Out of Stock: What Causes a Stockout and How to Prevent It

Rear view of a ceramic shop owner organizing her stock room.

In today’s increasingly competitive retail landscape, many businesses have focused on ensuring that customers get exactly what they want, when they want it, wherever they may be. The already-thin line between ecommerce and bricks-and-mortar retail has blurred even more in recent years, meaning many shopping journeys that begin with online research often end with an in-store purchase, or vice versa. Yet even the most diligent customer-focused stores can still struggle with one of the biggest challenges any retailer can face—running out of stock.

Stockouts, also known as out-of-stocks, are among the most frustrating experiences for online and in-store shoppers. Stockouts don’t just create disappointment and frustration for customers. They can also lead to missed opportunities to engage shoppers, lost sales and revenue, and potential damage to a retailer’s brand.

In this article, we’ll examine what stockouts are, what causes them, and how retailers can avoid them.

What are stockouts?

Stockouts cost retailers an estimated $1 trillion every year, and shoppers experience stockouts as frequently as every third shopping trip in some verticals, such as consumer electronics. But what are stockouts?

Stockouts can be defined as the unavailability of specific items or products at the point of purchase when the customer is ready to buy. In bricks-and-mortar stores, this usually means obvious gaps in a store’s shelves. In terms of online retail, stockouts can be even more frustrating for consumers, as there is often little to indicate whether the out-of-stock is down to a temporary technical problem or a major disruption in that retailer’s supply chain.

It’s worth noting that there is a subtle yet important distinction between out-of-stocks and generalized product unavailability.

When Disney released its hotly anticipated BB-8 droid toy to coincide with the theatrical release of Star Wars: The Force Awakens in 2015, virtually all retailers sold out of the toy immediately. This is an example of widespread, generalized product unavailability. But if most retailers had still had the toy in stock and one retailer in particular did not because of supply-chain issues or poor inventory management, then that retailer’s product shortage would be considered a stockout.

What causes products to be out of stock?

Although there are only a few likely outcomes from out-of-stocks, such as customer frustration and lost sales, there are many different scenarios that can cause stockouts in the first place.

Disparities between item counts

One of the most common causes of stockouts is a disparity between item counts or a record of how many units of a particular item a retailer has in stock.

There are four main reasons why there may be discrepancies between item counts:

  1. Human error
  2. Technical issues
  3. Shrinkage, or the loss of goods due to damage or theft
  4. A combination of the above

Although it’s difficult to quantify, many mistakes in inventory management can often be attributed to human error. Miscounting items can be all too easy during busy shopping periods, especially in retail stores, which makes mistakes not just possible but even probable in some environments.

Technical problems can also cause disparities between one item count and another. Many warehouses and distribution centers rely on computerized inventory management systems. But when those systems have technical issues, such as data center downtime, or there’s a delay in the synchronization between two computerized systems, discrepancies in item counts become more likely.

Sometimes, a combination of these two factors is to blame for inventory mismatches. Just as it’s all too easy for busy warehouse personnel to miscount items by hand, it’s just as easy to input the wrong data into an inventory management system.

Inadequate forecasting and inaccurate reporting

Stockouts are often caused by unexpected surges in consumer demand. However, inadequate forecasting or inaccurate reporting can cause out-of-stocks too.

Most retailers could probably tell you their most popular items offhand—yet many inadvertently allow their most popular products to sell out due to inadequate forecasting. If a retailer cannot effectively anticipate demand for a specific item, it’s almost inevitable that some customers will end up disappointed when that item is unavailable.

Similarly, inaccurate reporting can cause out-of-stocks. Retailers can only make business decisions based on the data available to them. If sales reports are inaccurate, making informed decisions about inventory purchases becomes that much harder.

Delivery and logistics problems

While many inventory management issues are well within retailers’ control, logistical problems often aren’t.

