Just how big a problem is it when something is out of stock? A study published in Retail Dive estimates that retailers are losing nearly $1 trillion of sales annually when companies are unable to fulfill customer orders.
What is Out of Stock?
Call it a stock-out, oversell, or out of stock (OOS), it happens when you have a product sale that you cannot fulfill.
While you want to avoid stock-outs whenever possible, some studies show that the average out of stock rate for retail is nearly 8%. That means when customers want to buy an item, it’s out of stock more than 1 out of 12 times. For discounted or heavily promoted products, the number can exceed 10%. That’s a big number when every out of stock is a potential lost sale.
Causes of Stock Out
Out of Stocks can be caused by a variety of reasons:
- Poor inventory management
- Inaccurate inventory counts
- Poor forecasting processes due to lack of data, such as historical sales, stock turn, sell-through, etc.
- Inaccurate calculation of safety stock
- Inefficiency in replenishment and reordering
- Poor warehouse operations practices.
These are just a few of the reasons out of stocks happen. There’s good news here, though. Most are preventable with the proper processes and management. There are specific actions you can take when it comes to figuring out how to avoid stock out.
Why Is Preventing Out of Stocks Important?
Too many out of stocks can devastate brand trust and increase customer service costs. For eCommerce sellers, it can result in a loss of customer confidence in doing business with your company. In some cases, the effects of stock out can result in penalties for online marketplaces including shutting you off.
Being out of stock on products customers want is devastating. You lose the sale and you may be driving your customers right to your competition. If they have a good experience there, customers may never return. Here’s how the Harvard Business Review characterized it: “Stock-outs cause walkouts.” It’s literally true for retail stores. For eCommerce sellers, it’s even easier for customers to leave your marketplace and head somewhere else.
For those reasons, how to prevent out of stock should be at the top of any company’s list of priorities. Out of stocks are unique in that they’re unpleasant for pretty much everyone in the eCommerce food chain: suppliers, buyers, sellers, and customers.
How Do You Prevent Out of Stock Problems?
So, how do you prevent out of stocks from hurting your business? Here are the steps that can help:
1. Prevent Out of Stocks by Utilizing Buffers
If you have shared inventory across multiple online marketplaces, operate as a multi-platform seller, or do daily deals you may want to consider using a buffer for those items. You’ll be surprised how drastically this will prevent stock outs.
There are generally two ways to think about buffers:
- When you get down to an available quantity of X, you’ll want to only have it live on XYZ marketplace. For example, when we have two size 9 Steve Madden shoes in stock, they will be live only on Amazon. Having them live on multiple platforms increases the risk someone will buy them and find they are OOS.
- You only want to show 50% of your total available quantities to a daily deal site or on certain marketplaces.
Most Channel Management systems offer buffers as one of their tools. Most channel management systems allow users to keep a minimum quantity in inventory. When the available quantity reaches the value, they’ll update the quantity of your SKU at the channel to “0” so that it can no longer be purchased by consumers. By maintaining a product buffer, you’re able to ensure that you won’t oversell a product. It will automatically be removed from a marketplace once it gets below a certain quantity.
SkuVault integrates with all the most popular channel management systems, including:
- Solid Commerce
2. Forecasting and Reordering
If you have high velocity products on multiple channels, then you will always want to make sure to reorder and receive before you run out and keep an adequate safety stock on hand to hold you over until new items arrive from your supplier. You can forecast and determine your reorder point analyzing your sales history, current order quantities, and on-hand quantities.
Even without forecasting, your reordering strategy can be a big part of solving out of stock problem by a simple reorder point notification. You can do this manually, or use a warehouse management software like SkuVault. SkuVault has replenishment reporting, which lets you know when your inventory levels dip below the desired quantity. This report allows you to control and replenish across three different report types: reorder, replenish, and assembly. It can be used in various methods, such as sales forecasting, reorder point, and maximum/minimum order quantity (MOQ).
