Globally, ecommerce sales generate over $4.2 trillion a year, but stockouts cost retailers an astonishing $1.1 trillion a year. That’s 25% of global revenue! So, how can your business protect itself from the costs and other impacts of stockouts?
What Is A Stockout?
A stockout is when a particular product is unavailable, so it cannot be purchased by a customer.
A stockout, also known as being out-of-stock, can happen throughout a supply chain. For example, stockouts occur when production depletes some or all of the raw materials in the manufacturing process, which means operations have to stop.
Alternatively, physical stores with gaps on their shelves may call this a stockout and ecommerce retailers can describe a stockout as when they have no stock of a specific product in their inventory available for sale.
The Frustration Of Stockouts To A Customer
It's estimated that a customer will experience a form of stockout at least once in every three shopping experiences. That's not good for their shopping satisfaction.
In the initial instances that a customer experiences a stockout, they are likely to look for substitutes for a similar item. However, research suggests that if customers experience three stockouts with a retailer, then 70% of customers will switch to another retailer. What's more, they are unlikely to make further purchases, of any kind, with the retailer they've had the negative stockout experience with.
Stockouts can be even more annoying for customers when they are shopping online. With a physical store, it can be easier for a customer to see a gap on the shelf and understand that it's out of stock or ask a store colleague.
However, in the online space, a stockout can be more difficult to determine. A customer may wonder if this is a temporary technical glitch or a major disruption. If the item disappears from the store page completely, they may decide that it's no longer being stocked and look to other stockists or similar products elsewhere.
In some cases, a customer may be able to order and purchase the goods, only to be informed at a later date that the product is unavailable. In fact, research suggests that over a third of businesses have had to ship an order late because they have sold a product that wasn't in stock - also known as “overselling”.
All of this can mean the retailer can lose business and harm the customer relationship, turning away loyal customers and generating bad reviews.
What Causes A Stockout?
1. Poor inventory tracking
One of the biggest reasons for stockouts is an inaccurate set of inventory data. This typically has 3 main causes:
In many cases, human error in the Inventory Audit (also known as inventory count or “stock take“) process are to blame for mismatched inventory levels. Of course, in busy distribution centres, it can be all too easy to miscount the stock. However, this can put your business in a very difficult position that can threaten your customer service.
Studies suggest that around 43% of US businesses don't even track their inventory and 36% of retailers have seen issues arise because of miscounts - so it's easy to see that this is an area where stockouts can be avoided.
If the stock has been damaged or stolen, and this hasn’t been reported, then this will be believed to be ‘available’ stock. This can lead to a stockout when it comes to packing and distribution, and there isn't the requisite stock in place to fulfil the order.
For retailers, a typical shrinkage rate is 1.62% of the bottom line. This may not sound like much, but shrinkage alone can cost retailers $61.7 billion every year.
When you consider shrinkage as a reason for stockouts as well as an additional cost - it’s obvious that shrinkage is a real problem that every warehouse should attempt to mitigate.
While computerized inventory management can be a significant boost to a business, downtime or a glitch in the system can cause an issue with an inventory count. Often, organisations will have multiple systems working in harmony. However, if they fail to sync, then it increases the likelihood of count discrepancies, increasing the chance of stockouts.
It's important to remember that all three aspects of inventory miscounts (human error, shrinkage and tech issues) can occur as standalone issues and potentially become a combination of issues that lead to errors.
2. Supply Chain And Logistics
Another significant source of stockouts is in the supply chain. For ecommerce retailers, there are many issues outside of your control. Delivery of stock to your warehouse can be impacted by third parties, mechanical issues and even the weather.
However, logistical issues can also be present in your own warehouse. For example, shipments may arrive at the wrong location, or staff could put stock away in the wrong place. There can also be logistical issues in the process of stock arriving at your premises and needing booking in, to being moved to distribution, ready for delivery.
As ecommerce businesses grow, it is important to ensure you remove any friction points in the logistical and supply chain process. With more inventory, it is critical to create seamless logistical processes and an efficient warehouse arrangement that can scale as you grow.
3. Poor Forecasting
Many cases of stockouts are caused by surges in product demand. These customer surges are often unexpected, and there is very little retailers can do to forecast such events. However, most retailers will know off-hand how quickly their most popular products sell and which products are the most successful. What's more, with the right systems in place, they'll also have accurate sales reports which can help them to plan their ordering.
