What system has a drawback that leaves a firm without a buffer stock of inventory?

Stockouts are what happen when you run out of inventory of a particular item. An out-of-stock can happen anywhere in the supply chain, but it impacts retailers’ shelves and profits the most when it occurs as the customer is about to purchase. 

Recent data from Adobe shows that stockouts were up 250% in October 2021, compared to pre-pandemic levels.

We’re all too familiar with the scenario: There’s a t-shirt you’ve been eyeing for a week. You love it. But when you finally go to buy it, it’s no longer available in-store or online. You could go to another retailer, but that’s often time-consuming and inconvenient. You either end up with a product you don’t really want or none at all.

It’s frustrating, to say the least. 

Stockouts, also known as out-of-stocks, are among the most frustrating experiences for online and in-store shoppers. Stockouts create disappointment and frustration for retailers as well. t In addition to lost sales and revenue, hey can lead to missed opportunities to engage shoppers,and potential damage to a retailer’s brand.

Want to reduce stockouts in your retail store? Learn how in this guide. 

Table of Contents

• What is a stockout?
• What causes products to go out of stock (OOS)?
• What are the costs of stockouts?
• How can retailers avoid running out of stock?
• Examples of retailers solving stock issues
• Never run out of stock at your store

What is a stockout?

Stockouts can be defined as the unavailability of specific items or products at the point of purchase when the customer is ready to buy. Stockouts cost retailers an estimated $1 trillion every year; in some verticals, shoppers experience stockouts as frequently as every third shopping trip.

A stockout can occur for many reasons:

• You miscount inventory and end up with less stock than you thought you had
• Demand surges for a particular item 
• Suppliers get delayed
• You have no cash to buy inventory

In brick-and-mortar stores, this usually means obvious gaps in a store’s shelves. Stockouts can be even more frustrating for online consumers, as there is often little to indicate whether the out-of-stock is due to a temporary technical problem or a major disruption in the retailer’s supply chain.

Of the 18 product categories tracked by Adobe, electronics currently has the highest out-of-stock levels, followed by jewelry, apparel, home and garden, and pet products.

There is a subtle yet important distinction between out-of-stocks and generalized product unavailability.

When Disney released its hotly anticipated BB-8 droid toy to coincide with the theatrical release of Star Wars: The Force Awakens in 2015, virtually all retailers sold out of the toy immediately. This is an example of widespread, generalized product unavailability. 

But if most retailers had still had the toy in stock and one retailer in particular did not, because of supply-chain issues or poor inventory management, that retailer’s product shortage would have been considered a stockout.

Take the guesswork out of restocks

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What causes products to be out of stock (OOS)?

Although there are only a few likely outcomes from out-of-stocks, such as customer frustration and lost sales, there are many different scenarios that can cause stockouts in the first place.

Disparities between item counts

One common cause of stockouts is a disparity between item counts and the record of how many units of a particular item a retailer has in stock (also known as phantom inventory).

There are four main reasons for discrepancies between item counts:

1. Human error
2. Technical issues
3. Shrinkage, or the loss of goods due to damage or theft
4. A combination of the above

Although it’s difficult to quantify, mistakes in inventory management can often be attributed to human error. Miscounting items can be all too easy during busy shopping periods, especially in retail stores.

Technical problems can also cause disparities between one item count and another. Most warehouses and distribution centers rely on computerized inventory management systems. But when those systems have technical issues, such as data center downtime, or there’s a delay in the synchronization between two computerized systems, discrepancies in item counts can occur.

Sometimes, a combination of these two factors is to blame for inventory mismatches. Just as it’s all too easy for busy warehouse personnel to miscount items by hand, it’s just as easy to input the wrong data into an inventory management system.

Inadequate forecasting and inaccurate reporting

Stockouts, and inventory shortages in general, are often caused by unexpected surges in consumer demand. However, inadequate demand forecasting or inaccurate reporting can also cause out-of-stocks.

Most retailers could probably tell you their most popular SKUs offhand—yet many inadvertently allow their most popular products to sell out due to inadequate forecasting. If a retailer cannot effectively anticipate demand for a specific item, it’s almost inevitable that some customers will end up disappointed when that item is unavailable.

Similarly, inaccurate reporting can cause out-of-stocks. Retailers can only make business decisions based on the data available to them. If sales reports are inaccurate, making informed decisions about inventory purchases becomes extremely difficult.

