What are Stockouts? (and 5 Ways to Prevent Them)

A stockout is challenging for any business, whether brick-and-mortar retail or ecommerce. Avoiding them completely is impossible, but reducing them and mitigating their negative effects should be a chief concern to any business owner seeking to build a loyal, satisfied base of customers.  

Key Takeaways

• Stockouts are inventory shortages that arise from issues such as shipment errors, supply chain delays, lack of raw materials, shrinkage, and human error.
• Preventing stockouts helps businesses sustain growth and build trust with their customers.
• Proactive measures, including inventory management, demand forecasting, and safety stock planning, can help minimize stockouts. 
• While maintaining safety stock can help prevent stockouts, it comes with risks such as increased storage costs and forecasting errors.
• Outsourcing inventory management to a 3PL is one of the best ways to keep stockouts to a minimum so you can focus on your core business.

Our guide will detail what causes stockouts, how to reduce their occurrences, and ways to lessen their impact on your business when they can’t be avoided. 

What is the Meaning of Stockout?

A stockout occurs when a business’s inventory of a select item runs out of stock. When this happens, fewer products are available for customers, and profits drop. In 2022 alone, retailers in Canada and the United States experienced nearly $350 billion in losses stemming from stockouts. 

Preventing stockouts is important not only to a business’s bottom line, but also in ensuring consumer loyalty. In order to understand stockout prevention strategies, let’s first examine what causes stockouts in the first place.

What Causes a Stockout to Happen?

There are various reasons why a stockout might happen. No matter how it occurs, it can prove to be devastating in the short and long term. 

Six of the most common reasons stockouts occur are:

1. Incorrect/faulty data
2. Supply chain delays
3. Lack of raw materials and/or components
4. Inventory shrinkage
5. Errors in inventory management
6. Ecommerce-specific issues

Let’s examine how each of these reasons can manifest in a business environment.

1. Incorrect and/or Faulty Data

Modern businesses live and die by the accuracy of their data. The following are various ways an incorrect data set can cause a stockout:

• Shipment Miscalculation: The incorrect or failed shipment of goods to a consumer. 
• Returns Miscalculation:  Incorrect or failed product returns to a consumer can result in inaccurate available inventory management.
• Shrinkage Miscalculation: The wrong determination of lost or stolen good amounts while taking inventory.

Anticipating delays and raw material shortages are essential aspects of inventory management. While some shrinkage is unavoidable, properly documenting and editing inventory to reflect that shrinkage will prevent you from overpromising and underdelivering. 

2. Supply Chain Delays

The supply chain represents the entire fulfillment and distribution process from start to finish. Stockouts can happen at any point during this process. If a delay occurs during procurement, operations management, or retail fulfillment, it would be a direct result of supply chain stockout. 

There are various stages of a supply chain, and stockouts can cause delays at any point during this process.

Whenever an issue in the supply chain happens, delays are likely to follow. Ultimately, delays translate into little-to-no available inventory. Thankfully, there are proven methods that can properly address a delay based on the specific situation. Through regional distribution and consistent sourcing, you will see better results in avoiding delays.

3. Lack of Raw Material in Production

Manufacturers require raw materials to mass-produce goods for retail. Unexpected production delays can happen due to  resources running out, issues during transportation, and other reasons that are hard to calculate. 

Some common results from a lack of raw materials are:

• Production Delays: When goods are not produced on schedule. 
• Design Rework: A redesign of goods that does not include a material that is out of stock
• Packing delays: The untimely packaging of goods set for distribution

By properly instituting data-based predictions, anticipating peaks in consumer activity and the life cycles of products your raw materials are needed for, you can increase your chances of having sufficient stock on hand.

4. Inventory Shrinkage

We touched on the subject of shrink earlier, but it warrants further discussion. Not having enough inventory on-hand to fulfill an order,  will lead to a few problems. 

Types of shrinkage that can cause a stockout are: 

• Miscounting: Inconsistency in calculating inventory prevents you from knowing the true scale of your active inventory.
• Theft: Goods go missing because of theft, resulting in there being less than what’s on record.
• Damage: When mishandling goods, some damage may occur in the process, preventing them from entering as available inventory.
• Loss: Inventory that does not make it into consumers’ hands because it gets lost in transit.

For example, let’s say a customer is looking for a particular polo shirt on a website. When the customer sees that the retailer has one left in stock in their size, they complete the transaction online with a reasonable expectation that the item they wanted is available. If this shirt isn’t in stock due to shrinkage, your now-frustrated customer is likely to shop elsewhere.

5. Errors in Inventory Management

Modern warehouses almost always use a software-based inventory management system. However, technical issues in the computer system can lead to stockouts. 

