Stockouts Explained: How To Avoid Inventory Shortages
by Jaidyn Farar
It’s the all-too-familiar message that causes consumers to close their laptops (or put down their phones) in disgust: “This item is currently unavailable.”
While online shoppers don’t know what’s going on behind the scenes in situations like this, your business does. Maybe your supplier is running behind with a big delivery. Maybe you’ve miscalculated your available inventory or underestimated consumer demand. Whatever the reason, the resulting stockout causes headaches for both you and your customers.
Stockouts come with a steep monetary cost; in a July 2023 report, the total cost of stockouts worldwide was projected at $1.2 trillion. And the impact on customer loyalty can be even more significant than the loss of revenue.
Let’s take a look at what causes stockouts, the harmful effects they have, and strategies for preventing them. But first, a definition:
What are stockouts?
Stockouts happen when businesses run out of inventory for a specific product, making it unavailable for customers to purchase. When customer demand is high but the available inventory (and safety stock) is insufficient, you’ll quickly run into a stockout.
Stockouts are surprisingly common: Seventy percent of retailers expected to experience significant or minimal inventory shortages during the 2022 peak season, and almost 60% of U.S. online shoppers report that out-of-stock issues have impacted their shopping behavior.
Later, we’ll dive deeper into why stockouts are problematic. But for now, you just need to know this: When your customers can’t buy your products, you lose out on revenue.
Stockouts vs. overstocks
Stockouts are caused when inventory levels aren’t enough to meet demand. Overstocks happen in the reverse scenario: demand for a product is low, and businesses have more inventory than they can sell. If you order too much of a product people aren’t interested in, you’ll end up with excess stock that incurs storage costs and ties up capital.
Stockout rate formula
Stockout rate is the percentage of products unavailable for sale at a given time. Calculate your stockout rate using this simple formula:
Stockout rate formula: Products not in stock / total number of products available
What causes stockouts?
What causes stockouts? Poor inventory management, inaccurate demand forecasting, and supplier issues are just a few culprits. This section will examine the most common reasons behind stockouts.
Poor inventory management
Inventory management is all about ordering, storing, and tracking inventory. When businesses manage their inventory effectively, they know how much stock they have at any given time, how much they need, and when they should reorder. This keeps their store running smoothly, with inventory being purchased and replenished in exactly the right amounts.
Lack of inventory visibility is a primary cause of both stockouts and overstocks. If you don’t know how much stock you have, or don’t know where to find something in your warehouse, it will be nearly impossible to ensure you have the right inventory levels to meet consumer demand.
On the other hand, inventory visibility helps ensure that you have enough stock to meet the demand of in-person shoppers, prevent stockouts, and streamline your shipping process for timely deliveries.
Inaccurate demand forecasting
Demand indicates what customers are willing to buy, and it fluctuates depending on seasons and trends. If you forecast demand accurately, you can stock up on the hottest products, making them available to customers who want them. Underestimating demand can result in stockouts that leave customers empty-handed (and frustrated).
Supplier or manufacturing delays
Sometimes stockouts aren’t directly in your business’s control. If manufacturers shut down factories, or if suppliers can’t keep up with orders from their clients, the consequences can trickle down to your store—and therefore, your customers.
For example, the Covid-19 pandemic saw major supply chain disruptions. According to research from Adobe, the number of out-of-stock messages consumers received rose 250% between January 2020 and October 2021. In just the month of October 2021, consumers saw 2 billion out-of-stock messages online.
While we’re past the worst of the Covid-19 supply chain crisis, logistical problems still abound. Severe storms, sociopolitical tensions, mechanical breakdowns, and other factors can cause supply chain disruptions that prevent your business from getting the inventory you need.
Human error
We’ve already talked about inventory management. But what causes poor inventory management? Nine times out of ten, the answer is human error. Everything from extreme carelessness to a simple miscalculation can lead to larger problems, potentially resulting in stockouts.
- Warehouse disorganization. Disorganized warehouses can make it difficult to pick and pack products. If you misplace inventory, you could have a stockout despite having enough products to fulfill orders.
- Insufficient employee training. Inadequate training contributes to errors in inventory management procedures.
- Poor communication. Inventory often flows quickly. If communication doesn’t keep up, you could end up over or underordering new stock.
- Manual data entry. Manual data entry introduces the potential for errors, leading to discrepancies in inventory records.
Poor cash flow management
To order new products (the obvious step to take if you want to avoid stockouts) you need to pay suppliers. But what if you don’t have enough money to pay them until you’ve sold the stock you have on hand? This is what happens when a business has poor cash flow management. It creates a cycle of inventory issues, potentially leaving you without your most valuable products until you can sell less profitable stock.
What are the costs of stockouts?
Stockouts don’t just cost you money; they also hurt customer loyalty, drive up operational costs, and waste time. While they can occasionally be beneficial (perceived scarcity often drives up demand) it’s generally best to avoid them.
Lost revenue
Stockouts represent lost revenue, directly resulting in missed sales opportunities. It’s the worst nightmare of an ecommerce store: customers are flocking to their website hoping to buy their product, and they don’t get the opportunity to sell it.
How much do stockouts cost in revenue? The answer depends on the length of the stockout, price of the product, and average number of units sold per day. Use the stockout cost formula below to learn how much money you’re losing with each stockout.
Stockout cost: (Number of days out of stock) x (Average units sold per day) x (Price per unit)
Here’s an example to illustrate.
A business has a stockout of their most popular smartphone cases. The stockout lasts for five days, the store normally sells an average of 30 cases per day, and each case costs $15. Plugging the numbers into the formula, we get this result:
(5 days) x (30 cases/day) x ($15 per case) = $2,250
In this case, the stockout costs the ecommerce store $2,250 in lost revenue.
