Stockout Costs: How Stockouts Can Impact Your Business
Originally Published: 12 April 2023
Last Updated: 31 July 2024
As a customer, there’s nothing worse than being super excited about a product only to find that it’s out of stock. You can double that frustration when you’ve checked out, and a few days later you receive an apologetic email to say there will be a delay due to stock shortages.
When an eCommerce store runs out of stock, we refer to this as a ‘stockout’. It’s an issue not only for your customers but for your business, too. In this article, we’re going to explore stockout costs, both financially and reputationally, and look at ways you can prevent stockouts from ever occurring.
In this article
Why do stockouts happen?
Although we do our best to avoid stockouts, they can happen to any business at some point in their lifespan. They’re especially common for newer businesses who have not yet learned the tricks of the trade, or even established businesses that don’t have a particularly good grasp on inventory management.
Here are some common reasons why stockouts occur.
Increased demand
Sometimes demand can increase unexpectedly. Perhaps you’ve overachieved in a marketing campaign, or some new trend creates a sudden demand for your products. Remember the great toilet roll shortage of 2020? Nobody could have predicted that happening. In Finland, a feta cheese pasta dish went viral on TikTok, with some outlets reporting that supermarkets ran out of feta! That latter example has pretty much been debunked, but you get the point we’re trying to make.
Supply chain issues
Supply chains are often hugely complex, with multiple variables that can impact the risk of stockouts. Shipments can be held up at ports, suppliers might struggle to secure materials, or could even end up going out of business altogether. Many supply chain issues can materialise in a way that’s out of your control, although this risk can be mitigated as we’ll explore later.
Nevertheless, when supply chain mishaps happen, this can lead to frustrating stockouts for your business.
Poor inventory management
Stockouts can also happen due to poor inventory management. One key aspect of proper inventory management is having the optimal amount of inventory in your warehouse at any one time, both to prevent stockouts and ensure that you don’t end up paying unnecessary storage costs.
Stockouts often occur when businesses don’t order enough inventory, order inventory too late, or fail to forecast demand effectively, resulting in products selling out much sooner than expected.
Cash flow
For any eCommerce business, cash flow is important. Without enough cash coming into the business, you won’t be able to do essential activities such as buying more stock. Being unable to afford new inventory at the required time suggests deep-rooted issues within the business, but nevertheless can often result in stockouts.
How stockouts can impact your business
Stockouts can damage your business both financially and reputationally, especially if many SKUs are out of stock, or customers can’t get hold of your best-selling items. Let’s take a look at some of the biggest ways stockouts can affect your business.
Unhappy customers
One of your primary objectives is, of course, to keep your customers happy. Customers who visit your site and regularly find the products they want or need are out of stock are unlikely to keep returning. Word of mouth travels fast around the internet, which can have an increasingly severe impact on customer loyalty and retention.
You might also find that customers leave bad reviews on Trustpilot or your Google My Business page. While you can try negotiating to have the review removed, more often than not, they’re a permanent stamp that most people who search for your business are likely to see.
Stunts growth
Your other main objective as an eCommerce business is to sell, sell, sell. Without regular sales, there is no business, and without a consistently stocked warehouse, there aren’t going to be regular sales. You can throw your business plan and milestone achievements out of the window if you’re regularly unable to make sales due to stockouts.
The eCommerce industry is incredibly competitive, and it’ll only get more competitive as time goes on. If you repeatedly have stockouts, you’ll find customers naturally gravitate towards competitors, leaving your business trailing behind.
Lose traction
As you begin to succeed with your online store, you’ll hopefully see interest and sales grow exponentially over time. Maintaining traction is key to success, and if you can’t keep up with demand, you may lose momentum and struggle to recapture it.
One guaranteed way to lose traction is by regularly having stockouts. The magic in the bottle you managed to achieve will quickly empty once customers begin to struggle buying from you.
How to reduce the risk of stockouts in your business
As we’ve already established, stockouts can seriously harm your business in both the short and long term. Thankfully, there are quite a few strategies you can use to mitigate the chances of stockouts from occurring.
While there are factors – such as a global pandemic or serious supply chain issues – that can result in unavoidable stockouts, there’s plenty you can do to keep the avoidable stockouts at bay.
