An inventory shortage can mean putting a dent in an otherwise positive customer experience.
While it’s hard to measure the exact value of ensuing losses, we do know that having an inventory shortage equates to missed sales—and missed sales are never good for business. As a result, many retailers are on the lookout for techniques, platforms, and tools to lessen the strain caused by inventory lapses.
“Products going out of stock are probably the biggest ’silent killer’ of growth I see in ecommerce,” says William Harris, CEO and DTC Media Buyer at Elumynt.
He isn’t wrong.
How many times have you been disappointed when a brand has items marked “Sold out” or “Notify me when back in stock”?
In this article, you’ll learn what an inventory shortage is, the causes, and how to deal with an inventory shortage.
What is inventory shortage?
Inventory shortage occurs when you have fewer items on-hand or in your retail store than what’s displayed in your records.
Inventory shortage causes
In order to solve the issue of inventory shortage, you have to get to the source of the problem.
These obstacles could include:
- Lack of working capital
- Errors in inventory data
- Unreliable forecasting
- Constant changes in demand
- Port congestion
When you’ve figured out which of these best describes your situation, you can then work out a plan to solve them.
Let’s take a deeper look at each.
1. Lack of working capital
Inventory doesn’t refer only to the products a company has for sale; it also pertains to the raw materials and supplies included in the production. As a result, it often eats up a huge percentage of working capital.
Increasing your working capital can have a positive impact on your inventory, but it’s not easily done for most small boutiques and mid-sized retailers. Fortunately, there are steps you can take to optimize your cash flow—it’s a bonus that you can also use them in times of crisis, such as a global pandemic or a war.
Another way to increase your working capital is to seek government funding. There are available grants to provide entrepreneurs resources for improving their inventory and other business aspects.
2. Errors in inventory data
Inventory mistakes have a major negative impact, since they directly influence the number of goods sold—and by extension, profits.
Inaccuracy can stem from either human or system errors. Incorrect physical inventory count is often the leading cause of data inaccuracies, but the good news is: it’s preventable.
Simple measures, such as performing regular store audits and having an omnichannel sales platform and a point of sale system with smart inventory features can significantly reduce the errors in your inventory data and ensure that your product counts are accurate no matter the sales channel.
3. Unreliable inventory forecasting
Unreliable predictions can cause companies to make decisions that don’t support the ebbs and flows of future-facing retail demand.
Kristina Lopienski, director of content marketing for ShipBob, points out that not ordering enough inventory from manufacturers leads to out-of-stock issues, back orders, and wait lists. On the other hand, she shares that ordering too much inventory results in high inventory carrying costs and the potential for outdated, expired, or unusable products.
In short: overoptimism can lead to oversupply, while downplaying data can cause a stockout. Regardless of whether you own a seasonal business or not, it’s imperative to have an accurate supply chain forecast.
“You will never get your inventory buying right. The goal is to be less wrong. The biggest thing to focus on is always to be a bit more conservative with your buying. Buying too little and running out will just slow your growth and create a sense of urgency with your customers. Buying too much can put you out of business.”
—Lanai Moliterno, founder of Sozy
4. Constant changes in demand
Customer demand is constantly changing. However, with accurate demand forecasting, most brands can project future trends, as well as spikes and upticks based on historical data and performance.
Sometimes, though, there’s a curveball. COVID, for instance, caused a rapid shift to online shopping. This increased attention cut both ways. While it drove up online sales, it also created a problem: lack of inventory to meet the near-overnight surge of demand.
This leaves retailers no choice but to adapt. Forging ahead with a scalable inventory management system can help brands keep up with shifts in consumer habits and unpredictable upticks in demand.
“A major theme coming out of 2020 was the idea of ‘just in case’ inventory, which is very much the antithesis of ‘just in time,’ which all operations management textbooks teach. I’m big on the idea of moving from an era marked by an emphasis on procurement for cost to an era marked by an emphasis on procurement for resilience. ‘Black swan’ events are becoming normal occurrences due to macro-economic, political, and weather events. For a number of businesses, the impact of the Suez blockage was more devastating than COVID.”
—Matthew Hertz, co-Founder of Second Marathon
5. Port congestion
The issue of port congestion differs from the rest of the listed inventory issues, because it’s beyond a business’s control. Unfortunately, it was one of the most pressing concerns among business owners during the pandemic, and it’s expected to last (globally) into 2023.
Port congestion occurs when a shipping vessel reaches a port to unload cargo but there isn’t a spot for it to berth. This means it has to wait out in the water until one becomes available.
Here’s what this means: Many products and raw materials come from different countries around the globe. When COVID caused worldwide shutdowns, even the biggest conglomerates in the country were suddenly sent scrambling to maintain their inventory.
When manufacturing recovered, production didn’t return to normal.
Aside from this, the ships used for delivery have become far larger than usual to maximize the amount of delivered goods. Since bigger ships occupy bigger space, fewer vessels can stay in port. This results in more ships left hovering on the water for days until they can dock.
What types of retailers or industries are inventory shortages impacting?
The majority of retailers around the world have been impacted by supply chain issues resulting from recent consumer behavior shifts and strict manufacturing practices. Few have been spared, but retailers with international suppliers and manufacturers have been especially impacted.