Some areas where technical errors can create an out-of-stock scenario include:

• Software corruption
• Synchronization issues
• Datacenter disconnects
• Discrepancies in inventory software

The use of computer systems has some risks, but the upsides far outweigh the downsides. Highly skilled software engineers and technicians mitigate the likelihood of issues occurring. 

In addition to technical issues, good old-fashioned human error can present itself in several ways. These mistakes can have a devastating effect on inventory accuracy and availability, and include the following: 

1. Disorganized warehouse
2. Poor training
3. Bad communication
4. Picking method
5. Manual data entry

In this case, manual inventory management opens the door to numerous possibilities for mistakes. Using warehouse automation such as a warehouse management system (WMS) will mitigate human error significantly.

6. Ecommerce Fulfillment Issues

Stockouts in ecommerce generally occur when the demand exceeds the projection of the forecasted trend. Thus, there is not enough available stock to fulfill all online orders in this situation. 

This may occur under the following circumstances:

• Increase in Product Demand: Lack of inventory monitoring for both yourself and competitor due to mistakes in forecasting customer trends.
• Poor Stock Management: Errors in the warehouse mixed with poor stock ledgers.
• Logistics Problems: Problems can occur with transport or lack of support stock.

To avoid these issues, on-demand warehousing (ODW) through third-party logistics (3PL) is an effective solution. 

What Impact Can Stockouts Have on a Business?

When a stockout occurs, it creates a trickle-down effect for all involved. I’ve listed some of these effects in the table below. 

One key area where a stockout can affect both the business and the consumer before a sale has even taken place is at the point of production. If required materials become unavailable, the manufacturer has to take action immediately. 

Manufacturer issues that can lead to insufficient stock on hand include::

• Loss of material resources needed
• Changing the production schedule
• Machine teardown or repair costs
• Required resource tuning
• Time delay due to carrying out the changes

To fully understand how stockouts can damage your business, we can resort to some relatively simple mathematics. 

How to Calculate Stockout Costs

In order to analyze your inventory to minimize costs and keep just enough stock on hand to meet consumer demand, you’ll need to calculate the cost of a stockout. Fortunately, there is a simple formula you can use to make this calculation. 

We multiply the days out of stock, units sold per day, and per-unit price. After multiplying all three figures, we get our cost.

• DO = Days out of stock
• US = Units sold per day
• PU = Profit per unit
• SO = Stockout cost

In this example, let’s say your business sells electronics, and the demand for a new miniature tablet proves higher than expected. Let’s figure out the stockout cost. 

Using the formula (DO x US x PU) = SO, we can accurately calculate the lost profits from insufficient stock

Depending on the size of your business, these costs can prove to be catastrophic. Businesses that rely on high-volume/low-margin sales in particular can experience severe setbacks due to stockouts. This brings us to the question of how a business can avoid this situation in the first place. 

How to Prevent Stockouts From Happening

Now that we’ve identified how badly a stockout can hurt your business, it stands to reason you’d want to prevent them entirely. Unfortunately, they can’t be prevented 100% of the time. We saw this during the COVID-19 pandemic, when even the biggest retailers in the U.S. couldn’t keep toilet paper or disinfectants on their shelves. 

However, some stockouts can be prevented, and the following five techniques will help you do just that. 

1. Improve Your Inventory Management System

Whether you’re a manufacturer, ecommerce business, or brick and mortal retailer, preventative measures via inventory management are the best ways to reduce stockouts. 

These measures encompass the use of advanced technology such as inventory management software in addition to many tried-and-true best practices. They include: 

• Accurate Lead Time Forecasting: This is the time it takes for an order to be processed and delivered. For instance, if a retailer places an order for thousands of holiday decorations to meet seasonal demand, the lead time could be several months between manufacturing and delivery. It’s important to think ahead, maintain active communication with your suppliers, and analyze customer buying trends to avoid surprises that can lead to stockouts. 

• Routine Inventory Counting: As a business grows, so too does its need for accurate on-hand inventory data. Counts should be performed on a routine basis to find instances of shrink, make necessary adjustments, and order additional stock as needed to meet demand. Businesses with large, diverse inventories will often use cycle counting to achieve this goal. 
• Demand Forecasting Via Sales Reports: As inventory management software has become more advanced, these programs have been able to analyze historical purchasing trends. In this way, the software doesn’t just keep track of inventory: it also generates reports businesses can use to accurately forecast consumer demand. 
• Annual Stock Counts: The physical counting of all items stored and sold. Having this function performed by a third party on a yearly basis is commonplace for big box retailers. 
• Determining Reorder Points: Also known as an optimal reorder level, this is the threshold at which you should reorder stock to meet projected demands. You can calculate this using this formula: average daily demand x lead time = reorder point. 

