It takes time and money to bring consumers to your website so when it's time for them to make a purchase you don't want there to be a stockout for the product they're after.
Stockouts pose a huge problem for businesses. In fact one study suggests that running out of stock costs them just under $1 trillion in sales each year.
With eCommerce becoming increasingly competitive online stores in particular need to take action to reduce stockouts. Competitor sites and listings are just a few clicks away so shoppers won't hesitate to take their business elsewhere.
Preventing a stockout can be tricky if you sell products across multiple platforms but it's worth the effort to increase sales and reduce costs.
What is a stockout?
A stockout is when a particular product is unavailable because a retailer doesn't have enough inventory.
In a store this means there are gaps on the shelves. Online it means an item is listed as out of stock. This can be frustrating for online shoppers as it's often unclear when an item will be restocked.
Stockouts are usually avoidable and can occur because of poor inventory management or supply chain issues. This isn't the same as when an item is out of stock everywhere because of huge demand.
What are the implications of an inventory stockout?
A stockout doesn't just hurt short-term sales it has lots of other knock-on effects which can impact product visibility and future profits too. These include:
Sometimes because of poor stock management you may not realize a product is out of stock until after a customer has checked out.
This leads to canceled orders which is disastrous in terms of customer experience. As a result brands may need to offer discounts or free delivery in order to maximize customer retention and minimize negative reviews.
Canceled orders can really hurt your reputation on marketplaces too. On eBay for example too many cancellations could result in selling restrictions being added to your account. This could stop you from listing certain items or reaching eBay's Best Match position.
Over on Amazon self-fulfilled sellers need to maintain a cancellation rate of under 2.5% to ensure their account isn't deactivated.
An inventory stockout can also affect your rankings on search engines and marketplaces: Out-of-stock product pages often have high bounce rates and a poor user experience which can have a negative effect on its Google ranking. Although displaying alternative products or 'Where to Buy' information which links to platforms where your product is in stock can prevent this from happening.
For Amazon a stockout can signal that you're an unreliable seller. So it can impact the visibility of your listings which can hurt future sales.
Loss of customer base
For businesses a stockout means the loss of a sale. But for consumers it means frustration and disappointment.
Loyal customers can easily switch to a competitor's website and if they have a great experience they may not return. In fact one American study showed that 15% of consumers who encountered a stockout online switched sites to buy the item.
As click-and-collect grows in popularity the stakes become even higher. If a customer buys something online and travels to a store to pick it up discovering it is unavailable could make them angry and turn them against your brand for life.
Experiences like this can also result in negative reviews which could deter prospective customers in the future.
If you offer free shipping or discounts to minimize customer dissatisfaction a stockout can increase your company's expenses.
Other stockout costs include marketing investments to reduce the impact of negative reviews and admin expenses associated with running product waitlists.
An unavailable product may also cause consumers to abandon other items in their shopping cart because they don't reach the threshold for free shipping or want to take their whole order to another website.
What causes a stockout?
Sometimes an inventory stockout is caused by situations that aren't within your control. Deliveries can be delayed because of things like bad weather mechanical issues or border controls. A shortage of raw materials or production problems could also delay orders coming from your suppliers.
In many cases online sellers themselves are responsible for stockouts. Inaccurate inventory counts can be caused by human error glitches in technology or unrecorded shrinkage.
Unpaid invoices cash flow issues and inaccurate forecasts can all impact inventory levels too. But an inventory stockout is most commonly caused by bad ordering practices. Usually products are ordered too late or in too small a quantity.
How can you avoid stockouts?
Although lots of issues can put pressure on product availability there's plenty online sellers can do to address them. Here are four key ways to prevent a stockout:
1. Get your forecasts rights
To create accurate forecasts you first need access to accurate data. So make sure sales reports and stock counts are up-to-date. Otherwise you won't be able to calculate current or future demand and you'll reorder the wrong amount of inventory.
If any data contains errors investigate why and address the cause. Stolen goods lead to inaccurate stock counts and increase security. If incoming shipments are frequently incorrect or misplaced devise a new process for checking and organizing deliveries.
You can feed all your data into inventory forecasting software which will help you see changes in sales volumes and velocities. But as well as looking at historical data you'll also need to adjust forecasts based on current trends seasons customer reviews and what's going on in the economy.
Stockout rates can increase significantly for products that are on sale so increase orders based on promotions marketing campaigns and organic visibility across your sales channels.
2. Focus on inventory management
Regular inventory counts are key to preventing unexpected stockouts. You can do full counts every couple of months or cycle counts where a few products are checked each day.
Introducing modern cloud-based technology is also a great way to take control of your inventory. You can use RFID tags to find and count products easily while stock reporting tools - like Digital Shelf - can provide an overview of stock levels across your retailer network in real-time. This will allow you to reorder stock without delay.
Recent data also suggests that stockout rates for best sellers hit between 8% and 12%. So if you're struggling to manage your inventory focus on monitoring and reordering your top-selling products first.
Lots of businesses use the ABC Analysis model for inventory management. This allows them to concentrate on the products that have the biggest impact on costs or profits.
3. Improve cash flow
If you can't reorder stock on time or in sufficient amounts because of problems accessing funds you can improve your cash flow by: selling off surplus stock promptly following up on outstanding invoices and shortening payment deadlines.
4. Plan ahead for logistical errors
It's important to have great communication with your suppliers and distributors. Make sure all agreements are in writing and let them know about any changes or problems as soon as possible. If they're based in another country you should also take note of their public holidays.
Make sure you receive advanced shipping notifications too. This way you can identify potential delays and take action to slow sales or source alternative stock where necessary. For key products it's a good idea to work with more than one supplier.
Most stores reorder products while they still have enough stock to last until the arrival of a new delivery. They do this by calculating lead time demand:
Lead time demand = Average lead time in days x Number of units sold per day
But it's advisable to have some safety stock in storage too. This will act as a cushion against surges in demand and is key to preventing stockouts. Here is the standard formula used:
Safety stock volume = (Max daily sales x Max lead time in days) - (Average daily sales x Average lead time in days)
An inventory stockout is bad news for any business but implementing new processes and software can safeguard against them.
Stockouts are not only an inconvenience for consumers but are also costly for businesses. However there are steps retailers can take to minimize and mitigate the negative effects of stockouts. Through proper forecasting inventory management improved cash flow and anticipating logistical errors you'll be well on your way toward preventing a stockout.