Out of stock: What is a stockout?

Ever spent a lot of time hunting down the perfect product that ticks all the boxes only to learn it’s out of stock? We’ve all been there. A surefire way to lose revenue as the let-down customer has to start the hunt again, maybe this time on some other store.

Out of stock or stockouts are a giant mood killer. They cost retailers an estimated $1 trillion each year! Customers like having what they want, when they want it, wherever they may be. And when a product they like is out of stock, it leaves them frustrated and disappointed. 

Don’t confuse stockout with general unavailability, though. Stockout means not having a specific product or item in stock at the point of purchase when the customer is ready to buy. 

A product may be unavailable when something gets sold out real fast due to its unpredictable virality. Still, if a competing retailer has what you’ve run out of, then that is considered a stockout. 

Is a stockout bad?

YES. Stockouts end up hurting a customer’s experience with your store. 

Customer acquisition cost is high. And if stockouts increase the customer churn rate, then you’re in a lot of trouble. The cost of not retaining a customer is not just on your bottom line but also on your reputation. 

Customers can look up alternatives in a matter of seconds if your products aren’t readily available. Not only do you lose sales and decrease your average order value, but you may also lose potential and returning customers for good, impacting your customer lifetime value.

The result is bad enough for you to want to stop it from happening. 

What causes a stockout?

Many culprits can cause stockouts. The major ones are: 

1. Underestimating demand

You might not be able to ascertain the future demand properly if you don’t rely on historical data while considering multiple factors then. This can potentially lead to excess demand that you might not be able to handle. 

2. Safety stock too low

Keeping stock in excess in case of emergencies is the best way to manage unprecedented sale surges. If safety stock is too low, then a rise in demand or break in the supply chain can lead to stockouts. 

3. A shortage of working capital

This may limit the value of orders that can be placed each month, resulting in stock-outs on key selling items due to too much cash tied up in high levels of excess on slow-moving items.

How to prevent stockouts for your ecommerce business?

1. Have adequate safety stock

It is the stock you keep in case of an outage of the supply chain or case the demand suddenly spikes. 

To calculate your safety stock, you would need to ascertain each SKU’s maximum daily usage, lead time, and average daily usage and lead time. 

Once done, just follow the simple formula: 

Safety stock = (Max daily usage x Max lead time) - (Avg daily usage x Avg lead time) 

2. Forecast future demand accurately 

While accurately forecasting future demand is tricky, it’s not impossible. The best way to forecast future demand is to rely on historical data. But demand and supply should not be relied on exclusively. 

Optimal inventory levels are also influenced by other factors – predictability of demand, seasonal fluctuations in supply, any anticipated advertising blitz or promotional campaigns in the pipeline, several local factors, the possibility of any external factor affecting the supply chain, the reliability of the supply chain partners, and more. Taking all the factors into your forecasting efforts would yield an accurate number. 

3. Invest in an inventory management solution

A good inventory management solution not only helps you keep an account of your inventory, it proactively provides several other services such as raising alerts when something is about to go out of stock or when an item is restocked. 

The best inventory management solutions offer comprehensive and in-depth real-time information to the stakeholders, including information such as available inventory by location, restock dates for low or out-of-stock units, and the real-time inventory position in transit, and more. 

Such services successfully predict stockout issues and permit managers to remain in control of overstock and the supply chain.

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