There’s no sound more deafening than that of the silent cash register, no sight more disheartening than the disappointed face of a customer met with empty shelves. An ”Out of Stock” sign can turn an online store into an echoing ghost town.
Stockouts are not just about missing merchandise. They signify missed opportunities, bruised reputations, and dwindled customer loyalty. A lot can be said about the cost of stockouts in the eCommerce industry. They eat away your immediate sales and can gnaw persistently at your future revenue too.
In order to avoid falling into this pitfall, it is essential to have a clear understanding of what stockouts are, what leads to them, and how they can be avoided.
In this blog, we’ll be delving into these questions, providing comprehensive answers to empower you to take control of your stock and, by extension, your business’s future.
Understanding the Meaning of Stockouts
Stockout can be defined as the absence or unavailability of a specific item or item that should normally be available in a retail store.
In simple terms, a stockout occurs when a customer wants to buy a product from your online store, but unfortunately, the product is not available.
How do we calculate the Rate of Stockout in Retail? The stockout rate is typically calculated as the ratio of out-of-stock SKUs to the total number of SKUs that should be in stock, often expressed as a percentage. For instance, if your store should carry 100 different SKUs and five are out of stock, your stockout rate would be 5%.
What Causes a Stockout Situation?
Inventory Mismanagement
The absence of an accurate, real-time inventory tracking system often leads to gaps in understanding the actual stock levels. This results in overstocking some items and understocking others, paving the way for potential stockouts.
Inaccurate Inventory Counts
Human Error in Manual Counts: Manual counting of inventory is prone to human error. Miscounts can lead to inaccurate stock records, making it seem like there’s more or less stock than what actually exists, causing potential stockouts.
Poor Forecasting Processes
Not analyzing historical sales data properly and ignoring seasonal trends and patterns can lead to incorrect demand forecasting. This can cause an underestimation of the required inventory levels leading to stockouts.
Inaccurate Calculation of Safety Stock
Making wrong assumptions about demand variability can result in miscalculated safety stock. Safety stock levels should be dynamic and adapt to changes in demand. A static safety stock level can lead to stockouts during periods of high demand. This might leave businesses unprepared for sudden spikes in demand, leading to stockouts.
Inefficiencies in Replenishment and Reordering
If suppliers take too long to deliver goods, stockouts might occur, especially if there’s a sudden increase in demand or if there are unexpected delays. An automated reordering system can prevent stockouts by maintaining optimal stock levels. Without it, reordering may be delayed, leading to stockouts.
Ways to Prevent Out-of-stock Situations
Utilising Buffers
Understanding the dynamics of buffers is similar to appreciating the art of balancing. It’s about ensuring you have enough, but not too much. Overstocking can lead to obsolescence and wastage. Conversely, understocking can result in the dreaded stockout.
This brings us to the value of buffers in preventing stockouts. By creating a safety net against uncertainties, buffers act as an insurance policy that keeps your inventory flow healthy and consistent. It allows businesses to meet unexpected demand, ensuring that customer satisfaction and trust remain high.
Forecasting and Reordering
Accurate demand forecasting is like peering into a crystal ball, enabling businesses to predict what customers will want, when they will want it, and how much they will want. It requires a deep understanding of historical sales data, market trends, seasonal fluctuations, and promotional impacts.
Accurate demand forecasting is not just an exercise in number crunching; it’s an art that balances analytics with intuition, enhancing the ability to make informed decisions. This kind of foresight helps avoid overstocking or understocking, optimising inventory levels and significantly reducing the risk of stockouts.
Reducing Human Error
We’re all human, and to err is human. Inaccuracies in inventory counting or data entry can creep in, leading to flawed stock information and miss target more often than not!
So, how do we minimise human error to prevent stockouts? The answer lies in embracing technology and investing in continuous learning. Automated inventory management systems, equipped with features like barcode scanning and real-time inventory updates, are like eye-catching inaccuracies before they snowball into bigger problems. Such systems reduce manual data entry and enhance accuracy and efficiency, significantly lowering the chance of errors that lead to stockouts.
