Stockouts: What they cost you and how to avoid them

October 12, 2022

Oct 12, 2022

Expert Insight

Are stockouts plaguing your business? You are not alone. Stockouts, also known as out-of-stocks, can be costly and have long topped the list of challenges faced by consumer brands and retailers. In fact, along with overstocks it has been said to cost retailers alone $1.1 trillion a year globally. 

In this article, we’ll have a look at what causes them, what you need to take into account when it comes to calculating your stockouts, and how you get control of them.

What is a stockout?

First off, there are stockouts you want to have. Those that you plan for. Seasonal goods you want to sell out before you move into the next season, limited collections, or perhaps you want to create scarcity by limiting availability to a product and restocking less frequently. Then there are those undesirable stockouts that leave your website gaping empty unintentionally, resulting in loss of sales, disappointed customers, and a battered brand.

If a stockout is a good or bad thing also comes down to the strategic goals related to your business model. It is perhaps no secret that some brands' sales models rely on having a steady supply of new products on their shelves whereas others make a point of selling out on coveted items never to restock before the next collection launches. What end of the scale your business model leans towards naturally determines how you view, handle and plan your inventory levels to optimize for regular stockouts or sooner avoid them.

What causes stockouts?

When it comes to those undesired or unplanned stockouts, they can be caused by many different things like production failures, delays in delivery, or a number of human errors. However, inaccurate inventory planning due to defective data and inefficient demand forecasting is one of the main culprits causing stockouts. This not only renders you unable to plan your purchases to meet market demand,  it can cause low cash flow with money tied up in the wrong inventory, creating a vicious circle of carrying the wrong products and problems with overstocks as well as stockouts. 

No matter what your goals are, reaching a lean level of inventory is oftentimes advisable. Carrying extra inventory and tying your funds up in overstock can be detrimental to your business. However, being lean at the cost of sales can be harmful to your brand’s reputation.  When managing your inventory levels, there are a number of things to take into account to figure out the right balance. When is making a sale more profitable than avoiding inventory-carrying costs? What does a stockout really cost you?

What does a stockout really cost you?

One of the obvious consequences of unplanned stockouts is lost revenue from missed sales when a customer can’t buy the item that they want. They might get a cheaper product instead or leave completely empty-handed. 

The most direct calculation to quantify the cost of a stockout is by estimating the demand during a period of undesired stock-out and multiplying that with the gross margin of the stocked-out articles. If the article typically has a stable demand, you can look at sales velocity. In case of higher variance in demand, you can look at historical sales to see other articles that have followed the same demand patterns to get an idea of how the article would have sold during the period of stock-out. 

In addition, a stock-out comes with consequences for customer satisfaction. Not delivering on customer expectations can be a hard hit on your brand. Some are equipped to withstand a temporary loss in sales, for others stockouts mean walkouts and the potential loss of a customer to a competitor and a hit on future sales as well. Stockouts may also mean costs for backorders, additional freight expenses, manual handling costs, and disruption in operations as they rush to rectify the issue.

In any case, as stated above, undesired stockouts are costly for your business in more than one way. Without automation in your inventory planning, resolving these issues once they occur will be even more significant. The best port of call is to predict and address them in advance.

How to avoid stockouts

So how do you avoid stockouts? Simply put, you need to know what to buy and when. You need to get on top of your inventory planning processes and get more precise with your sales forecasting. To make accurate and timely purchase decisions it is essential to consider your lead times as well as both your historic and real-time sales and inventory data. 

  1. Improve data accuracy. Stock counts and accurate inventory data are vital. Inventory planning software like Madden Analytics can help you aggregate sales and inventory data from all locations ensuring you have real-time data for forecasting and planning purchases. Leading us to:

  2. Improve inventory forecasting. Knowing your true demand for a product is essential. This means accounting for desired stockouts, historic stockouts, and seasonal demands when making your sales forecasts. It not only helps you avoid stockouts, but it also helps you keep ideal inventory levels to avoid overstock.

  3. Automate reordering. With software like Madden Analytics, your demand forecasting will be even more precise. Taking into account your business's specific lead times, and desired stock levels it will give you recommendations on when to re-stock and how much to meet your demand.

  4. Invest in inventory planning software. It will not only help you more accurately forecast your future sales, it will increase reliability and flexibility in your planning, reduce risk and save money on manual processes.

Identify and prevent stockouts using Madden Analytics

Madden Analytics will help you keep a desired stock level no matter if your goal is to keep a good level of safety stock or to stay as lean as possible.

The tool will help you identify stockouts and take historic stockouts into account when demand forecasting. Our Planning module allows you to plan sales across your assortment and quantify what you need to buy and when. It gives you an overview of your sales plan, projected volume flows, and stock coverage. It lets you know how many units to buy and how well your plan matches your budget and sales goals.

In the Stock List feature, Madden will give you concrete recommendations for restocks and activation of overstocks tailored to your lead times, desired stock coverage time, and desired stock levels. Madden will also let you know what inventory is sitting as deadstock, what needs activation to reduce risk of future overstock, and if inventory could benefit from being moved between sales locations rather than restocked.

Do you need help combatting your stockouts and revolutionizing your inventory planning processes? Learn more about our Planning and Stock list features or book a demo and we’d be happy to give you a closer look!


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