What are Stockouts and How to Prevent Them

One of the most critical parts of inventory management is calculating the right amount of product units (SKUs) needed in stock at any given time. If your stock level dips too low, you run the risk of running out of products which can lead to missed sales, backordering, and customer service issues. In ecommerce fulfillment a stockout occurs when customer orders for a product exceed the amount of inventory that is available on hand. This usually happens when demand for products is higher than expected, and the amount of inventory and safety stock is too low to fill all orders. 

A stockout situation can happen due to delays in the supply chain, as well as stoppages in a company’s production process or other replenishment disruptions. A shortage of working capital or poor cash flow management could also lead to stockouts. Stockouts can lead to lost sales, since customers are more likely to look elsewhere for the necessary items if you don’t have them available. This can also have a negative impact on customer satisfaction. Once they go elsewhere to look for a product, chances are that they will then return to that company to purchase the product. Many causes of stockouts can be prevented by taking steps to better understand your business and products, and by refining your processes. This guide will explain what happens if you, and therefore your customer, experience stockouts as well as some tips to help avoid them.

What Happens With a Stockout?

As mentioned above, the scenario for a stockout occurs when an item that is to be used for a customer’s order or for a production order is not in stock. If an item is not available for a customer order then four possible outcomes can occur.

  • Customer waits. If the item is vital to the customer, then they may be prepared to wait. Despite this willingness, there may be significant damage to the customer’s satisfaction level.
  • Customer backorders. Not as ideal as when the customer agrees to wait for the order to be complete, but the order is still being fulfilled. Nevertheless, the customer’s satisfaction level is still significantly reduced.
  • Customer cancels. If the customer is able to obtain the item from another vendor or does not need the item immediately, then the customer can cancel the order. It is still possible that the customer will order from you in the future, but the chances of that happening are significantly diminished.
  • Customer shops elsewhere. This is the worst-case scenario of a stockout. If a customer is unhappy with the communication or information supplied by the vendor with regards to available inventory for purchase then they may be willing to cut all ties and work with another vendor.

How to Prevent Stockouts

There is no perfect approach when it comes to proper ecommerce stock control and choosing the right inventory management system to avoid stockouts. It is important to figure out what will work best for your unique situation and understand the different strategies that are available so that you can figure out what works for your business.

The below methods will help you avoid overselling your products and finding yourself in a situation where you have to deal with stockouts and the negative customer effects that can arise.

Set A Standard Level of Stock

This simply means the minimum number of products that must be available in your stock at all times.

With this ecommerce inventory management strategy, you’re able to restock your inventory once the number of available products falls below your set standard. You’ll be able to avoid inventory overselling and, in turn, minimize the number of customers impacted by not having the products they want in stock. For maximum effectiveness, your stock alerts should be based mainly on the frequency of your customers’ orders, especially for high-demand items.

Carry Out Regular Inventory Audits

Carrying out regular inventory audits is crucial to avoid ecommerce overselling. Auditing your physical inventory can be time consuming, but it is an important aspect of inventory management. It involves counting actual warehouse inventory on hand (also called cycle counting) and making sure that it matches up with what you have listed in your inventory management software. If you work with a 3PL provider, they should perform inventory counts on a regular basis (using a barcode scanner to track SKUs) and compare it to the information against their inventory management system. 

There are several methods to do this, including:

  • Physical inventory audits once every week, month, quarter, or year.
  • Spot checking certain products that sell frequently.
  • Doing special inventory counts on products prone to inventory errors in the past.

“Physical inventories are always a tedious task, something you dread doing. We can either have DCL do it on our behalf and send us a report, or when we want to be personally present and really confirm everything ourselves, just come to the warehouse to do it. It’s as easy as calling up my account manager, and saying ‘Hey can we come down for 4 hours, later this week?—it’s that simple.”

Jen Voges COO, Gate Labs

Utilize Inventory Management Software

Finding the right software system to help provide inventory data is invaluable. The right software will provide the real-time metrics, reporting, and updates that match your needs, whether that is needing to move unsold products, meeting a sudden and unexpected demand in sales, or re-calculating your inventory after making a mistake. Accurate reporting of inventory levels is crucial, and your inventory software should keep you on top of this when you need it. One of the main objectives of using these systems is to control available inventory levels at different points in the supply chain, and to establish alerts indicating when certain SKUs need to be replenished. The right software can even help you choose where to warehouse your inventory which can cut down on shipping costs. An inventory management system like eFactory will allow you to run inventory reports, even schedule them to come to your inbox at the same time every day.

“I use eFactory in so many different ways. First and foremost I used it to know what our inventory levels are—whether it be return material or finished goods ready to go out the door. It’s great to have a real-time view of what we truly have at any given time.”

Jen Voges COO, Gate Labs

Maintain Safety Stock

Maintaining a safety stock can act as an insurance policy if overselling does occur. If a certain product experiences a spike in sales and sells out fast, for example, a safety stock can prevent it from becoming totally out of stock until you can reorder or manufacture it again.

This method is especially useful if your company offers non-perishable goods. Notably, safety stock shouldn’t be listed as part of the available stock.

The only downside to this strategy is that you’ll need additional space where the extra products will be stored, which could cut into your bottom line.

Utilize the FIFO Method

FIFO means “first in, first out.” In other words, the oldest inventory, being the first in, should be sold out first before the newer stock is offered to customers. This ecommerce stock control strategy is especially important to retailers who sell perishable goods. This way, you don’t end up stuck with expired products that you can’t sell.

Even when you sell products that aren’t perishable, having them sit for a long time on the shelves potentially leaves them out of date if newer options become available. Another factor could be if your supplier changes the packaging of their products, the old stock begins to look obsolete, meaning it’s especially important to sell the older stock first.

Accurately Predict Product Demand

This ecommerce inventory management strategy entails being able to accurately predict demand for products. This can be challenging, however it is worth the effort. One of the first things for retailers to consider when preparing inventory forecasts is lead time or the time between placing an order for new products and actually receiving those products from a supplier.

Some other factors that should help with accurate demand forecasting for certain products and maintain effective inventory management include:

  • Prevailing economic conditions
  • Yearly business growth
  • Sales made the previous year in the same period
  • Market trends regarding product popularity
  • How demand for your competitor’s products stacks up

Partner With a 3PL

Many companies think that outsourcing ecommerce fulfillment and inventory management to a third-party logistics (3PL) provider means completely turning over the inventory management process to them. A 3PL can provide valuable tools and data that will allow a seller to successfully manage their inventory in the most efficient as well as cost effective manner possible. The 3PL will help you manage the flow of inventory from manufacturer to their fulfillment centers; they will alert you when the inventory levels get below a certain threshold and order more inventory to be sent to their fulfillment centers which will decrease your fulfillment costs. They can handle all of your purchase orders, dropshipping, and ensure that you have safety stock.

Bottom Line

Proper inventory management is crucial for long term success and profitability of your ecommerce business. If you have the proper inventory management software in place you can automate reorder points, view inventory counts in real-time at the SKU level, and run reporting on inventory trends and forecasting to ensure you never run out of stock again. Using the right stock control strategies can help you maintain a healthy inventory turnover and keep your shelves stocked with just the right amount of product.

Help with inventory management is one of the many benefits to working with a 3PL. If you are seeking logistics support we’d love to hear from you. You can read DCL’s list of services to learn more, or check out the many companies we work with to ensure great logistics support. Send us a note to connect about how we can help your company grow.