Regular Cycle Counts
Regular inventory checks or ‘cycle counts’ are the fuel of your retail business, ensuring your operations keep running without hiccups.
These checks help align the stars – or in this case, inventory records – with the actual stock. You can identify discrepancies before they evolve into full-blown stockouts by periodically verifying the number of items physically present against what your records indicate.
Miscounts, damages, theft, or administrative errors – regular cycle counts bring these hidden foes into the light, allowing for prompt rectification.
Implementing Quality Control
Ensuring the quality of the products is the secret recipe to preventing disappointments, a.k.a stockouts. Quality control is the sieve that filters out sub-par products, ensuring only the best reach of your customers. Implementing quality control measures means minimising the chances of returns and replacements due to faulty or unsatisfactory products. When your inventory is in shipshape with top-notch products, you maintain adequate stock levels, keeping the dreaded out-of-stock scenarios at bay.
Inventory Sync
Real-time inventory synchronization is the process of updating inventory data across all sales channels in real time. Inventory sync ensures that all your stock data are perfectly aligned, whether you sell your products in a brick-and-mortar store, on your website, or through various eCommerce platforms. This alignment prevents confusion and discrepancies and helps avoid potential stockouts caused by selling the same item in different places simultaneously.
Building Better Relationships with Suppliers
Your supplier is an integral partner, and the success of your performance (inventory management) heavily relies on the strength of this partnership. These relationships are much more than just transactional exchanges. Instead, they form the backbone of your supply chain, determining the consistency and timeliness of your product deliveries. In essence, they serve as the lifeblood that keeps your inventory healthy and robust.
Using Warehouse Management Systems
In the era of technological evolution, businesses are leveraging every possible tool to streamline operations, increase efficiency, and maintain a competitive edge. One such game-changing tool is Warehouse Management Systems (WMS), a paradigm shift from traditional, manual management methods; these systems serve as the fulcrum upon which successful inventory management balances.
Essentially, these systems are the epitome of inventory automation. They digitally track and manage inventory across multiple locations and channels, reducing the chance of errors and inefficiencies associated with manual processes.
Implementing the ABC Method of Cycle Counting
The ABC inventory management method is based on the Pareto Principle or the 80/20 rule. So, in the ABC method, inventory is categorised into three groups based on their value and sales frequency – ‘A’ being the highest value items, ‘B’ the medium, and ‘C’ the lowest.
Now you might be wondering, how does this method help prevent stockouts? The ABC method is all about prioritising. By distinguishing between high-value ‘A’ items, which likely have higher turnover rates, and lower-value ‘B’ and ‘C’ items, businesses can focus their attention on where it matters the most. ‘A’ items are counted more frequently, ensuring their stock levels are continuously monitored and replenished as needed. This reduces the risk of running out of these high-demand products, thereby preventing stockouts.
Creating Strong Operational Processes and Procedures
A successful inventory management system isn’t merely about having the right software or the most advanced technology. It’s as much about human processes as it is about algorithms and data. Reliable, well-defined operational processes play a crucial role in inventory management. They ensure the consistent, accurate tracking of goods and swift replenishment of inventory.
Having clear procedures in place reduces the likelihood of mistakes that could lead to stockouts. For example, a well-defined reordering process ensures timely replenishment of stock before it hits the danger level. Regular cycle counts, as part of the operational procedures, prevent discrepancies between actual and recorded stock, eliminating unexpected stockouts.
Conclusion
Stockouts are the stealthy saboteurs in the eCommerce world. They creep in unnoticed, attacking businesses where it hurts the most – customer satisfaction, brand reputation, and, ultimately, revenue. But every cloud has a silver lining, and this out-of-stock scenario is no exception. With strategic planning and astute management, you can steer clear of stockouts, ensuring your inventory is always ready, matching steps with your customers’ demands.