Demand forecasting
If you’re unfamiliar with the term, ‘demand forecasting’ is the process of using historical data to forecast future demand. For example, in the previous year you may have had a particularly busy July and August. You can use data from these periods to forecast demand for the upcoming July and August.
The more data you have, the more reliable your forecasts will be. Demand forecasting is particularly good if you’ve been trading for a few years, and know that certain seasonal trends are not just anomalies.
Not only does demand forecasting help reduce the chance of stockouts, but it also assists you in predicting revenue, managing your supply chain, preparing budgets, and developing pricing strategies.
Work with a network of reliable suppliers
Forging and nurturing good relationships with a range of suppliers is key to avoiding stockouts. By fostering positive relationships with different suppliers, you improve the chances of them going the extra mile to get goods sent out to you urgently or have other suppliers to fall back on if one cannot fulfil your orders.
Similarly, by working with different suppliers, you’ll have a better understanding of who is reliable and who is more likely to let you down, and you can take this into consideration when it’s time to make a new order.
Calculate your reorder points
A reorder point, or reorder level, is the point at which you make a new order from your supplier. By using the Reorder Point Formula, you can calculate the optimal time to order new stock and avoid a stockout, while also avoiding overstocking your warehouse.
The great thing about the Reorder Point Formula is that it takes into account the potential of a sudden rise in demand, delays from your suppliers, or a sudden bulk order. It gives you enough wiggle room should something unexpected happen.
Embrace technology
Investing in technology can take a lot of the guesswork and number crunching out of avoiding stockouts. Inventory management software allows you to keep a close eye on sales, storage costs, and shipping costs, and, with more advanced software, provides you with intelligent insights on a wide variety of data, allowing you to make smarter decisions on when to order new stock, when to run a sale, and how to position your inventory in the most cost-effective way.
Inventory management software works by tracking your inventory in the warehouse and in transit via tracking labels, while also connecting to your sales channels via an API. This approach provides you with full clarity over the status of your inventory from the beginning to the end of the fulfilment process. By better understanding where your stock is, how quickly it moves through the warehouse, and the speed at which it is sold, you have enough information to avoid stockouts in the vast majority of cases.
Partner with a fulfilment provider
One of the most effective ways to avoid a stockout is by partnering with a tech-enabled 3PL like J&J Global Fulfilment. Outsourcing your fulfilment has a lot of perks, not least of which is the fact you’ll be working with a team of fulfilment specialists who understand best practices around good stock management and will work with you to ensure that your stock levels remain healthy at all times.
J&J also have a custom-built inventory management tool, ControlPort™, an award-winning piece of software that truly changes the game when it comes to inventory management. We make data accessible and user-friendly, meaning that you don’t have to dig through piles of spreadsheets or a host of complex dashboards to understand the best way to avoid stockouts and take your business to the next level.
There are, of course, a whole lot more fantastic benefits to working with a fulfilment provider. To learn more, don’t hesitate to get in touch with us for a no-obligation chat.
Stockout Costs FAQs
What are stockout costs?
Stockout costs are the expenses incurred when a company runs out of a product and cannot meet customer demand. These costs can include lost sales, increased backorder processing, and damage to customer satisfaction and loyalty.
How do stockouts impact sales?
Stockouts can lead to immediate lost sales and potential future losses as customers may turn to competitors. This not only reduces revenue but also can erode market share over time.
What effect do stockouts have on customer satisfaction?
Stockouts negatively impact customer satisfaction as they create inconvenience and frustration. Customers expect products to be available when needed, and repeated stockouts can lead to diminished trust and loyalty.
How can stockouts affect operational costs?
Stockouts can increase operational costs due to expedited shipping for backorders, administrative costs for handling customer complaints, and potential overtime wages for employees managing the fallout. These additional expenses can significantly impact profitability.
What strategies can businesses use to prevent stockouts?
Businesses can prevent stockouts by improving demand forecasting, optimising inventory levels, using safety stock, and implementing robust supply chain management practices. Leveraging technology for real-time inventory tracking and predictive analytics also helps maintain adequate stock levels.
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