💡 PRO TIP: Shopify POS comes with tools to help you control and manage your inventory. Forecast demand, set low stock alerts, create purchase orders, know which items are selling or sitting on shelves, count inventory, and more.

Delivery and logistics problems

While many inventory management issues are well within retailers’ control, logistical problems often aren’t.

Retailers have recently been struggling with many supply chain difficulties, including hundreds of thousands of unloaded containers with merchandise on ships waiting to dock at ports around the world. Beyond shipping, the Covid-19 pandemic has disrupted the global supply chain, from manufacturing to transportation and logistics.

Recent research shows that 38.8% of small businesses have experienced supply chain delays due to the COVID-19 pandemic.

Just as it’s easy for goods to be misplaced by warehouse staff, it’s just as easy for the wrong shipment to be delivered to the right location.

Similarly, a logistics provider’s shipping manifest might indicate that a shipment is on the road for delivery, when, in fact, that shipment is still waiting to be processed in a distribution center. Multiply these problems across millions of products due to be shipped to thousands of retailers and it becomes clear how critical accurate logistics information can be.

Poor cash flow management

Cash flow problems can also cause stockouts. You may know how much inventory is needed, but without enough cash, you can’t purchase it. If low cash flow is causing stockouts, better planning and funding can help solve the problem. 

Services like Shopify Capital can help keep items in stock through quick and easy access to funds. Whether you’re going through a rough patch or preparing for the holiday season, you can use the money to cover inventory and reduce stockouts. There are no lengthy applications and you can receive money within a few days, then pay it back with a percentage of your sales.

Inefficient stock replenishment

Stock replenishment involves making sure you always have enough product to sell at the right time. Research suggests that between 70 and 90% of stockouts are caused by poor shelf replenishment practices, and only 10 to 30% from supplier shortages. Careful attention to stock replenishment has become increasingly important in the omnichannel retail environment, where you must provide the best possible product selection, whether online or in-store. 

Gaps in shelf replenishment practices often cause stockouts. Poor inventory restocking processes can lead to lost sales and negative customer reviews. Meeting customer demands during the busy holiday season requires a well-planned roadmap showing when to restock, what to restock, and how to restock.

There are many automated stock management systems available today to track inventory and order items based on your guidelines. It’s key to not only keeping items in stock, but also forecasting future demand, reducing mark-downs, and keeping customers happy. 

💡 PRO TIP: Ship-to-customer order fulfillment is the easiest way to prevent stockouts from hurting revenue. Rather than being limited to selling products you have in stock, you can sell products in-store and ship them to customers from your warehouse or another store location that has inventory.

What are the costs of stockouts?

Blue Yonder’s recent Future of Fulfilment report found that 51% of retail and ecommerce executives cited out of stocks as the biggest challenge driven by the pandemic. Retailers and consumers alike have become all too familiar with stockouts as demand for certain products surges and supply shrinks. 

But what are the hidden costs of having products out of stock?

Lost revenue

The most obvious consequence of stockouts is lost revenue. If a customer goes to place an order and the item is out of stock, you lose the profit of that sale. Shoppers may opt for cheaper products. Or even worse, you may lose a customer forever, which means less recurring sales in the future.

One way to determine stockout cause is through the following formula:

SC = (D x AS x P)

• SC = Cost of stockout
• D = Number of Days Out of Stock
• AS = Average Units Sold Per Day
• P = Price Per Unit or Profit Per Unit

Say demand surges for a popular t-shirt you're selling during the holiday season. You sell an average of 15 units per day and your profit per unit equals $18. The t-shirt goes out of stock for three days.

Using the formula above, your equation looks like this.

CS = (3 x 15 x 18

CS = $810

In this case, your total cost of stock is $810 for one item. Now imagine multiple items going out of stock at the same time. When it comes to your inventory levels, be aggressive. Don’t shy away from ordering more than you think you need, especially during busy shopping seasons. Stockouts cost you money and send shoppers to your competitors. 

Poor customer experience

Having items out of stock creates a poor customer experience. One survey found that 30% of consumers feel stockouts hurt their shopping experience. Some 69% will choose a substitute item after a first stockout occurrence, but after experiencing three of them, 70% of shoppers will go to another brand entirely. 

Three quarters of consumers are concerned about stockouts and shipping delays during the holiday season.