Another common technique used by businesses to combat the risk of stockouts is the purchase of safety stock. 

2. The Benefits and Risks of Safety Stocks

Safety stock is extra inventory businesses keep on-hand to meet unexpected surges in demand. On the surface, employing this practice might seem a no-brainer. Why not keep as much stock on hand as possible? However, there are benefits and risks involved with safety stocks.

 Benefits of this strategy include:

• Preventing Loss of Profits: Obviously, you can’t sell what you don’t have. Having additional stock available keeps cash flow steady and leads to our next benefit. 
• Retaining/Creating Customer Loyalty:  Even the most loyal customers can be forced to look elsewhere if you can’t meet their needs. Conversely, if you have safety stock and a competitor doesn’t, it could be an opportunity to earn new repeat business. 
• Protecting Against Extended Lead Times: If you have reason to believe that lead times for your goods are going to increase between reorder points, it might be worthwhile to make a larger order than normal to avoid disappointing future customers.
• Price Fluctuation Protection: Let’s say you have 500 stock keeping units (SKUs) worth of safety stock for an item that sees a sharp and sudden increase in manufacturing costs. Since you already paid the original, lower price, you won’t necessarily have to pass that cost on to your customers immediately. 

Meanwhile, keep these possible drawbacks in mind when deciding on safety stock levels:

1. Increased Storage Costs: Storing and maintaining safety stock is likely to drive up your warehousing costs.
2. Risk of Incorrect Supply Forecast: Even with advanced warehouse management software, forecasting isn’t an exact science. You might end up with significant overstock that doesn’t move if unexpected forces such as new competition start disrupting the market. 
3. Decreased Available Capital: Money spent on safety stock won’t be available should any unexpected expenses impact your business. 
4. Products Becoming Outdated or Superseded: If you have a large amount of safety stock for a product that becomes outdated and replaced by a newer model, that stock’s value is likely to plummet.

The more accurate your sales projections, the easier it is to use this technique effectively to minimize out-of-stock scenarios.

Related: Safety Stock in Supply Chain: Surviving a Stockout

3. Maintain Open Communication With Your Customers

This technique is less about reducing stockouts and more about reducing their negative impact on your customer base. Whether you’re a B2B supplier or you work directly with end users, informed customers are happy customers. 

If you know a stockout is likely to occur, passing that knowledge on to your customers can be beneficial for reasons such as:

• Giving B2B customers time to adjust plans and schedules with their own client base.
• Providing clarity to end users who might otherwise have waited too long to make a purchase.
• Maintaining and building trust with your buyers.

Nobody likes to be surprised by finding out an item isn’t in stock. Going above and beyond with emails, flyers, signage, and outbound calls will set your business apart from those who don’t make this extra effort.

4. Diversify Your Sources of Goods and Materials

You might have a main supplier you routinely purchase goods from to maintain stock levels, but it’s never a bad idea to have other options. Here’s a common scenario I often encountered during my time in aftermarket sales.

• A customer calls to order a part that is found to be out of stock.
• Rather than losing the sale or asking the customer to wait, we contact a larger dropshipping warehouse.
• The warehouse has the item in stock, and the order ships directly to the customer from the dropshipper instead of coming to us first.
• Instead of losing the sale, the customer’s expectations are fulfilled, and the sale goes through.

There are disadvantages to this option, chiefly that you’ll take a hit on your profit margins by purchasing from a dropshipper instead of directly from a manufacturer. However, you might find it less costly than maintaining safety stock, especially if you don’t run into stockout issues very often. 

Related: The Dropshipping Process: A Difficult Task Made Simple

5. Outsource Your Warehouse Management to a 3PL Provider

By now, you’ve probably noticed that stockout prevention is a skill set unto itself. This is why growing businesses will often turn over inventory storage, management, and maintenance to a third party logistics (3PL) provider. 

3PLs specialize in providing retailers, manufacturers, and ecommerce businesses with modern warehousing solutions that reduce stockouts and help you create a satisfied customer base. These providers can scale their services as your business expands, freeing you up to focus on your core competencies. 

How Fulfillment and Distribution Can Help

A stockout can occur from more than just one of the reasons covered. Sometimes, a combination of factors will cause them to occur. Partnering with a trusted third-party logistics (3PL) service is one of the most effective ways to avoid this issue. That’s where we come in.

Fulfillment and Distribution is the gold standard in distribution and fulfillment services. We’re here to serve you and ensure that your business has the best options in both distribution services and warehousing. 

Our distribution and fulfillment services include: 

• Full 3PL warehousing
• Pick and pack fulfillment
• Reverse logistics services
• And more

Feel free to reach out to one of our friendly experts at (866) 989-3082 or fill out a contact form online today. We’re ready to partner with you to reduce stockouts and keep your profits high.