Stockouts happen when an online or physical store runs out of certain items. It’s a situation that’s frustrating for the shopper and a revenue loser for the retailer.
When consumers visit your ecommerce store or physical shop, they’re often searching for a specific item to purchase. By maintaining stock levels, you can maximize the chance the press buy in the moment. But if items are constantly out of stock, it can cause customers to shop elsewhere and lower your sales revenue.
Read on to learn how enterprise retailers can prevent stockouts and improve customer satisfaction.
What is a stockout?
A stockout is the unavailability of items when a customer is ready to purchase them. This results in a loss of sales for the business.
Also known as out-of-stock (OOS), the costs associated with them include the loss of customers and income as a result of a shortage of inventory. Stockouts are most harmful when there’s no clear indication to customers of when the item will be back in stock and available for purchase.
A stockout can happen for several reasons:
- Demand spikes for a specific item
- Retailers miscount inventory and end up with less stock than they thought they had
- Cash flow issues cause delays in ordering stock
- Supply chain issues cause product shortages
- Shipping delays result in late delivery of in-demand products
Pandemic-induced supply chain issues, worker shortages, and shipping delays have all increased the likelihood of a stockout. Currently, in the US alone, 60% of consumers report being unable to get a product due to shortages.
In physical retail stores, a stockout might be more evident with obvious gaps in the store’s shelves. Stockouts can be even more annoying for online shoppers. There’s often limited information on whether the stockout is a temporary technical issue or if it’s part of a wider problem in the retailer’s supply chain.
Stockouts are a major inventory risk that leads to lost revenue and disappointed customers. In fact, stockouts cost retailers an estimated $1 trillion every year. They are usually a result of inaccurate inventory forecasting and the inability of retailers to operate in an agile way.
What are the causes of stockouts?
There are multiple situations that cause stockouts. Some are the retailer’s responsibility while others are out of their control.
Inaccurate item counts
A leading cause of stockouts is the difference between item counts and the record of how many units a retailer has in stock.
There are three key causes for differences between item counts:
- Human error
- Technical problems
- Shrinkage, or loss of goods due to administrative issues, shoplifting, product damage, or vendor fraud
While it’s difficult to calculate, poor inventory management is often down to human error. It’s easy to miscount items during busy shopping periods.
System glitches can also cause disparities between item counts. Most enterprise retailers rely on warehouse and distribution centers with computerized inventory management systems that automate the process. Sometimes these systems suffer issues like delays in synchronization or data center downtime. This can cause discrepancies in item counts.
When human error and system glitches combine, it causes inventory mismatches.
Cash flow problems
Poor cash flow management can also cause stockouts. While you may know how much inventory is required, without enough cash you can’t buy it. If low cash flow is causing out of stocks, then you may need to prioritize better planning and funding to alleviate the problem.
Ineffective stock replenishment
Stock replenishment means ensuring you have enough products to sell at the right time. Paying attention to stock replenishment is even more important in omnichannel retail, where customers expect to see the same product online and in-store. It’s key to set reorder points and allow low stock alerts so that you can automate your restocking process.
Delivery and supply chain issues
Sometimes stockouts are unavoidable and out of your control. Supply chain issues as a result of the COVID-19 pandemic have increased the chance of a stockout. Stockouts were up 250% in October 2021 compared to pre-pandemic levels. And at the end of 2020, around 56% of CEOs and retailers reported moderate supply chain disruption while 12% reported heavy disruption.
There’s also the issue of goods getting held up in global ports. According to the NRF (National Retail Federation), 97% of its members have been impacted by port congestion and shipping delays.
Worker shortages mean that hundreds of thousands of unloaded containers with merchandise are waiting to dock at ports. According to Bloomberg, 77% of the world’s ports are experiencing abnormally long turnaround times.
Given the widespread global delays in manufacturing, logistics, and transportation combined with supply shortages, retailers need to consider new ways of managing their stock levels.
Anticipating supply chain problems is challenging. But by maintaining accurate records, you can more easily forecast customer demand and reduce future inventory shortages.
Inaccurate demand forecasting
Inventory shortages and stockouts are a result of spikes in customer demand for items. But incorrect demand forecasting and reporting can also result in stockouts.
You most likely know your most popular SKUs. But do you know how many SKUs you need to stock to meet customer demand every retail season?
Many retailers fall into the trap of letting their best-selling products sell out as a result of inaccurate forecasting. When retailers don’t properly anticipate demand for specific products, it’s unavoidable that some customers will lose out on purchasing the product they were looking for.
Inaccurate reporting can also result in out of stocks. Retailers can only make correct stocking decisions based on the historical data they have at hand. If there’s not enough data or it’s inaccurate, making correct decisions about inventory levels becomes extremely challenging.
Rob Williams, the director of clothing manufacturer Hawthorn International, explains how inaccurate demand forecasting is common in the fashion industry.
“The most common reason for stockouts in the fashion industry is the brand underestimating the popularity of certain styles when compared to others. As we deal with start-up brands mainly, many of these don't have experience yet in which styles will sell best for them, and therefore they'll experience a stockout in either a size within a style or of a style altogether.”