Damage to brand reputation and loyalty

Customers who don’t get what they want from you will go to your competitors. In fact, 37% of consumers who experience a stockout will shop with another brand, and 9% will buy nothing at all. Disappointed customers can also post negative reviews online about your brand and hurt your reputation. 

Increased operational costs

If you need inventory fast and it’s not available in-store, you’ll need to purchase inventory on short notice. This usually results in paying a rush fee for fast delivery. 

Employees may have to stay late and scramble to deal with backorders or rush shipments. Or they spend time in the stockroom looking for products that aren’t there–this can increase delays for customers and impact their experience.

Of course, you can mitigate the amount of time employees spend looking for products by organizing your stockroom.

How can retailers avoid running out of stock?

Many retailers react to stockouts rather than taking proactive steps to prevent them. But reacting means retailers are constantly on the defensive. With a little planning and the right tools, retailers can proactively avoid out-of-stocks and ensure their customers are happy.

Reconciling disparities in item counts

As noted, stockouts often occur when there are differences in item counts from one inventory management system to another. While eliminating human error entirely is practically impossible, ensuring that inventory data is up-to-date is relatively easy.

Shopify’s unified commerce platform centralizes inventory data from everywhere you sell in-person and online. By managing all your channels from one back office, inventory levels stay up-to-date as you receive, sell, return, or exchange inventory online or in-store. This prevents any discrepancies that may occur from having to manually count and reconcile online and store inventory in different systems.

Unifying its sales channels with Shopify helped green beauty retailer The Detox Market scale its operations from two California pop-up stores, to six permanent retail locations across the US and Canada, along with two warehouses, and an online store. Their team of three inventory specialists manage thousands of SKUs from hundreds of suppliers for both online and retail stores. 

Shopify and the Stocky app made it easy for us to scale. Without those tools, it would have taken us more time and people to grow to the size that we have in such a short time.

Syncing inventory data between online channels and bricks-and-mortar locations makes it much easier for retailers to manage their stock effectively. It also helps merchants give customers a much better experience when they use more than one channel to shop. 

Recent data suggests that the vast majority of shoppers begin researching products online and whether a product is available for in-store pickup before visiting the store. To serve these shoppers better, merchants need accurate inventory data displayed both on their online store and in their point-of-sale (POS) system. 

With Shopify POS, for example, merchants can view each store’s inventory, see if one store is selling products at a faster rate, and transfer items from either their warehouse or another location to ensure they have stock on hand. 

💡 PRO TIP: Offering in-store pickup as a delivery method at checkout is a great way to get more online shoppers to visit your store. To get started, enable local pickup availability in Shopify admin to show online shoppers whether a product is available for pickup at one of your stores.

Forecasting demand more accurately

Another common reason for an out-of-stock is inadequate or inaccurate inventory forecasting.

Anticipating demand for specific products is a major challenge for retailers. Recent data suggests that 73% of retailers struggle with inventory demand forecasting.

Accurately predicting how much inventory will be needed and by when is easier for some retailers than others by performing an ABC analysis. Businesses that rely primarily on seasonal items, such as winter sports equipment or beach apparel, may find it much easier to predict demand for specific products. That said, there are ways for retailers of all types to anticipate demand and avoid stockouts.

One of the first things for retailers to consider when preparing inventory forecasts is lead time--the time between placing an order for new products and actually receiving them from a supplier. One way to gauge lead time is to examine previous purchase orders from specific suppliers. This probably won’t be enough on its own, but it can serve as a starting point for calculating lead time from individual suppliers.

Lead time demand refers to the demand for specific products during the lead time for a resupply order to arrive.

While calculating lead time can help retailers plan for busier shopping periods, stores run the risk of stockouts if they fail to take lead time demand into account. Fortunately, figuring out lead time demand is quite simple. To calculate lead time demand, retailers can multiply the average lead time in days for a given product by the average number of units sold per day. The resulting figure is the lead time demand.

💡 PRO TIP: Having trouble knowing how much stock to order from a vendor? Merchants using Shopify POS can forecast demand with the Stocky app, which uses historical sales data to suggest which products and quantities to reorder.

Optimize safety stock

Another factor for retailers to consider when predicting anticipated demand for specific products is “safety stock,” or the amount of stock a retailer has on hand to act as a cushion against unexpected surges in demand.

