What Are Stockouts? Causes, Effects and How To Avoid Them
By Indeed Editorial Team
Updated November 4, 2022
Published July 7, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Warehouse showing rows and tiers of boxed containing products ready for shipping.
Having enough inventory to satisfy customers is an important part of a retailer's business process. Preventing stockouts can help a company make consistent profits and maintain customer loyalty. Understanding how to prevent stockouts can help you keep products ready for customers.
In this article, we define stockouts, discuss their causes and effects, explain what you can do to prevent stockouts and share some FAQs about them.
What are stockouts?
Stockouts are when products are unavailable to customers who want to make a purchase. Stock shortages occur in both physical stores and online stores. Supply shortages and improper inventory management commonly cause stockouts. Another stockout scenario is when a retailer has a product in stock in its warehouse, but the item isn’t available for purchase when the customer wants it.
What causes stockouts?
There are different reasons items may be out of stock, including:
Item count errors
When there's a difference between the actual items available and the item count customers receive, an item gap occurs. Item gaps happen for a few different reasons:
Technical issues such as an inaccurate display number on a website or a machine counting error
Human error such as a miscount of inventory
Loss of goods through theft or property damage
Sometimes, inaccurate anticipation of customer demand may cause a stockout. For example, if a highly anticipated toy is released, but the retailer is unaware of the toy's demand, it may become a challenge for the retailer to have continuously ready stock. Performing market research and surveys can help organizations stay up to date on in-demand items.
Delivery problems from suppliers to retailers may also cause stockouts. While challenges like weather conditions or stolen merchandise are largely out of a retailer's control, there are delivery problems within a retailer's control that may cause a stockout. For example, an employee may lose a delivery within the warehouse or deliver it to the wrong address.
Additionally, differences in manifest data can cause a stockout. For example, a manifest, which is a document that displays inventory, may tell customers and employees conflicting information about a product's location. Confusion from conflicting manifests may cause item loss.
What effects do stockouts have?
The effects of stockouts can include:
Loss of revenue
One of the main effects of a stockout is the loss of revenue for a business. When items are out of stock, customers can’t purchase them, meaning the business can’t make money unless it receives more stock. This may also lead to fewer sales in the future if customers decide to purchase items from other companies instead.
If an item isn’t in stock when customers want to buy it, they may become frustrated. Customer retention may decrease in the event of stock outages. Keeping customers' desired items in stock can help prevent customer loss and keep customer satisfaction high.
Negative perception of a brand
Customers may start to develop a negative perception of a brand if its products are constantly out of stock. This can also happen if customers purchase an item online, then the business notifies them that the item is unavailable. Stockouts can cause customers to feel that a brand is unreliable, and they may write negative reviews online or share their opinion of the business with friends and family.
How to avoid stockouts
There are many ways a retailer can prevent stockouts, including:
1. Update computer data
Because item gaps cause stockouts, keeping updated computer data across warehouses and retail locations can help prevent these situations. Syncing data across all warehouses allows computer systems to apply updates. Unifying warehouse details can help you better manage warehouse stock and compensate for demand by shipping items from multiple warehouses at a time. For example, if a warehouse near a customer is out of stock, another warehouse may be able to deliver the item to the customer.
2. Establish a recheck system
Establishing a recheck system for all stock counts can help reduce the number of stockouts due to human error. For example, if employees manually check the stock of certain items every week, establishing a recheck in the middle of every week may help reduce item gaps.
The same principle can be true for digital item checks. Computerized systems manage large warehouses, so establishing rechecks can help ensure data accuracy. Syncing data across both online stores and in-house retailers can also make it easier for retailers to manage their stock responsibly. For example, a retailer may help prevent online items from going out of stock by using in-store items to compensate for a temporary online store shortage.
Related: What Is Inventory Turnover?
3. Gather more stock-related data
Understanding stock data can help compensate for stock demand and delivery challenges. Some of the ways you can better assess your stock include:
Some retailers can more easily predict demand than others. For example, a store that sells camping supplies can typically expect a higher demand for summer gear and winter gear in their respective seasons. Even if a company doesn't sell seasonally, there are still many ways it can prepare for sudden demand to prevent stockouts.
