Chances are your small business relies on loyal, satisfied customers to stay productive and profitable. And when it comes to keeping customers happy and business bustling, satisfying buyers’ demands right away is absolutely crucial. Unfortunately, a stockout can prevent your company from making a sale to your customer—inconveniencing them, frustrating them, or perhaps sending them straight to your competition.
This article will touch on the basics of inventory stockouts and shortages, defining the terms and explaining how both situations can be avoided.
What is a stockout?
A stockout happens when a business runs out of inventory of a particular item. This is especially common in retail, where customer demand for a given product may exceed the inventory level a business has on hand.
Also called an out-of-stock (OOS), stockouts can occur for a variety of reasons. Maybe an athleisure brand releases its best-selling bike shorts in a fabulous shade of periwinkle, and tons of people buy them almost instantly. Since demand exceeds inventory, this retailer will be facing a stockout—perhaps in one size, multiple sizes, or all of them.
It’s worth noting that this stockout can occur at any point in the supply chain. Maybe that fitness apparel company wants to offer more bike shorts once they sell out, but the retailer’s periwinkle spandex vendor is experiencing a stockout of their own. Whether your supply chain is experiencing a few kinks or a full-on crisis, disruptions to this network can leave you facing a significant stockout.
Other businesses that might be affected by a stockout? All types of retailers, including grocers (think: toilet paper, bread, eggs, feta cheese) and even pharmacies (think: flu medicine, thermometers, heart medication). And unfortunately, stockouts can cost retailers around $1 trillion in lost revenue every year.
What’s the difference between a stockout and a shortage?
A stockout is the unavailability of a particular item that a customer is ready to buy for one reason or another. A shortage is exactly what it sounds like: the shortage of a particular product or good. A shortage may be a potential cause of a stockout, though not always.
For instance, maybe a person goes to a big-box retailer to buy 10-pound dumbbells, but there are only 8-pound and 12-pound dumbbells on the shelf. That’s a stockout. It could also happen online on the store’s website if the website confirms that there are no 10-pound dumbbells in any of its warehouses for this shopper to buy.
Or perhaps smartphones are “out of stock” because there’s a shortage of labor or parts to build or transport that inventory.
As mentioned, there are lots of different shortages that can cause stockouts. Labor and parts shortages are two of the most common varieties. Maybe those dumbbells are out of stock because at an overseas port, there are no workers to steer the ships that bring those weights stateside. These issues can be caused by any one of the variables along complex supply chains, as well as simply increased demand.
How do stockouts impact retail businesses?
Stockouts, even those outside of a company’s control, can carry hefty, unwanted consequences. For retailers, the top three concerns are lost sales, upset customers, and less brand loyalty.
1. Reduced sales
When a business experiences a stockout, it quite simply cannot make a sale. That means a customer who was ready and willing to pay for a specific thing is, by default, not going to spend that money.
One thing to note: lost sales can cost businesses a lot more than the retail price of that out-of-stock item. If your company has been spending money on marketing to attract customers, those costs are also sunk.
2. Upset customers
Typically, your customers will be frustrated by stockouts, especially if they’re prolonged or widespread. (Those periwinkle bike shorts? Even more frustrating for your customers if they’re sold out in every other color, too.) This can damage your business’s online reputation, too.
3. Less brand loyalty
Whether they’re shopping for clothes, windshield wipers, or paper towels, your customers will take note of your stockouts. And the more frequent they are, the less likely these buyers are to continue shopping with you. And they’ll likely start shopping with a competitor that offers similar inventory that’s actually in stock.
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How do stockouts impact service businesses?
Service businesses, like auto repair shops and event rental companies, are also profoundly affected by stockouts. Here’s how these non-retail companies can be affected.
1. Reduced profits
Like a retail business, service providers lose a sale when they lose a job due to a stockout. Whether they’re out of a certain car part or have rented out all their white tablecloths for the weekend, one thing’s for sure: no sale is being made.
