss.

Yes, those alternatives may seem extreme when multiplied by numerous occurrences. However, applying these solutions repeatedly can spiral into a habit of pervasive and unsustainable losses. Let’s look at more practical stockout policies and methods.

How to Prevent Stockouts  

The ramifications of letting stockouts happen are serious, so the best solution must be to prevent those occurrences, not handle them. The good news is that you can avoid most of the overt and more obscure causes of stockouts by consistently exercising effective inventory control procedures. 

The key is to strengthen your operational practices to minimize the risk of future stockouts. Here are some preventive measures you can combine for an optimally effective shortage prevention program:

Routine Stocktake

This is the standard retail industry procedure for manually tracking the quantity of each item in your inventory and monitoring the quality condition of all items. Identify damaged goods, items with upcoming expiration dates, and low stock quantities. Continuously gather this data to keep it current, use it to generate a steady flow of inventory reports, and use the reports to adjust cycle times for deliveries and tracking. Make further adjustments for historical and seasonal internal (and external market) sales trends.

Timely Stock Replenishment

Online retailers need an updated software platform to compete well in the modern retail venue of the World Wide Web. Proper software technology goes much of the distance to prevent stockouts by conveniently maintaining inventory levels for you automatically. Computerized data management can more accurately track inventory depletions and generate more meaningful reports for more effective forecasting.

Set Stock Level Alerts

Set your store options to trigger alerts when the stock drops below your planner’s specified threshold. Manual tracking systems are important, but syncing incoming and outgoing quantities is modern technology’s best answer to inventory-level management struggles. It will further cure the opposite common problem of inventory overages by displaying high counts and the time lengths that SKU items have remained in stock storage. 

If you’re using Magento, the Out-of-Stock Notification module will do the trick. 

Automatic Inventory Ordering Processes

Virtual versions of the basic KanBan inventory level tracking, automatic replenishment systems, and other tools are proven approaches to effective, more or less hands-free confirmation of stock status. They offer counts at a glance for physical warehouse storage and integrate with your digital inventory tracking software on your e-commerce sales platform.

Supply Chain Coordination 

Implementing radio frequency identification (RFID) technology bolsters the transparency of your supply chain processes as they advance from member to member down the chain. This is a modern tool that savvy retail business managers use to minimize the costs of stockouts and other issues. An RFID chip is inserted into the product packaging. It travels with the item, enabling error-proof SKU tracking and clarity on levels of demand for an item.

Effective Marketing and Product Promotion

Your product management for each inventory item should be comprehensive. It’s not enough to promote a product to temporarily boost sales. Effective promotion involves ensuring that your store can meet the demand your sales event generates. Consider either increasing restocking frequency or seeking discounts on larger bulk inventory orders throughout your campaign.

Maintain Control Over Inventory Management

Again, there are lots of moving parts to the challenge of ideally balancing predictable fluctuations, actual current-period demand, supply chain stability or volatility, and delivering the market’s best customer experience. Whatever your overall management strategy, it should include routinely collaborating with your inventory management team on ways to improve departmental accuracy and efficiency. 

Responding to Stockouts

Over 1/3 of businesses have reportedly shipped items to customers late due to unintentionally selling products that were out of stock at the time ordered. However, even if you do everything right, a seasonally uncharacteristic surge in demand for this or that product can catch your team by surprise with an unpredictable stockout.

In an unexpected stockout event, it’s time to choose your course of action in response to the unpredicted shortage. One of these two options may be the most practical for your business:

Launch Pre-orders for the not-yet-released items

  • Anticipate the volumes of customer interest for products that are about to be released by introducing the ‘pre-order’ function.
  • Analyze the number of pre-orders made on your website and plan your stock accordingly, avoiding shortages at the peak of interest.

Accept backorders

  • Launch into backorder management mode. Facilitate customers’ placement of orders for the out-of-stock product(s) and expedite inventory shipping. 
  • Promptly communicate the situation to all affected customers and assure them of your team’s timely response to meet their expectations and guarantee their satisfaction.

Label the item “out of stock”

  • Label the product in question as out of stock instead of placing it on backorder, if that makes more sense under your operational model and your customers’ usual expectations.
  • If you trust your supply chain to deliver in this time-sensitive circumstance, accepting backorders can be the right solution for resolving the shortage while preserving customer loyalty and current revenue flow. But, if you’re unsure, it may be safer to explain that currently, you can no longer take backorders for the product.

Read More: Backorder vs. Out-of-stock vs. Pre-order: Pros and Cons of Each Strategy

Prevent and Resolve Your Stockout Issues

By now, it’s probably apparent to you that running out of stock is to be diligently avoided in retail order fulfillment. Selling inventory that you cannot deliver is a very serious mistake that can irreparably damage your brand’s reputation. 

One takeaway message is that you should consider automated inventory management tools for online sellers. You are also well advised to build strong connections with your suppliers and to train and perpetually coach your staff to initiate the protocols you choose as your stockout policy to minimize adverse impacts on your business in such events.

Frequently asked questions

To further help you determine which approach is best for your company, here are answers to some frequently asked questions about treating stockouts as backorders or out-of-stock items:

A stockout is an item that is simply not available at the time a shopper wants it, whereas a backorder is an actual order for an item that is promised to a customer for future delivery when stock is replenished.

Delivery time frames for backorders can vary from days to weeks, even to months in some cases, depending on a wide range of factors involving manufacturers, workforces, transit, technologies, and others.

Yes, a customer can place a new order for an item that is already on backorder. Ordering a back-ordered product places the order for the shopper so that he/she can receive the item when it becomes available and customers who have already ordered it have been served.

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