By calculating stockout costs, you’ll better understand which products to prioritize restocking. When you keep your most profitable products on hand, you won’t lose out on valuable business.
Lost customers to competitors
Attracting and retaining customers is like tightrope walking across the Grand Canyon. If you mess it up, you don’t usually get a second chance.
When your products are out of stock, online shoppers have two options: check back later or find another place to buy what they need. If they do find somewhere else to make their purchase, they might stick with your competitor in the future. And if you experience frequent stockouts, people could leave negative reviews, damaging your reputation and dissuading potential buyers.
One survey found that 65% of consumers have tried a new brand because an item was out of stock. Don’t make customer acquisition easier for your competitors due to stockouts! Make sure loyal customers can rely on your store to have what they need, when they need it.
Higher operational costs
Correcting stockouts can drive up operational costs. If you need to have inventory delivered quickly, you’ll have to pay extra fees to expedite your order. You might also need to pay employees overtime to unload, sort, and store the influx of new products.
Wasted time
In business, every minute counts. If you’re scrambling to fix stockouts rather than focusing on business growth, you’re not using your time as efficiently as you could be. The opportunity cost of lost time is difficult to measure but is often significant.
The silver lining: demand fueled by scarcity
While stockouts have many negative consequences, they come with a bright side too: Scarcity can make products appear more attractive. Customers might see an out-of-stock notification and think, “Wow! This product must be really popular. I should come back and buy it once it’s back in stock.” With this heightened demand, your product sells better than ever.
To use this situation to your advantage, include a call to action (CTA) encouraging customers to sign up to be alerted when the product is back in stock.
How can ecommerce businesses avoid stockouts?
Spending time and money to fix stockouts is often necessary, but it’s not ideal. By proactively putting measures in place to avoid stockouts, you’ll save time and money and keep your business running smoothly.
Use inventory management software
As mentioned above, issues with stockouts are often caused by poor inventory management. When businesses use manual methods like spreadsheets to track inventory levels, it opens up the possibility of human error. One wrong number, miscalculation, or miscommunication, and suddenly recorded inventory levels don’t match the amount of stock you have.
The best solution is to use inventory management software. These systems create full inventory visibility, showing exactly what you have at any given time. Because they’re not subject to human error, they’re much more accurate than manual tracking methods.
The following are just two things that inventory management software does.
Keeps inventory counts up to date
Inventory management software syncs with your ecommerce platform and, if you have a physical store, with your POS (point of sale) system. When customers make a purchase, the inventory management platform automatically updates inventory counts, letting you see an accurate number of available inventory.
Automatically restocks when inventory runs low
You can set up the system to notify you when inventory runs low, or even to reorder automatically once levels drop below a certain point, reducing the risk of stockouts and maintaining consistent product availability.
Forecast demand accurately
Your inventory management system may be able to help with demand forecasting. You can also use dedicated analytics and forecasting tools to estimate customer demand and predict fluctuations.
Conduct an ABC analysis
ABC (always better control) analysis helps you understand which products are most valuable to your business. You simply divide your inventory into three groups, or classes:
- Class A. These are the products that sell best and/or bring in the highest profits. Running out of Class A products will cost the most in lost revenue (remember the stockout cost formula above), so you should prioritize selling and restocking them.
- Class B. Class B products sell well, but they don’t bring in as much revenue as Class A products. Consider these your medium-priority products.
- Class C. Although Class C products have the lowest value, they generally make up the bulk of your inventory (around 80%). It’s often better to have a stockout of Class C products than an overstock—you don’t want to tie up capital in inventory that’s not selling.
Calculate your safety stock
Demand forecasting and ABC analysis will help you determine appropriate stock levels for each product you sell. But what if there’s a sudden surge in demand? For your most profitable products, keep some back-up stock reserved to avoid stockouts. You can calculate your safety stock using the formula below.
Safety stock: (Maximum daily sales x Maximum lead time) – (Average daily sales x Average lead time)
As you’ll see in the formula, it’s important to take lead time into account when determining your safety stock. Lead time is the duration between placing an order for new inventory and receiving it.
Let’s look at a quick example!
An ecommerce store sells insulated water bottles. The maximum number of bottles they’ve sold in a day is 100, and the average is 50. Their maximum lead time is 14 days, while the average lead time is 10 days. Plugging the numbers into the formula, we get this result:
(100 bottles/day x 14 days) − (50 bottles/day x 10 days) = 900 bottles
The store needs to maintain a safety stock of 900 bottles to account for potential fluctuations in demand or delays in restocking.
Choose the right suppliers—and have backups
What are the weak links in your supply chain? Carefully examine your suppliers’ performance. Which partners consistently meet your standards? Which ones frequently fall short? By replacing subpar suppliers with outstanding ones, you’ll reduce the risk of supplier-caused stockouts, even when supply chain disruptions occur.
Of course, it’s always a good idea to have a plan B. Choose some backup suppliers that you can rely on if your main partners run into difficulties. Diversifying your suppliers across different geographic regions will build supply chain resilience, helping you keep operations up and running if a severe storm or other natural disaster strikes.
Strengthen your logistics today
By implementing inventory management best practices, you’ll avoid stockouts and keep your organization healthy. With warehouses full of inventory waiting to be sold and shipped, the next question becomes, “How can I send these products as affordably and reliably as possible?”
EasyPost has the answer: Use our Shipping API and other tools to automate your carrier integrations, service level selection, and shipping label generation. In just a few seconds, EasyPost can analyze order information and suggest the best shipping options, allowing you to save on shipping and focus more on other crucial aspects of your business.