Retailers may not be able to do much about weather conditions or the mechanical problems of a delivery vehicle. Unfortunately, logistics problems aren’t always this straightforward. Just as it’s easy for goods to be misplaced by warehouse staff, it’s just as easy for the wrong shipment to be delivered to the right location.

Similarly, a logistics provider’s shipping manifest might indicate that a shipment is on the road for delivery, when, in fact, that shipment is still waiting to be processed in a distribution center. Magnify this problem across millions of products due to be shipped to thousands of retailers and it becomes easier to see how critical accurate logistics information can be.

How can retailers avoid running out of stock?

Many retailers react to stockouts rather than taking proactive steps to prevent them. But reacting means retailers are constantly on the defensive. With a little planning and the right tools, retailers can proactively avoid out-of-stocks and ensure their customers are happy.

Reconciling disparities in item counts

Stockouts often occur when there are differences in item counts from one inventory management system to another. Eliminating human error entirely is practically impossible but, fortunately, ensuring inventory data is up-to-date is much easier.

Shopify’s unified commerce platform aggregates inventory data from all locations, both online and in-store. With a single back end underpinning all of a retailer’s sales channels, stores using Shopify can rest easy in the knowledge that they’re working with up-to-the-minute information that updates in real time.

This unified approach to commerce is what allowed green beauty retailer The Detox Market to scale its operations from two pop-up stores in San Francisco and Venice, California, to six retail locations across the US and Canada, two warehouses, and an online store.

Detox Market inventory counting

The Detox Market relies on just three people to manage an inventory of thousands of products from hundreds of retailers. Using Shopify, Shopify POS, and Stocky by Shopify, The Detox Market’s lean staff can effectively manage this kind of inventory because Shopify’s ecosystem of sales and inventory data updates in real time across all of the retailer’s stores and sales channels.

“Shopify and Stocky made it incredibly easy to scale. Without them it would have taken us much longer, and many more people, to grow to the size that we have in such a short time.” —Justine Prevosteau, digital business analyst, The Detox Market

Syncing inventory data between online channels and bricks-and-mortar locations makes it much easier for retailers to manage their stock effectively. It can also help provide customers with a much better experience.

Recent data suggests that the vast majority of shoppers begin researching products online before ultimately purchasing in-store, highlighting the importance of accurate inventory data. By tracking inventory across multiple retail locations, Shopify can help retailers avoid stockouts and give their customers the experience and service they expect. For example, if a specific product is selling much faster at one store than another, retailers can quickly see this trend and move stock from their warehouse or another retail location to meet that demand.

For Shopify retailers, add-on tools such as Tally and Better Reports can also make accurate inventory counts much easier.

Tally offers a range of helpful tools to ensure inventory counts are accurate. Retailers can create separate counts across multiple bricks-and-mortar locations, as well as create individual counts of specific types of products. Tally’s detailed discrepancy reports make it much easier to identify where counts are off and can help ensure inventory data in Shopify is as accurate as possible. Similarly, Better Reports can help retailers manage their inventory more effectively by providing greater insight into which products are selling well. Retailers using Better Reports can create custom reports based on more than 60 templates, create custom stock alerts, and more.

Forecasting demand more accurately

Another common reason for an out-of-stock is inadequate or inaccurate inventory forecasting.

Anticipating demand for specific products is a major challenge for retailers. Recent data suggests that 73% of retailers struggle with inventory forecasting.

Accurately predicting how much inventory a retailer will need and by when will be easier for some retailers than others by performing an ABC analysis. Businesses that rely primarily on seasonality, such as winter sports equipment stores or beach apparel sellers, may find it much easier to predict demand for specific products. That said, there are ways for retailers of all types to anticipate demand and avoid stockouts.

One of the first things for retailers to consider when preparing inventory forecasts is lead time or the time between placing an order for new products and actually receiving those products from a supplier. One way to gauge lead time is to examine previous purchase orders from specific suppliers. This probably won’t be enough on its own, but it can serve as a starting point for calculating lead time from individual suppliers.