If you carry too much inventory, you tie up money in working capital; if you don’t carry enough inventory, you face stockouts. Fortunately, the cycle stock portion of the inventory equation is straightforward. What keeps people up at night is safety stock.

Although this buffer will vary from one retailer to another, store owners can calculate their safety stock using the following formula:

(Maximum daily sales * maximum lead time in days) - (average lead time in days * average daily sales) = safety stock volume

Retailers concerned about accurate inventory forecasting can also rely on data-driven solutions to ensure they don’t run out of their best-selling items. Shopify POS apps like Stocky can largely automate much of the work of examining historical sales data and calculating reorder points.

Many small retailers will keep a week or two of safety stock on hand, determining the quantities based on experience or instincts.

For even more peace of mind, retailers can configure custom stock alerts in Stocky to notify them when popular items are at risk of selling out, when to place important reorders, and more.

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Managing logistical challenges

Although retailers can only exercise so much control over how and when their goods are shipped, there are a number of best practices retail brands can follow to minimize the risk of stockouts due to logistical problems.

Retailers concerned about shipping problems causing out-of-stocks may want to consider working with a logistics provider that offers advanced shipping notifications (ASN). When shipments leave a warehouse or distribution center, retailers are notified and provided with an estimated time of arrival. Many major logistics providers now offer ASN as standard, but it may be worth checking whether smaller logistics companies offer ASN before making a commitment.

Choosing the right logistics provider allows customers to focus on their core business while feeling confident that their transport needs are being addressed properly.

Some logistics providers may offer ASNs for each individual touchpoint in the supply chain, not just for a shipment’s initial departure and final ETA. This can be useful for highly time-sensitive merchandise, such as perishable foods. 

Retailers may also want to ask whether logistics providers rely on automatic data collection technologies, such as radio-frequency identification (RFID), or whether ASNs are handled manually.

Another factor in evaluating logistics providers is whether they offer less-than-truckload (LTL) shipping. Unlike conventional logistics, which favors less-frequent shipments of full truckloads of merchandise, LTL shipping offers smaller, more frequent deliveries. LTL shipping can be advantageous for smaller retailers, as they only pay for the capacity needed to ship their goods. It can also help reduce warehousing costs.

Cross-docking is an option retailers also may want to evaluate before choosing a logistics provider. Cross-docking is the practice of loading merchandise to be shipped to customers directly from a manufacturer without its being stored in a warehouse or processed at a throughput center. Cross-docking can work well for retail businesses that offer dropshipping.

Ultimately, logistics management isn’t just about minimizing the risk of stockouts. It’s about being able to respond to emerging problems quickly and provide shoppers with superior customer service when things do go wrong.

Automate stock replenishment

Another way retailers are reducing stockouts is by automating stock replenishment. They are using radio-frequency identification (RFID) technology to store and track product information and maintain inventory accuracy. 

With RFID, retailers can automate their inventory data and improve accuracy by 30%, while reducing out-of-stock situations by 50%

People manually counting items takes too much time and is expensive. RFID allows you to check entire shipments rather than rely on package scanning and receipts. You can find items quickly, reduce cycle count time, and auto reorder products at safety stock levels. 

Athletic apparel retailer Lululemon has experimented with RFID to improve inventory management and customer satisfaction. It places RFID chips on the back of hang tags for employees to scan. When scanned, it’ll show them where on the floor or in the backroom a product lives. 

RFID technology not only streamlines inventory processes, but also provides 100% accuracy when it comes to restocking.

Using a hand-held reader, employees can electronically receive and update the inventory. When an item is sold at the register, the RFID technology will automatically tell the stockroom to replace it right away, versus manual restocks every half hour or hour. This keeps available items on the floor for guests at all times. 

Have backup suppliers

A steady supply of inventory is fundamental to avoiding stockouts, and it helps to have extra suppliers as backup. During the holiday seasons, for example, when most retailers experience higher sales volume, demand increases. You risk running out of stock if you rely on one supplier to meet higher demand. 

Meaghan Brophy, Retailer Subject Matter Expert and Analyst at Fit Small Business, agrees. “Sometimes wholesales have stockouts too, or there are delays in manufacturing. Make sure you have multiple suppliers for your most popular and bread-and-butter products,” she says. 

Ideally, she notes, you want to have a local supplier to cut down on shipping time. “Even if you can’t get the products physically to your store in time, work with a supplier that offers dropshipping so you can order the products for your customers to be delivered to their home.” 