What are the consequences of stockouts?
Stockouts can have crippling consequences for enterprise retailers. For instance, stockouts at homewares retail store, Bath Bed & Beyond resulted in $175 million in lost sales in the fourth quarter of 2021.
- Lost revenue
- Damage to customer loyalty
- Higher operational costs
Lost revenue
The clearest stockout cost is lost revenue. When customers go to make an order, and the item is out of stock, you lose the profit of the sale. Consumers might go to a competitor to buy the product or they’ll opt for a cheaper product.
Damage to customer loyalty
30% of consumers feel stockouts harm their shopping experience. Frequent stockouts cost you customer loyalty. If customers can’t purchase the product they want, they’re likely to buy it elsewhere. 69% of customers will choose a substitute item after a first stockout occurrence, but after experiencing three of them, 70% of consumers will shop with another brand.
Higher operational costs
Running out of stock means potentially needing to purchase inventory at short notice when it’s not easily available. This short notice could trigger rush fees in production and delivery. Your team may have to work overtime to handle backorders and surges in customer orders. These additional costs quickly add up and may have a negative impact on your bottom line.
How can retailers prevent stockouts?
The key to preventing stockouts is forward planning. Instead of scrambling at the last minute to match customer demand, retailers should focus on implementing the right tools and strategies from the outset.
Here are three ways to more easily match customer demand and prevent stockouts:
- Dropshipping
- Endless aisles
- Accurate demand forecasting
1. Dropshipping
Dropshipping is a fulfillment method that lets you meet customer orders without storing products in your inventory. Any orders placed on a retailer’s site go straight to the manufacturer. The manufacturer then ships the order to the retailer’s customers. Dropshipping acts as a kind of virtual inventory for shoppers, providing plenty of choices.
Rob Williams, the director of the clothing manufacturing company, Hawthorn International, explains how dropshipping not only helps brands keep more accurate tabs on their stock but also better meet customer demands.
“We actively encourage dropshipping to our customers to help to avoid stockouts. With dropshipping services which are able to allow brands to keep a real-time eye on their stock levels and access trends, we think dropshipping is a great tool not only to service end users better but also to allow the brand to see which styles need to be re-ordered with as much notice as possible.”
The key to a successful dropshipping program is to effectively onboard new brands to your chosen trade platform. That way you can sync product, inventory, and pricing data while completing contracts, service level agreements (SLAs), and other legal workflows.
Convictional enables retailers to onboard and transact their brands faster and easier. What used to take months now takes minutes. By using our platform, retailers can reduce their held inventory and establish dropship relationships with their brands more easily.
Indigo is a Canadian book and gift retailer that wanted to expand into new product categories for its loyal customer base. However, it didn’t want to risk holding inventory and stocking out of popular SKUs. They partnered with Convictional to dropship 10,000+ SKUs from 150 new brands in three months. By accelerating its revenue growth with dropship, Indigo was able to swing its EBITDA by $60 million and return to profitability.
2. Endless aisles
Endless aisles let your physical retail store offer customers a buy-in-store ship-to-customer experience. Customers can purchase out-of-stock items that aren’t available for purchase in-store but can be shipped to their chosen address. This may include ordering an out-of-stock item in a different color or size that’s not available to take away from the physical store.
Using endless aisles means you don’t need to maintain and balance stock across multiple physical locations. It also means you can showcase your whole product catalog in your physical store without having to carry the stock.
When you effectively integrate endless aisle technology you’ll receive real-time inventory updates too.
Menswear retailer Bonobos is an example of a personal concierge-led endless aisle showroom where customers can try on items in-store. Bonobos store associates help customers choose the perfect items before taking care of shipping them to their home addresses.
Accurate demand forecasting
Inaccurate inventory predictions are another common reason for stockouts. Correctly predicting customer demand is challenging––73% of retailers struggle with demand forecasting.
Accurately estimating how much inventory will be needed at different times during the year is usually easier for retailers who sell seasonal products. All retailers should maintain accurate reports and data in order to see which items are most likely to sell at any given moment. It’s essential to use an integrated inventory management software that can help you manage inventory data. Our partners at Cogsy have also highlighted the forecasting misconceptions you should avoid to produce a more accurate forecast.
Retailers also need to consider lead times––the time between placing an order for a product and actually receiving it from the supplier. Review your previous purchase orders from each supplier to get an idea of general lead times. To ensure you can meet any unprecedented spikes in demand, keep some safety stock on hand––but take care not to go overboard and overstock.
Access to historical sales data and knowing your product lead times should help improve your demand forecasting accuracy.
Avoid stockouts in your business today
Stockouts are frustrating for both customers and retailers. Shoppers feel disappointed they won’t be able to purchase the item they wanted, while retailers miss out on sales. Although it’s impossible to totally remove the risk of stockouts, retailers can implement new strategies to lower the chance of future out-of-stocks.
Ready to onboard retailers more easily? Contact our sales team today to get started.
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