And the lost sale doesn’t even begin to account for the time your business has spent working with a customer only to disappoint them. Plus, if your business spends money on advertising and other outreach, the costs of those campaigns are wasted, too.
2. Disappointed customers
Just like your retail counterparts, service-based businesses have to deal with upset customers, too. Your customers have come to you for a reason. Maybe their car won’t start, or they’ve got a wedding to plan. Whatever the reason, they chose you—and they can’t get what they want.
3. Losing those customers
Those disappointed customers probably won’t wait around until your business is ready to fix their car. Or simply pick table linens from what you’ve still got in your available inventory.
Chances are, these customers will take their business elsewhere—namely, to a competitor who is not experiencing a stockout.
What causes a stockout or shortage?
There are many causes of stockouts and shortages, including:
1. Demand fluctuations
You probably already know that for most products, customer demand isn’t constant. Rainstorms lead to increased umbrella sales, a new accessories trend leads to increased headband sales, and the holidays lead to an increase in gift sales. Demand ebbs and flows, with the weather, trends, seasons, and evolving consumer preferences.
Some fluctuations in demand are predictable, but others can catch even the most strategic businesses by surprise. For example, who could have predicted COVID1-9, and how it affected the inventory of everything from dumbbells to hand sanitizer?
When unforeseen shifts in demand exceed available inventory, a stockout is pretty much guaranteed. And if kinks in the supply chain are making an immediate restock impossible, businesses can expect that stockout to be prolonged.
2. Quality control issues
Have you ever received a case of goods from a supplier that was unacceptable? It happens. But if that shipment was the restock you’d been waiting for, you’re looking at an even more prolonged stockout—and some pretty disappointed customers.
These delays, even though outside your control, can make things even harder on your business.
3. Delivery delays
Chances are, you and your suppliers have a set ordering and delivery schedule. You order what you need at certain times, and you’re promised a specific delivery date. But things happen, from traffic jams to broken-down trucks to labor shortages.
Regardless of why these delivery days occur, one thing’s for sure: they can wreak havoc on your inventory, causing stockouts even when you forecasted demand perfectly.
4. Under ordering
When a business under orders, it fails to stock enough inventory to keep up with customer demand. There can be a couple of reasons for this.
The first is poor forecasting. If your business is using inaccurate reports or outdated information to predict demand, it’s very possible you’ll experience a stockout at some point shortly.
Another reason? Disorganized inventory. If you don’t know what’s where, or how much of it you’ve got, it’s pretty much impossible to assess your existing inventory—and what you need more of. Fortunately, inventory management software can help your business track all its inventory, even if you store items across multiple locations.
How to prevent inventory shortages and stockouts
To avoid stockouts and shortages, you’ll want to forecast demand as accurately as possible. And while you won’t be able to forecast every trend, shortage, or economic event, you’ll at least be better prepared for business as usual. That alone should protect you from the vast majority of avoidable stockouts.
Still, there are those things you can’t control, such as quality issues or late deliveries. To help protect you from shortages and stockouts, you’ll want to calculate your safety stock. That way, you’ll always have a little extra product on hand.
Just remember, safety stock is a formula, not a guess. If you’re wondering how to prevent an inventory shortage, it’s by practicing proper inventory control. And that means balancing the need to meet demand with staying lean; over-ordering is not the answer, either.
You can use an inventory app to help you prevent inventory shortages and stockouts. Another helpful tip? ABC analysis. This process will help you identify the most meaningful and profitable items in your inventory, so you can focus on keeping these vital products in stock.
Prevent shortages before they become stockouts—today
There are always going to be shortages and stockouts beyond your business’s control. But organizing your inventory can help your business understand what it’s got, what’s selling quickly, and what needs to be restocked ASAP.
With features like low stock alerts, barcode and QR code scanning, and customizable reports, Sortly’s inventory management software can help your company practice more intelligent inventory control.
Ready to keep up with demand—and say goodbye to preventable stockouts? Start your free trial of Sortly today.