Running out of stock means losing money and customers, no suppliers or retailers want that at the same time they’re also not inevitable.
In this article, we start by discussing what a stock-out means, the importance of avoiding it, common causes, and finally how to avoid such inventory stock-outs.
What is a Stock-Out?
Stock-outs are exactly what they sound like: Items are out of stock when consumers want to buy them.
Stock-outs can occur in both retail and wholesale scenarios. In a retail context, stock-outs often happen at the point-of-sale (POS); customers come into the store to make purchases and are told there is no available stock.
For wholesalers, stock-outs occur when retailers are looking to purchase make large-volume purchases but due to delayed shipments or poor trend forecasting, wholesalers don’t have enough on-hand to meet demand.
Why You Need to Avoid Stock-Outs
While availability issues can sneak up on you when you least expect them, stock-outs can devour profits margins in just a matter of seconds. And as noted by Industry Week, historically low inventory levels combined with evolving consumer demand preferences have put stock-outs at all-time highs.
Stock-outs not only have a direct impact on sales but are also often wrapped in hidden additional costs as well. As highlighted by the Association for supply chain management, the consequences of a stock-out don’t end there:
“Not only is there the cost of losing out on a sale, but there is also often an additional cost associated with having to process a backorder as well an administration cost to review the item and place another order.”
And this is all before you factor in the long-term costs of losing a customer!
Apart from lost sales, they also result in poor customer satisfaction and lower loyalty levels. Customers often feel let down when you don’t have what they’re looking for, and the last thing you need is to disappoint them.
As noted by the Harvard Business Review, when faced with a stock-out, between 21 and 43 percent of customers will take their business somewhere else, in turn costing companies both immediate sales and long-term revenue.
Common Causes of Stock-out:
These are some common causes that our consultants came across while taming the stock-out issues.
1. Poor Forecasting:
Forecasts form the basis for all decision-making. And yet, many businesses depend on essential forecasts that lack the sophistication to reflect the future demand. Without a robust forecast, stock-outs are inevitable.
After all, how can you hope to achieve the optimal level of inventory to satisfy your customers with a forecast you can’t trust?
2. Supplier Performance Issue:
Are your suppliers always letting you down? Did you find they are still late? Or do your suppliers fail to deliver exactly what was agreed? Supplier performance issues cannot be ignored. So factor in their lead time, and add the extra lead time that your supplier required while forecasting.
3. Volatile Demand:
Volatile demand is no excuse for availability issues. It would be best if you did everything you can to close the gap between forecasted and actual demand. After all, wherever there is a misalignment between supply and demand, this represents a cost.
Where demand outstrips supply, the cost is a lost sale. Where supply exceeds demand, the cost is waste. Therefore, be vigilant and remain responsive to shifts in demand! Plan your demand: make sure the sales team knows which is running low and let them push alternatives.
Specific times of year are often more volatile than others. For example, the weeks leading up to Black Friday, Cyber Monday, and Christmas often see substantially increased demand.
4. Unreliable Data:
When it comes to stock data, the old adage applies: Garbage In, garbage out. Yet how often does your system tell you there’s plenty of stock on hand while the shelves remain empty?
Stock on hand, order volume, minimum order quantities, and lead times as well as all other key master data is correct and up to date, you are making important decisions in the dark! Without the above data, it will be hard to prevent stock-outs.
5. Broken Communications:
How many inventory issues could have been avoided if everyone had communicated a little better? While operations, sales, finance, and management all have a vested in inventory, they often only speak when there is a problem. If everyone in the process we’re engaged in open dialogue, many of the factors that cause stock-outs would be eliminated.
A good example is during a promotion when marketing might do over-promotion or promote it in additional territories that are not planned for and operations might not be prepared for that, resulting in demand growth but not enough stock.
