Stockouts are a very visible sign that you have a supply chain problem. And if you don’t see stockouts in your warehouse or in your stores, you will certainly feel the impact of them on your P&L.
Stockouts have a significant impact on both your margin and your customer experience, which, importantly, aren’t mutually exclusive.
In fact, the worse your stockout issues are, the bigger the issue of negative customer experience becomes. This will ultimately impact your margins and by the time you realise how severe it is, it might already be too late.
At the most basic level, no stock means no sale. But over the course of a longer duration, persistent stockouts will force your customers to go elsewhere. It this turns into a regular pattern, you’ll have serious problems on your hands.
There are a number of reasons you might run out of stock. But all too often, out of stock situations are down to poor planning.
What Is a Stockout ? What Does OOS Mean?
Stockout, or Out of stock (OOS), occurs when a business runs out of inventory for a particular product. It means the product is not available in the warehouse or in store for purchase by customers.
Whether it’s from inaccurate demand forecasting, supply chain disruptions, or unexpected spikes in demand, there are a number of reasons why stockouts might occur.
At best, stockouts will lead to lost sales. At worst, they’ll lead to dissatisfied customers, damage to your company’s reputation, and result in a slip in market position in comparison to competitors who have plenty of stock to sell.
If you can mitigate the risk of stockouts, you’ll be far better protected against both short- and long-term consequences. There are a number of strategies you can take to effectively safeguard against both.
Be it an optimised supply of safety stock, robust demand forecasting, or simply more effective supply chain planning.
6 Common Causes of Stockouts
Understanding the main causes of stockouts will take you an incredibly long way to combating them. Here’s a handy, non-exhaustive list that might help your business stay ahead of the curve.
1. Item count errors and inaccurate master data
Discrepancies in inventory levels, or simply the cardinal sin of miscounting, might lead your business down the path of overestimating the current on-hand availability of products.
This is certainly far from ideal, and totally avoidable with the right systems in place. But it does happen. A product’s marked as available when it’s not, a customer buys it, and it’s not actually there.
Of course, this also happens the other way. Stock’s marked as sold out on a system, but actually exists in the warehouse. Neither situation is great, but restricting trade for no reason is equally as problematic.
2. Poor forecasting
Inaccurate forecasting can have a number of knock-on effects. Stockouts are simply one of them. But again, having too much inventory could easily be another one, and just as damaging to your business.
Underestimate demand and it’s likely you won’t have enough stock to meet your customers’ orders, making a stockout incredibly likely.
Excess inventory, on the other hand, may even lead to stockouts of other items as your available working capital is squeezed.
3. Inaccurate reporting
Sales data is incredibly valuable to businesses. But only if it’s accurate and timely. Should your data be incomplete, inaccurate, or out of date, your inventory levels will quickly fall out of balance. You’ll also find it far harder to make effective business decisions.
Without this information, anticipating and responding to changes in demand or supply are almost impossible.
And so stockouts rear their head once more. To prevent them, your inventory levels must be well monitored and replenished based on actual sales and demand trends, rather than the whims or best guesses of those with the purse strings.
4. Ineffective working capital management
They say cash is king, and that’s probably not changing any time soon. If you have insufficient capital or poor cash flow management, your ability to purchase inventory to meet demand will suffer.
Often, you’ll find it tied up in non-liquid assets, or cash shortages across the business. As a result of these two issues, the procurement of inventory could be delayed or limited and that’s an issue that needs addressing, quickly.
Left to its own accord, you’ll find stockouts are unavoidable.
5. Supplier reliability challenges
Every business in the supply chain suffers from delivery problems at some point in their existence. It might even be a regular occurrence.
Experiencing delays, damages, or errors in your deliveries will disrupt the availability of goods and may lead to stockouts. Especially if it’s a regular occurrence.
Of course, if your inventory’s delayed by a long duration, or fails to arrive completely, you may not have the inventory on hand to replenish before the next shipment arrives.
Whether it’s a transportation delay, customs clearance problems, or just supplier capacity constraints, the reasoning behind the issues need addressing before they impact your product availability and bottom line.
6. Inefficient stock replenishment
Smooth processes will grease the wheels of many issues in your business. On the flip side, ineffective or slow replenishment processes can result in stockouts.
This is especially true if your customer demand fluctuates throughout the year based on seasonality or trends.
To avoid the possibility of stockouts, focus on placing orders promptly and reducing lead times wherever possible. Communication with both your internal teams and supply chain partners should be top of the list of priorities. The better you communicate, the better the business will run.
How Do Stockouts Hurt Your Business?
Stockouts are an expensive problem. Right away you’ll find lost sales revenue due to customers being unable to buy your products.
As mentioned above, this will also lead to a less than satisfactory experience for your customer. Whether it harms the brand’s reputation depends on the severity of the issue, but if they can find a more reliable place to shop, they will.
The loss of customer loyalty isn’t a great strategy to pursue for long-term business success. Especially if those once loyal customers become loyal to your fiercest competitors.
It’s highly likely your operational costs will rise as a result of stockouts.
Simply dealing with the problem will require additional resources and efforts you might not have the capacity to focus on. Maybe it’s expedited shipping, rush orders, extra staff hours, new promotional campaigns, stockouts of other products in your inventory, or higher marketing spend – the list is almost endless.
You might even have to offer discounts, making any sales you do complete less valuable to the business. And missing cross-selling or upselling opportunities is a natural follow on.
A common solution considered by many businesses is increasing the working capital investment in safety stock to make sure they never experience a stockout again. But of course, that has its own perils. Your carrying costs will rise, as will the risk of excess and obsolescence.