Despite this knowledge, many retailers still do not adequately forecast what they need. As a result, stockouts can be commonplace and become almost inevitable for a store's most popular products.
Getting to fully understand sales reports and utilising this data effectively is a critical task to help prevent stockouts.
However, in order for this to be an effective way to forecast stock trends, this real-time data must be accurate. You can learn more about Veeqo’s dynamic forecasting feature here.
How To Calculate The Cost Of A Stockout
Of course, stockouts can have knock-on effects on the rest of the business; but to calculate the primary cost of a stockout, there is a simple formula to follow:
To calculate approximate revenue lost as the result of a stockout:
(Number Of Days Out Of Stock x Average Number Of Units Sold Per Day x Price Per Unit)
To calculate approx. bottom line loss as the result of a stockout:
(Number Of Days Out Of Stock x Average Number Of Units Sold Per Day x Profit Per Unit) + Any Consequential Costs
In some cases, the loss calculation can be more impactful to the business. This calculation may be the catalyst needed for the organisation to put steps in place to prevent stockouts from happening again.
Example stockout calculation
So, if a retailer sells ten pairs of trainers per day, but they are out of stock for 30 days, the calculation will look like:
14 x 10 x £150 (price per unit) = £10,500
14 x 10 x £25 (profit per unit) = £3,500
These calculations do not include any consequential costs. These consequential costs may include charges for expedited delivery to the customer. Alternatively, the cost of consequence may be the cost of switching a production line over, penalty costs acquired by your stockists or supplier costs for a fast-track service.
What Are The Dangers Of A Stockout?
As we've just calculated, a stockout can be a significant financial loss. However, there are further dangers that can cause a wider impact on the business:
If a stockout occurs, retailers can face the impact of cancelled orders.
If you cannot provide items when your customers need them, they will likely look elsewhere to meet their needs. If your customer service is normally good, then you may still retain those customers and just miss out on this particular sale. However, the more frequent the stockouts, you can be sure that customers will be seeking a more reliable provider.
If a stockout occurs, 37% of customers are likely to buy a different brand, while 21% of consumers will try to purchase the same brand elsewhere, while 9% will buy nothing at all. All of this can significantly impact your bottom line.
It’s interesting to examine the change in customer perception during repeated stockouts. The first time a stockout occurs, 69% of customers are likely to look for a substitution. By the second time, this drops down to 50%. At the third time of a stockout (as mentioned earlier) 70% of customers will not make a purchase and will shop elsewhere.
Your customers can serve as ambassadors of your business. However, as soon as there is a drop in their customer experience, they can actually turn prospective customers away from your business. A study by BrightLocal found that negative reviews can stop 40% of buyers from doing business with the organisation. Also note that in our study on trustpilot review, 21% of 1 star reviews are due to bad customer service. So, keeping your customers happy with stock can be essential for the growth of the business and attracting new and prospective clients.
Is Back Ordering Worthwhile For Businesses?
In some cases, back ordering can work well for businesses. After all, if you are trying to keep your inventory lean and reduce space in your warehouse, having items on back order frees up space and storage costs. For some highly desirable products (e.g. the latest tech gadget), back orders can work to an advantage, as the fear of missing out (FOMO) means people are happy to be on the back order waitlist.
For stocking new products when you are not sure of the demand, then back orders can help to inform your inventory management to help you forecast the stock you need to order in the future.
While back orders can work well for some businesses, there are some drawbacks. Excessive lead times can lead to customer frustrations. This can also be exacerbated when the estimated delivery time changes or becomes delayed. Leaving orders too long means customers are likely to look elsewhere for similar items and substitutes, meaning you could risk losing the sale completely.
Another issue for omnichannel retailers is when you display an out of stock on third party selling sites (such as Amazon), you risk dropping lower in the rankings, meaning you're less likely to show up in searches and could lose out to competitors - which is obviously negated by holding stock.
A big factor to consider with back orders is the cost of customer service. Customers will expect frequent updates about their orders; they are also more likely to reach out to customer service teams to inquire about the item. Having a set-up for this is vital to maintain high service standards but does require significant investment. This could be through a system that can send automatic updates or hiring personnel who are ready to assist customers with their queries.