This report can help you maintain your stock levels for eCommerce platforms, and works especially well for Fulfillment by Amazon (FBA) sellers.
You can prevent out-of-stocks because you’ll know exactly how much inventory you have on hand, and be ready to order more before you run completely out.
3. Reducing Human Error
To keep your inventory accurate, you need to reduce as much human error as possible. While it’s impossible to eliminate all human error, you can certainly minimize it by creating strong processes and procedures.
If you’re using spreadsheets or doing anything manually, you’re going to have errors. A robust inventory management system, such as SkuVault, should be at the heart of your warehouse operations.
One of the easiest ways to reduce human error is to use scanning to record inventory, fulfill orders, and enter information into your inventory management system. Anytime you have users typing there are going to be mistakes. Scanning avoids mistakes. In fact, scanning not only prevents human errors, but it can help you improve your accuracy as it will automatically flag errors.
Another way that a warehouse operation manager can reduce human errors is through consistent measuring and monitoring of performance. Set maximum deficiency goals and measure performance against these goals consistently. Embracing the practice of continuous improvement where you can continue to find deficiencies and take corrective action, including people or processes, to optimize operations.
Many operators use incentives for employees when they meet or exceed individual or team goals. It forces workers to pay attention to quantitative measurements of their work. Not only do they know their actions are being tracked, but they also have an incentive to help reach the goals. This tends to drastically reduce errors as well as increase efficiency.
Incentives don’t always have to be financially to be effective. We conducted a study where we tracked the average picking time and compared the weekdays to the weekend. On the weekends, the employees at this facility were told they could leave when the day’s work was completed. Not surprisingly, but certainly depressingly, they were literally twice as fast on the weekends.
4. Conducting Regular Cycle Counts
The average retail operation in the United States has an accurate inventory count on just 63% of its stock, according to the GS1 US Apparel and General Merchandise Initiative, a consortium of retailers, distributors, and suppliers. That’s a lot of potentially lost revenue or misplaced stock. Inaccurate inventory leads to oversells and out of stocks. More than 30% of businesses have experienced situations where they sell items they showed as in-stock but were not able to be located within the inventory.
Organized inventory is accurate inventory, and accurate inventory is less susceptible to out of stocks. Regular cycle counts will help you maintain and improve upon the state of your inventory and your warehouse.
Your cycle count should be conducted based on a schedule so that all of your inventory gets counted at least once a quarter. To do this effectively, it should be part of the daily operations within your warehouse.
The ABC Method of Cycle Counting
Most companies follow the ABC method. This segments inventory based on its value with A being the highest value merchandise, B being the next highest, and C being the least expensive. Some companies will define value as the cost of goods while others will define it as products with the highest margin.
Regardless of how you define it, the items in the A group are the ones you deem as most critical. The A items will be counted most frequently because of their importance. The B items get counted less frequently and those in the C group get counted even less frequently since there is less risk.
To make counting more accurate, you should conduct blind counts where those doing the counting are unaware of what’s recorded in the system. This eliminates the temptation to match up numbers. Another best practice for cycle counting is to have a different person record the count instead of having the person doing the counting record it. This helps with quality control.
A warehouse management system (WMS), such as SkuVault, makes the cycle count process easy by helping manage the entire process.
5. Quality Control
After picking, but before packaging / shipping, have someone in your warehouse responsible for quality control.
If the wrong items are being removed from inventory, you are losing accuracy, which can be reflected in what is live online and can cause more out of stocks. It is the ultimate defense against human error in the picking process. This not only prevents the wrong items from being sent out, but will also prevent out of stocks as well.
SkuVault can optimize the pick, pack, and ship process by automatically generating paperless pick lists using a variety of methods, including:
- Wave picking
- Batch picking
- Zone picking
- Hyper picking
An efficient pick process with quality control measures can make sure you’re shipping the right items to the right customer. This keeps your inventory accurate, cuts down on returns and handling, and helps prevent out of stocks.