Specific verticals have also seen huge surges in demand. Outdoor equipment, exercise machines, and sporting goods have been especially hot commodities as people forgo indoor fitness centers and spend more time on outdoor recreation activities.
Jordan Schau, founder of Pure Cycles, acknowledged an initial delay and hiccup in the supply change brought on by the pandemic. Since then, the bicycle company has suffered from manufacturing delays and hasn’t been able to fulfill orders at its usual pace.
How does inventory shortage impact retailers?
Stockouts cost retailers $1 trillion every year—even before COVID. Selling out of inventory sounds like a great problem to have, but when this happens, customers are left disappointed—and retailers take the brunt of that frustration.
It also causes ripple effects, like restrictions around scaling efforts. Parker Gilpin, CFO of Compound Studio, says this was an issue for Compound’s portfolio brands in 2020, including jewelry line Etah Love.
“Sales have been above projections, which has limited our scaling efforts as we ramp up inventory,” he says. “We’ve pulled back on marketing spend until we have been properly restocked.”
Sean Dawes of Modded Euros also experienced a multitude of issues caused by inventory shortage, such as:
- Short shipment due to a brand’s inability to meet requested stock orders
- Long front-end lead times decreasing conversion rate for different products
- Relying on dropshipping to ensure orders get to customers in time
These unexpected consequences have left retailers in a tough spot. Many were forced to think outside the box or to pause operations.
But not Josh Karam and Erika Mozes. They took a bold move, opening Delancey Sports during the pandemic. They had a goal—to open the store in time for the holidays, especially considering the demand for sporting goods.
They managed to pull it off, but like many others, inventory shortage was their biggest challenge.
The interior of Delancey Sports
How do retailers deal with inventory shortage?
Resourcefulness and creativity are needed when working through an inventory shortage. Let’s look at a few best practices:
Minimize marketing spend
When inventory shortage is inevitable, swift action is critical. This means you need to quickly notify your marketing teams so they can adjust ad spend and reduce advertising budget for products that are low in stock or sold out.
“If we know that a certain product/brand/collection is going to be out of stock in 10 days and you won’t be able to get more in for 30 days, it doesn’t make sense for us to keep spending as much as possible on those products. That would hurt the unit economics since it’s assumed that a lower spend would stagger that inventory a little better—ideally at a lower CPA.”
—William Harris, CEO and D2C Media Buyer at Elumynt
Make agile transitions
Retailers who can make a quick, agile transition and adapt to an inventory shortage are the ones that recover during challenging times. It’s also a form of exhibiting resilience, a quality retailers need to prepare for the future.
This may mean risk reduction via expansion into additional fulfillment centers, or it could mean making the shift to neutralize increasing consumer demand quickly.
Pure Cycles adapted to the ongoing challenges through strategic merchandising. Since most of its core bikes were not available, it started pushing on-hand models and coming up with new products that are easier to manufacture, such as bags and security locks.
Prioritize customer service
While dealing with challenges, it’s easy to get flustered and focus on solving the problem at hand. However, it’s important to remember the heart and soul of any business is its customers. Prioritizing excellent customer service and implementing stop-gap solutions can help manage customer expectations and experiences.
For example: jewelry company Etah Love uses a Notify Me button on its sold out product pages that allows customers to opt into an automated email once the product is available again.
Aside from tools, you can also rely on social media. Clothing brand Sozy keeps tabs on its ambassadors through its VIP Facebook group, which allows it to share updates and learn what resonates most with partners’ followers.
Explore other shipment options
If port congestion is what’s setting your business back, looking into other shipment options is a good idea. Recently, air cargo has been experiencing a demand surge, as more retailers turn to it for deliveries. It saves time, but often is more expensive.
Other retailers are finding workarounds for increased port traffic by receiving shipments from a variety of locations.
“Industry West has established capabilities to receive at three ports—Jaxport, Savannah, and Long Beach—so when something goes down at one port, we push to the other.”
—Sissy McQuaig, COO of Industry West
Be prepared for an inventory shortage
An inventory shortage can occur unexpectedly. That’s why it’s important to prepare and have strategies in place to mitigate the ripple effects it can cause. Now that you’ve read this article, you have the knowledge to succeed if or when your business experiences an inventory shortage.
Additional research and content from Alexis Damen.
Inventory shortage FAQ
What causes a shortage in inventory?
Shortage in inventory can have a variety of causes, including unexpected increases in demand, production delays, supply chain disruptions, and supply shortages. A shortage in inventory can also occur when a business’s forecasting and planning processes are inaccurate or ineffective. Other possible causes of a shortage in inventory can include inefficient inventory management, theft or fraud, and natural disasters.
How do you handle inventory shortage?
Inventory shortages can be handled by implementing a variety of strategies, including:
- Identifying the cause of the shortage and addressing it
- Establishing a buffer stock to help manage shortages in the future
- Exploring alternative sourcing options Improving inventory planning and forecasting
- Offering incentives for early ordering or pre-ordering
- Offering back-order options to customers
- Utilizing safety stock to prevent future shortages
- Reevaluating product availability and stocking levels
- Leveraging technology to automate inventory management
- Utilizing third-party fulfillment services