6. Human Error:
Of course, human error can be attributed to almost all the problems, but what we want to imply for human error is:
One, is the usual human error where even the most competent inventory managers make mistakes. Whether these mistakes are made in a random moment of madness or are the result of poor knowledge, it only takes one missed or short order to impact availability!
Two, especially when you rely on old systems or even excel to calculate forecasts, were changing customer demand or trends are wrongly accounted for.
Given that poor inventory management is the common factor in all 6 of these deadly sins, knowing the causes is your starting point on your optimization journey. The goal here is all about finding the perfect balance between working capital, operating costs, and the optimal service level.
But to keep stock-outs at bay, you not only need robust process-based tools that support effective decision-making, but your team must also have a complete understanding of how these decisions will impact the wider business.
Here are the steps that our consultants take to avoid stock-out issues for our clients and steps you can take as well to drastically reduce your future inventory stock-outs.
>> Success Story: See how Sephora, UAE reduced supply chain cost by 25% using Slim4
Six Tips to Help Prevent Stock-Outs
1. Keep a Clean Data
The first step in preventing future stock-out is to keep clean data. As mentioned before “garbage In, garbage out”.
Accurate demand and supply data is critical to ensure that stock levels reflect actual customer preferences rather than idealized versions of stock needs.
2. Align Promotions & Special Offers
Stock-outs alone is bad enough, but if the customer feels like they are also missing out on a special offer, this only adds insult to injury. As a result, retailers must manage promotional activity accordingly. Given that the available inventory is already under strain, promotions and events will only place further pressure on your operations.
Operations, marketing, and in-store teams must collaborate effectively to ensure that all promotional activity is well aligned to the level of demand that the business can actually satisfy.
With this in mind, for items in short supply, any promotional event or exclusive offer deals may have to be amended or even cut completely.
3. Multiple Location Planning
Faced with a shortage of stock, available inventory must be prioritized to the locations where it is required most. In many cases, this is cheaper than simply buying more.
Shipping time for limited shelf-life products must also be factored in. If you have a product that will expire in 60 days, but it usually takes 2 weeks to move it between locations, will your expected turnover rate justify the cost of shipping it?
Your next priority is to adjust your baseline demand and safety stock strategy for locations that are open. Previous demand for the item or similar items is a good starting point for baseline demand. For safety stock, include factors like seasonality and supplier production capacity.
If the data is available, other factors can include customer demand from previous shortages/stockouts, and consumer behavior from similar markets that have opened before yours (e.g. Western Europe).
4. Good Lead Time & Supplier info
Another challenge we’ve worked with our customers is dealing with excessive lead times. Consider a product that was ordered weeks or months ago but is only now on the water or a product that has been released after a longer than usual hold in customs.
Once again, your goal is to find the best fit based on demand and distance. However, if travel time is too long or shifting product isn’t feasible then it’s time to get creative.
5. Proper Demand Forecasting
Once all the data is updated, companies must use this clean data for proper demand forecasting. Given the increasing complexity of supply chain and logistics markets, it’s no longer enough to leverage gut feelings and past experience;
Companies must combine human insight with actionable and accurate data sources, such as historical buying patterns and likely future demand, to predict needed stock levels.
This itself is a detailed topic, more details on how our consultants approach demand forecasting for the last couple of decades will be shared soon. We recommend monthly forecasting, more details on monthly forecasting can be found here.
6. Utilize the Whole Buying Group
Sometimes, getting hold of any additional stock may be simply impossible. Thus, to minimize the risk of leaving customers feeling disappointed, retailers should take advantage of the other products within the same buying group that is available.
For example, while lettuce may be at a premium at present, products such as spinach or rocket could offer the perfect substitute. However, the additional demand for substitute products must be taken into account when replenishing stores as well as while ordering stock. Failure to do so could result in even more availability issues!
Regardless of how effective you are at managing a short-stocked item, however, ultimately, prevention is always better than a cure. Wholesalers and Retailers should also strive to proactively avert risk factors before they result in a problem.