6. Inventory Sync
Out of stocks are more than just a hassle. It can have lasting implications for your FBA business on Amazon and a similar impact on other sales channels. Algorithms can drop you in the rankings as a seller and give priority to your competitors. This can have a devastating impact on your revenue. Some companies have lost their coveted position in the buy box because of too many stock-outs. There are reports that other eCommerce sellers have been placed in time out, or dropped altogether because OOS issues occurred too often.
This is yet another example of why it’s crucial to sync your inventory across all your warehouses and sales channels. If you are using a 3PL, it should be synced as well. Regardless of where your inventory is physically and where you are selling it, you must have a consistent – and accurate – inventory count.
This is another place where SkuVault excels. You need to ensure that what you’re listing for sale on multiple marketplaces, including your own website, is accurate to avoid out of stocks. With SkuVault quantity updates, you never have to worry about this again. Unlike other inventory management systems (IMS), SkuVault updates quantities in near real-time. Some IMS software only updates inventory once a day or once every 24 or 48 hours. When products are moving quickly, you can’t wait a day or two to make sure you know what’s really available for sale. That leads to out of stocks.
Common Questions About Preventing Out of Stocks
Here are some of the common questions that companies ask when it comes to preventing out of stocks:
How do I better forecast sales for peak demand or seasons?
Accurate historical data is your best friend when it comes to forecasting demand, especially if your products have a selling season. If you’re only relying on average monthly sales, it can lead to stock-outs during peak times. SkuVault tracks your historical data, which can be used for replenishment and reordering to ensure adequate stock levels and adjust for peak and non-peak times.
Why do out of stocks impact return rates?
When customers want to buy a product and they are unable to do so because an item is out of stock, one of two things happens. They either go to a competitor to attempt to purchase the product or choose another item from your store. In the first case, you lose the sale and risk the customer never returns. In the second case, you risk that the customer is unhappy with their purchase since it’s not what they really wanted. This leads to higher return rates and more handling costs.
In the U.S. alone, shoppers return more than $260 billion in merchandise each year – nearly 8% of all retail sales. For eCommerce sellers, the return rate is dramatically higher – as much as 30%. Besides the costs of returning items to inventory, many of the goods can only be sold at discount. Many retailers are getting less than 30% of the original sale when they resell returns – which means they lose money every time merchandise is returned.
Are there “real-world examples” of how out of stocks hurt companies?
Walmart is famous for a lot of reasons. One of them is its impressive logistics operations. Even so, the company estimates that they have a 90-95% level of merchandise in-stock at any one time. Considering the company’s $520 billion worth of sales at its U.S. operations, these OOS items represent billions of dollars of sales that could be lost.
The bigger the company is, the bigger the problem out of stocks cause. Best Buy took a big hit to its reputation one year when they failed to fulfill orders right before Christmas. Customers bought items on Black Friday, but the company was unable to deliver them. They had to cancel the orders, notify customers, and live with a big black eye and loss of consumer trust. Best Buy admitted later they had not accurately forecast demand and made adjustments to its supply chain.
Nike admits it failed when it didn’t have the right system in place to forecast demand. At one point, they found themselves in possession of excess stock in low-selling items and a significant shortage of their most popular sellers. The company self-reported a loss of $100 million in potential sales due to out of stock items.
These are big companies that got it wrong. If it can happen to them, it can happen to anyone. That’s why it’s crucial to have the right inventory management system, forecasting tools, demand planning, and warehouse management system to reduce the risk.
Strategies on how to prevent stockouts can make a significant difference in your profit margins and overall bottom line.
If you’re selling on multiple channels or running a busy warehouse, out of stocks happen, but with a little planning, they don’t have to. Take the steps to prevent out of stocks to reduce customer service costs, uphold brand and customer trust, and make your operation more profitable.