Everything You Need To Know About Stockouts (+ 5 Smart Ways To Prevent It)

Everything you need to know about stockout

Imagine you are a consumer who has been saving up for a specific product you saw on an online storefront. After two weeks, you get all excited when you finally have enough money to buy that exclusive product, only to find that it is now out of stock! Yes, that’s exactly how your customers feel when you have stockouts in your inventory. In this blog post, we tell you how stockouts are costing you more than you thought and how you can solve the problem once and for all.

Stockout or out-of-stock is what happens when your inventory runs dry of specific products. That is one of the most frustrating and testing experiences for consumers. Not only is it bad for your consumers, but it is equally bad for your business. Here’s why:

Why Are Stockouts Bad For You?

Lost revenue and sales

Like we’d mentioned in our previous blog posts, inventory is the primary asset of an organization. You make your profits by selling them. If you end up running out of specific products, that will lead to you losing out on potential revenue that you could have made by selling those inventories.

Missed opportunity with your customers

Gone are the days when brands didn’t have any scope for engagement with their consumers. Today, supply chain management is all about ensuring seamless experience for consumers while building great relationships with them through communication. Every sale you make gives you the opportunity to engage with consumers. When you face a stockout, you lose this opportunity.

Impact on brand image

How often have you stopped buying a specific product that you used to love because it tends to be out-of-stock most of the time? That’s not just a result of your frustration, but also the result of how you have started perceiving the brand. While stockouts can make it look like the brand sells out fast, it can also make the consumers feel like the brand isn’t listening to the consumers’ demands and increasing production. Or worse, it can drive them to your competitors!

In a nutshell, the cost of a stockout can be very high and can have adverse effects on your business if you don’t take action immediately.

But, how can you calculate the cost of stockout? Here’s a simple formula you can use 

SC = (D x AS x P)

SC = Stockout cost

D = Number of Days Out of Stock

AS = Average Units Sold Per Day

P = Price Per Unit or Profit Per Unit

For example, let us say the demand is high for a particular shade of lipstick you sell after you collaborate with an influencer on Instagram. You sell an average of 30 units per day, with a profit of ₹150 per unit. The shade goes out of stock for 7 days. Now, per the formula, here’s what your cost of stock out will look like:

SC = (D x AS x P)

     = (7X30X150)

     = ₹31,500

Now, this is only for one product . Imagine the financial loss your business will incur if multiple products go out of stock at the same time! 

What causes inventory to go out-of-stock?

Here are a few factors that cause stockouts.

Increased demand

This is one of the most common (and positive) causes of stockouts. It could be the new ads you have launched on Instagram or that contest you held a week ago, but people have all of a sudden shown interest in your product, and before you can come to terms with the pique in interest, the product goes out of stock.

ProTip: It’s times like these that buffer stock works wonders. Keeping it ensures you have enough time to increase the production of the item in demand without leading to stockouts. You can calculate buffer stock using the following formula:

BS= (max. daily usage * max. lead time) – (avg. daily usage * avg. lead time)

Poor inventory management

We cannot stress enough the importance of inventory management. Poor inventory management can look like the follows:

  • Reactive inventory planning
  • Counting disparities
  • Lack of data-insights
  • Poor replenishment process
  • Inability to adapt to changes
  • Lack of quality control

It can, in turn, lead to a longer work-in-progress (WIP) that directly amounts to stockouts. One other thing that falls under poor management is working with geographically distant suppliers leading to a longer lead time. 

ProTip: If your upstream process (relationship between your company and its raw materials and packaging suppliers) can be unpredictable, consider having safety stock. It ensures the production doesn’t come to an immediate halt in case of delays from your suppliers. 

Here’s how you can easily calculate the same:

Safety stock volume=(Maximum daily sales * maximum lead time in days) – (average lead time in days * average daily sales)

Bad forecasting

No matter how great your production process is, if you do not forecast your demand efficiently, there are high chances of you either over-stocking or under-stocking; Both can prove to be bad for your business. It is advised to invest in a good, AI-led demand forecasting software that helps you make data-backed decisions and avoid any waste of inventory. Keep in mind that forecasting goes hand in hand with reporting. If the sales reports are inaccurate, the forecasting will also be inaccurate. 

ProTip: Be mindful of the external changes that could affect your supply chain process. For example, sales usually go through the roof during festive seasons. Or, a global pandemic might significantly reduce the demand for certain products. 

Inefficient logistics

We do not have to tell you how badly inefficient logistics can affect your business. You would have faced this in real life. How often has your shipping tracker said the order is out for delivery, but it was still in the godown? Let us not even get started with the wrong orders being delivered! More often than not, it leads to a huge delay in both the upstream (relationship between your company and its raw materials and packaging suppliers) and downstream (relationship between your company and your consumers) supply chain process. In a survey by Wakefield Research and Bossa Nova Robotics, 65% of the respondents said they struggle with the ability to track inventory through their supply chain. 