Calculating lead time can also help retailers plan for busier shopping periods. However, stores run the risk of stockouts if they fail to take lead time demand into account. Lead time demand refers to the demand for specific products during the lead time for a resupply order to arrive.

Fortunately, figuring out lead time demand is quite simple. To calculate lead time demand, retailers can multiply the average lead time in days by the average number of units sold per day. The resulting figure is the lead time demand.

Another factor for retailers to consider when predicting anticipated demand for specific products is “safety stock” or the amount of stock a retailer has on hand to act as a cushion against unexpected surges in demand.

“If you carry too much inventory, you tie up money in working capital; if you don’t carry enough inventory, you face stockouts. Fortunately, the cycle stock portion of the inventory equation is straightforward. What keeps people up at night is safety stock." —Peter L. King, Lean Dynamics

Although this buffer will vary from one retailer to another, store owners can calculate their safety stock using the following formula:

(Maximum daily sales * maximum lead time in days) - (average lead time in days * average daily sales) = safety stock volume 

Retailers concerned about accurate inventory forecasting can also rely on data-driven solutions to ensure they don’t run out of their best-selling items. Shopify add-ons such as Stocky can largely automate much of the work of examining historical sales data and calculating reorder points.

Tools such as Stocky don't just offer an additional level or protection from stockouts. They also take the worry out of remembering to run reports, alert you when popular products are running low, and make it easy to place reorders by reusing previous purchase order information.

For even more peace of mind, retailers can configure custom stock alerts to notify them when popular items are at risk of selling out, when to place important reorders, and more.

Managing logistical challenges

Although retailers can only exercise so much control over how and when their goods are shipped, there are a number of best practices retail brands can follow to minimize the risk of stockouts due to logistical problems.

Retailers concerned about shipping problems causing out-of-stocks may want to consider working with a logistics provider that offers advanced shipping notifications (ASN). When shipments leave a warehouse or distribution center, retailers are notified and provided with an estimated time of arrival. Fortunately, many major logistics providers now offer ASN as standard, but it may be worth checking whether smaller logistics companies offer ASN before making a commitment.

“Choosing the right logistics provider allows customers to focus on their core business while feeling confident that their transport needs are being addressed properly.” —Vincent Touya, Dachser USA

Some logistics providers may offer ASNs for each individual touchpoint in the supply chain, not just for a shipment’s initial departure and final ETA. This can be useful for highly time-sensitive merchandise, such as perishable foods. Retailers may also want to inquire whether logistics providers rely on automatic data collection technologies, such as radio-frequency identification (RFID), or whether ASNs are handled manually.

Another factor when evaluating logistics providers is whether they offer less-than-truckload (LTL) shipping. Unlike conventional logistics, which favors less-frequent shipments of full truckloads (FTL) of merchandise, LTL shipping offers smaller, more frequent deliveries. LTL shipping can be advantageous for smaller retailers, as they only pay for the capacity needed to ship their goods. It can also help reduce warehousing costs.

Cross-docking is an option retailers also may want to evaluate before choosing a logistics provider. Cross-docking is the practice of loading merchandise to be shipped to customers directly from a manufacturer without being stored in a warehouse or processed at a throughput center. Cross-docking can work well for retail businesses that offer dropshipping.

Ultimately, logistics management isn’t just about minimizing the risk of stockouts. It’s about being able to respond to emerging problems quickly and provide shoppers with superior customer service when things do go wrong.

More accurate inventory management means happier customers

Stockouts don’t just mean disappointed customers. They also mean missed opportunities. When popular items are out of stock, retailers are literally leaving money on the table and inviting their shoppers to take their business elsewhere.

While it’s almost impossible to eliminate the risks of stockouts completely, retailers can take a more proactive approach to inventory management to reduce the chances of out-of-stocks considerably.

Request more info to find out if Shopify POS is right for your inventory management needs. 

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