To compensate properly for an in-demand season, a retailer can first calculate how long it takes for a product to arrive at a store from a supplier. By understanding this period, often called lead time, a retailer can better forecast how much time it may take for a new supply to arrive in the event of a demand influx. One way to learn lead time is by examining purchase times in contrast with arrival times.
Configuring stock alerts
Another way you can prevent stockouts is by configuring programs to alert a retailer when inventory may be low enough to cause a stock shortage. Stock outage alerts can help a retailer understand when and how much to reorder. In addition to understanding lead times, stock alerts can help prevent demand overflows during high buying periods at a store.
4. Manage the delivery process
While the deliveries themselves are typically out of a retailer's direct control, managing the delivery processes can help prevent stockouts. Some ways you can streamline your delivery process include:
Using advanced notification systems
Advanced shipping notifications let retailers know when an item leaves a distribution center and track every stop point along the way until arrival. Many advanced shipping notifications give an estimated time of arrival, further enabling a retailer to understand how to adjust the reorder schedule. Some distribution businesses use advance shipping notifications as a standard. For retailers that handle time-sensitive items, such as perishable foods or items that expire, having an estimated time of arrival and accurate shipping details may help expedite the delivery schedule process and help prevent stock loss.
Related: How To Track Inventory
Accepting more frequent shipping
Another way you can better control your shipping process is by allowing more frequent shipping, often called less-than-truckload shipping. Typically, when shipping to retailers, distribution companies use a full truckload, shipping only when a certain quota of items is available. Using a less-than-truckload schedule allows for items to ship as soon as they become available. Less-than-truckload shipping offers more frequent deliveries, which can help prevent stockouts.
Less-than-truckload shipping can also be helpful for smaller retailers who may not have extensive storage areas. Using this method, smaller retailers can have a consistent supply of stock while having fewer shortages.
Implementing cross-docking shipment
Cross-docking is a shipping method that allows for item transport directly from the production warehouse to the customer. This method can save shipment time and help prevent stockouts. While it may not work as well for larger retailers due to a higher volume of deliveries, smaller retailers with online stores might consider this option for faster shipping times.
Tips for compensating customers
If an item isn't ready for a customer, a business may improve the situation by compensating for item shortages. While changing the production schedule may help fix long-term challenges, there are limited short-term options to help satisfy customers, including:
Back-order items. If a customer still wants an item, they can wait until it becomes available by back-ordering the item. Back-ordering may reduce customer satisfaction, but the customer still purchases from the store, even though they may not receive the order right away.
Make it easy to cancel orders. If the customer can get the item from another retailer without waiting, they may choose to cancel their order. In this scenario, the customer may choose to order from your store again in the future if you make the cancellation and refund process easy to navigate.
Allow customers to wait. The customer may choose to wait for the item to come back in stock, making no changes to their intentions. This can be one of the best scenarios to happen in response to a stockout, as the company still profits.
Offer markdowns or gifts. Losing a customer can be the worst-case scenario when encountering a stock issue. Retailers may help reduce customer loss by offering compensation like discounts and free products.
FAQs about stockouts
Here are a couple of questions about stockouts to help you better understand this concept:
What’s the difference between stockouts and overstock?
Stockouts refer to when items have gone out of stock, while overstock is when a business purchases too many items to sell. These situations can be challenging in different ways. When a business has too much inventory, it can lose money because it can’t sell all the products and has to keep storing them. When a store runs out of items to sell, it can lose both profits and customers.
Are certain types of businesses more prone to having stockouts?
Any business could experience a stockout, but online retailers might experience more challenges with stockouts. This is because customers may find it harder to determine if an item is out of stock when shopping online compared to when they shop in person and find an empty shelf. It’s important to update your online inventory regularly to ensure that customers can see what items are in stock and which products aren’t.
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