ProTip: Training is key to a seamless supply chain process. Training your team at every level and strict supervision can help ensure there are no discrepancies in the process. Knowing what to do when stockouts happen and how to deal with them swiftly should be an integral part of the training exercise. Be sure to provide refresher training as well as you adapt to the changes in your industry.

How can you avoid stockouts?

Per a survey, 30% of consumers feel stockouts hurt their shopping experience. Here are a few ways you can avoid hurting them and your business.

Resilient forecasting

Forecasting the demand rightly can transform your supply chain management process. Knowing which product of yours has been in demand can help you make sure the production of the same is going in full swing in order to avoid stockouts. Recently, data found that 73% of retailers struggle with inventory demand forecasting. As mentioned above, leverage highly effective forecasting software available in the market today to ensure there is no scope for human error in forecasting. Here is a curated list of top 10 demand planning and forecasting tools listed on G2.

Adopt AI-led tools

AI-led technologies have been changing the business world the past few years. Right from your corner shop to the IT giants, everyone leverages Artificial Intelligence in one way or the other. You can also adapt to modern technology to ensure you don’t face a stock-out situation. Some of the features that many supply chain intelligence platforms in the market offer today include automated inventory replenishment, tracking of sales, supplier management, salesforce automation, and more. 

Leveraging AI-led applications can also ensure you have a central repository that has all the information about your inventory. Inventory management becomes a piece of cake when you have an in-depth view of all your processes in one place.

ProTip: When evaluating vendors for supply chain management tools, make sure they are customizable and scalable. Look for features like automated low-stock alerts, automated order replenishment, etc.

Manipulate the demand

While this might sound unethical, it really isn’t. If you know the demand for a product has been surging and you will run out of inventory pretty soon, you can control the demand by increasing the price reasonably. As a result, you will also increase your profit from the said inventory. Again, to understand which products can be leveraged here, perform the ABC analysis. Also, make sure you set reorder points so you know when to replenish your best-selling inventory.

ProTip: Remember not to increase it unreasonably. Look at your historical sales and decide upon a price that wouldn’t scare away your consumers forever.

Stay organized

This, though trivial, is one of the most significant ways to avoid stockouts. While technology can keep track of the inventory virtually, physically organizing the inventory neatly can be really helpful. It not only ensures you don’t lose any inventory to damage or theft, but also helps physically see and visualize the inventory and can aid in avoiding stockouts. Make sure you spend some time in cycle counting so you can see if what’s on the systems match what’s in the store.

ProTip: Leverage RFID to count and organize your inventory. It helps track your inventory throughout the process and makes sure you don’t lose any of it.

Improve your logistics

Having a seamless supply chain has always been a priority for businesses. However, with lockdowns, port restrictions, and policy changes, the situation has been a nightmare. You can try and source your materials or products locally or nationally to ensure you don’t face international restrictions. You should also invest in a robust supply chain process, including the distribution and transportation so everything runs smoothly and there is no delay in terms of the logistics.

How can you navigate through stockouts?

We’ve told you how you can avoid stockouts. But, what should you do if you anyway end up having a stockout for your e-commerce store? 

  1. Push out-of-stock items to the bottom of your website page
  2. Display “Out of stock” in bold
  3. Have “Exclude out-of-stock” as a filter option
  4. Suggest alternative, similar products
  5. Sell now, ship later
  6. Have a countdown for restock
  7. Enable pre-orders
  8. Add “Out-of-stock” in the meta tag
  9. Notify when restocked
  10. Clarify size stocks to avoid disappointment 

Bonus: What if the consumer has already ordered the item, and then it goes out of stock before you can fulfill the order? Here’s an email template you can use to ensure you don’t lose this customer.

Dear First Name,

Thank you for your order! 

Unfortunately, one of the items you purchased is unavailable. We’re out of stock due to an unexpected rise in demand. The refund for the same has been initiated.

We expect the item to be back in stock soon. We will let you know as soon as it’s ready to ship. However, if you don’t want to wait, we’ve included a few similar products below that you might consider. 

As a token of apology, we’re offering you 10% off these items or a future purchase. Simply type “10off” at checkout.

If you have any questions about this order, please email us at [email address], call us at [phone number], or simply message us on social media [add social media links]. 

Sincerely,

Brand name

—————————–

Now that you know what to do in case of a stockout, tell us how else you would avoid it in the comments below.

ABOUT VELOCITY

Being India’s largest revenue-based financier, Velocity provides founder-friendly revenue-based financing to growing DTC businesses. If you are a D2C brand looking for funding to manage your inventory and marketing needs, apply for revenue-based financing, and get funded within 7 days.

Recommended Reads:

  1. Three Smart Ways To Liquidate Surplus Inventory
  2. Packaging Inserts Ideas For Ecommerce Brands (With Templates)

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