Whether a back order system works for you during a stockout is a unique business decision. For some businesses, it can generate excitement and buzz to grow the business. On the other hand, back orders can lead to cancellations, poor reviews and lost customers. It can be a knife-edge decision and one that needs careful planning.
Five Ways To Avoid Stockouts
Reducing stockouts in your business can be essential for the ecommerce businesses that need to operate on such tight margins. From not contributing to the $1.1 trillion that is lost through stockouts or lowering your inventory costs by 10%,there are many benefits to implementing strategies that avoid a stockout scenario.
1. Choose An Inventory Management Solution
Tracking and controlling your inventory can help to ensure you have accurate counts that can avoid stockouts. With an inventory management solution (such as Veeqo), you have a full synchronisation across all of your systems, whether you have multiple warehouses or sales channels.
An inventory management solution can also alert you to low stock so that you're prepared before a stockout can occur. As well as helping to prevent stockouts, inventory management solutions can prevent you from over-ordering, meaning you can stick to a lean approach to inventory.
2. Improve Your Forecasting
A stronger understanding of the numbers behind your business is the key to successful forecasting. As an omnichannel retailer, you'll have access to a wealth of customer data that can help you identify and understand the product life cycle stages and what that means for your forecasting.
Again, having a system that can pull your data together from a wealth of sources and create accurate predictions can help with forecasting. A system like Veeqo will take into account lead times, back orders and transfers that make it even easier to forecast your inventory needs.
3. Automate Processes
Human error in warehouse operations can be a significant factor in stockouts and other inventory issues. What's more, without real-time updates through your inventory management system, it can be very difficult to keep up to date stock levels. Manual stock counting can cause issues from miscounts, stock being in the wrong place and having to cease operations while a stock count takes place.
An automated process that continuously monitors stock levels can be a huge time-saver for businesses while also minimising the risk of human error. Automated processes can be as high-tech as RFID applications to more affordable digital stock monitoring such as Veeqo’s “Cycle Stock Take“ feature.
4. Have A Safety Stock Level And Reorder Points
It is important to tread that careful balance of having enough stock without overburdening yourself with too much stock. With this in mind, it is crucial to create a safety stock level that can cushion you against stockouts but reduces your risk of high levels of hard-to-shift inventory.
By having a safety stock level in place, you can set stock alerts to notify you when you're using your safety stock, which items are at risk of stockout, and when to begin reordering.
5. Minimize Supply Chain Issues
For ecommerce businesses, the supply chain can be extraordinarily complex. However, taking time to optimize each process within the supply chain can be vital in preventing stockouts. It can help to conduct risk analysis for your main suppliers and understand their contingency plans should the worst happen - as well as developing backup plans of your own; such as putting secondary and even tertiary suppliers in place for your most important products.
Reviewing the tools you use for managing your supply chain is key to maintaining its effectiveness.
Taking the time to understand supply chain cycles and seasonal fluctuations may not solve the problem of stockouts - but are likely to give you advance warning, which means you can put in place the measures that help mitigate the negative impacts of stockouts while maintaining your high levels of customer service.
Avoiding Stockout Key Takeaways
- $1.1 trillion is lost every year to stockouts
- Preventing stockouts can save you 10% of your inventory costs
- Stockout cost calculations can help inform the business case on inventory system investments
- Calculating safety stock levels creates a comfortable buffer to avoid stockouts
- Inventory management systems can offer dynamic data-driven decisions to keep your inventory running smoothly.
Is A Stockout The Same As Product Unavailability?
Often, stockout and product unavailability are used interchangeably. However, there is a difference. A stockout is usually something that can be prevented through inventory and supply chain management. Alternatively, product unavailability is a more widespread issue.
Product unavailability is when it is not possible to acquire a product anywhere. For example, when a limited-edition product sells out from every stockist and there are no more in the production line.
A stockout is when it is possible to acquire the product, but perhaps a specific retailer doesn't have any in stock, or there is an issue in the supply chain which means that more stock is available but currently not accessible.
If you are reading this article, you would probably be interested in learning more about inventory control. Alternatively, you could look through our other inventory management guides.