Review your sales data from previous holiday shopping seasons and take note of your bestsellers. Did suppliers provide enough stock to avoid running out of those products? If not, you’ll want to add one or two extra suppliers to your roster.

Influence demand with pricing

The law of demand says that at higher prices, buyers will demand a smaller quantity of an economic good. Adjusting the price of your products will impact how many people want to buy them. If a product is about to go out of stock, in other words, and demand is high, increase your price. This improves profits on the product and can reduce stockouts by decreasing demand. 

But do it carefully. If you overprice a particular product, it could destroy demand entirely. Plus, you’ll need to stay within anti-price gouging bylaws designed to block predatory pricing tactics. The goal is to keep stock available so as not to disappoint shoppers by running out of stock. 

Examples of retailers solving stockout issues

The Fragrance World 

Perfume retailer The Fragrance World found that social and reality TV promotions often lead to out of stock events. Founder Katie Johnson recalls a time in June 2021 when a popular Love Island star mentioned a particular fragrance. “That evening we absolutely cleared our shelves as people were rushing to get it,” she says. “It’s even more difficult when it’s a lower selling item to get a huge influx of orders.”

The Love Island event changed how The Fragrance World approaches inventory management. Katie now prepares The Fragrance World for these events through forecasting and highlighting any potential spikes in trends to ensure they have the product available. “We now always look forward and plan. We buy [product] as far in advance as we can to always have a spare batch of stock waiting,” Katie says. 

RT1Home 

Premium home and gardening supply retailer RT1Home gets a good amount of press promotions from sites like BuzzFeed and The Knot. It’s hard to prevent a stockout in these cases, but founder Rhiannon Taylor has found that an immediate response is key. “As soon as you are aware of the sales increase from a press article or influencer, restock it.”

In her day-to-day operations, Rhiannon recommends consistently doing inventory checks so you’re always aware of stock levels. This gives you enough time to make products (if you’re manufacturing in-house) or need to order wholesale from suppliers. 

Surf Gear Lab

For retailer Surf Gear Lab, stockouts tend to happen during big holiday shopping weekends like Memorial Day, Black Friday, and Cyber Monday. Founder Marc Bromhall uses inventory management software to automate tasks like inventory control, tracking, and optimization. These tasks are normally prone to human error that results in stockouts. 

Marc says that software has “improved our demand forecasting by a country mile,” helping the retail analyze inventory reports and historical sales data. “This enables us to run at an optimal stock level. Just enough to satisfy demand throughout the year, but reduces our cost of inventory because we are never overstocked.”

💡 PRO TIP: Only Shopify POS integrates your online and retail store data into one back office–from customer data to inventory, sales, and more. View easy-to-understand reports to spot trends faster, capitalize on opportunities, and jumpstart your brand’s growth.

Never run out of stock at your store 

Stockouts don’t just mean disappointed customers. They also mean missed opportunities. When popular items are out of stock, retailers are literally leaving money on the table and inviting their shoppers to take their business elsewhere.

While it’s almost impossible to eliminate the risks of stockouts completely, retailers can take a more proactive approach to inventory management and significantly reduce the chances of out-of-stocks.

Make stockouts a thing of the past

Only Shopify lets you manage your online and retail store inventory from the same back office. Balance inventory with fewer counts, Set reorder points, enable low stock alerts, and create purchase orders without leaving your POS system.

This post was originally written by Roxanne Voidonicolas and has been updated by Michael Keenan.

Stockouts FAQ

What is the meaning of currently out of stock?

Items that are currently out of stock, also known as a stockout, can be defined as the unavailability of specific items or products at the point of purchase when the customer is ready to buy.

How can stockouts be prevented?

Stockouts can be prevented by reconciling disparities in item counts by using a unified inventory management system.

Does out of stock mean discontinued?

No, out of stock simply means the vendor does not currently have the item, but it will become available again once stock is replenished.

What causes a stock out?

One of the most common causes of stockouts is a disparity between item counts or a record of how many units of a particular item a retailer has in stock.

What are the consequences of stock shortage?

Stock shortage leads to lost sales and lost revenue as customers are unable to purchase the items they want.

What is stock out cost?

Stockouts cost retailers an estimated $1 trillion every year, and shoppers experience stockouts as frequently as every third shopping trip in some verticals.

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