Why you run out of stock—and strategies to avoid it

Retailers worldwide lose $1.75 trillion each year due to the cost of overstocks, out-of-stocks, and needless returns that are, in part, caused by delayed orders and long wait times. Those inventory issues not only hurt your business, but they also hurt how customers perceive your business.

Knowing your inventory and managing its use are a smart way to protect your company’s image and reputation—which, in turn, protects your bottom line.

To help you get ahead of inventory issues like stockouts, we’re going to look at the four main reasons they happen, and three steps you can take to avoid them.

Leading causes of stockouts

Stockouts are a significant problem, but they can be avoided if you understand the causes and are prepared to address them. We’ve parsed a lot of research concerning stockouts of in-store retail locations, eCommerce businesses, and B2B manufacturers, and found these four primary reasons.

1. Inaccurate inventory counts

Not knowing what you have makes it hard to know when to restock. Inaccurate counts put you at risk in two ways.

First, you don’t restock in time, and you simply run out of goods.

Second, you order too much of one product, which can take up physical space for others. That means you either don’t have any space left for them or, perhaps, a crafty employee stores the additional units of Product A behind Product B—but your count for Product B includes everything on the shelf, and you don’t find out until it’s too late.

2. Underordering

This builds on inaccurate inventory because underordering is usually tied to visibility and communication. When your team is forced to guess how much to restock, they can quickly over- or under-shoot. Perhaps you’ve ordered three crates a month for the past six months. It seems like three is a safe bet for month seven—but you didn’t account for your summer spike. Not having the full context in these decisions is a significant risk factor.

3. Supply chain delays

You can’t remove supply chain delays. Trucks break down, trailers have accidents, roads close.  So, the risk here is when you don’t order soon enough to have a buffer set of products to cover any delays.

4. Relying on manual processes

You’ve run out of Product A and ask a team member to order 1,000 of them. It normally ships to you in a single crate with 1,000 individual units and you’ve placed past orders via phone so there’s no easy paper record for the employee to find. Do they call in an order of 1,000 units—or 1,000 crates?

Manual processes are a breeding ground for errors and mistakes. There’s simply too much easily available and affordable software to not protect yourself with some automation.

How to avoid stockouts

1. Planning: Limit harm with better data

To address all of the concerns above you have to know what you’ve got. Then you’ve got to measure it and know how to use it. All of those steps require planning and the use of data.

Inventory data must be accurate. It’s that simple.

Unfortunately, it’s easy to have inaccuracies when you’re working with inventory. Someone grabs something accidentally or doesn’t put it away correctly, things break, someone stocks boxes in a different orientation so your “eyeball” count is off, and so on. That’s not even touching purposeful harm, like product theft or suppliers misrepresenting shipments.

The good news for today’s businesses is that inventory management solutions (IMS) and warehouse management solutions (WMS) aren’t too difficult to implement or cost prohibitive. An IMS or WMS can help automate much of this counting and introduce practices such as scanning goods as they are put away, picked, and packed. They can also turn counts from a full-day affair to something that takes a few minutes each day and gives you more accurate results.

You can boost your capabilities even more by choosing a system that integrates with your eCommerce platform, making it easier to alert you when the data shows that inventory counts are starting to fall.

When it’s accurate and consistent, data can help you understand the big picture.

2. Predicting: Short-term and long-term stock protection

It’s best to start by collecting as much data as possible to generate an understanding of what your company sells on average. Your short-term stock protection will be based on that result, and you should maintain your levels to meet those needs. That’s your baseline.

Here’s a list of metrics to help you understand how to get to that baseline knowledge and improve your inventory management and prediction capabilities.

Once you know you can fill expected orders based on today’s volume, it’s time to beef up your analytics and predict how that volume will change over time. You’ll want to learn the historical trends for your business—and the real data may surprise you.

If you’re focused on summer goods, for example, you might instinctively think that July is your biggest month. However, it could be that you orders start to tick up significantly at the end of May because people buy your goods early so they can enjoy them as soon as the weather is hot enough. Or there might be a moment in the middle of the fall that gives people one last glimmer of warmth where you get a little bump too.

The more data you have on actual purchases, the better you’re able to understand trends and how your customers behave. A good base of data makes tracking and predicting easier and more accurate. When you’re able to test and see results, you can start changing business habits based on this data and always be ready, even when a rush of orders hit.

3. Checking: Verify, verify, verify

Planning and predicting are great steps, but they can quickly lose their usefulness if the data they rely on is unreliable or the steps they suggest are unachievable. Your warehouse needs a consistent verification process to keep your contingency plans realistic and your shelves full.

Start by testing the systems you use. Reviewing inventory counts as well as warehouse readiness are among the best ways for you to prepare for any unexpected event.

For stockouts, always come back to checking your minimum inventory level. First, verify that the systems you use are properly generating orders as soon as you hit the threshold. Finding out the hard way that these resupplies aren’t happening is a major way to hurt your revenue stream.

After you know the system works, it’s time to verify that you’re using the correct levels. You need to be sure that you can meet average order volumes each day/week/month and that the resupply level gives you enough of a buffer that you don’t run out before the shipment arrives.

It’s a promising idea to give yourself a little bit of an extra buffer in one of your restock orders (for non-perishables at least) so you can be protected if a truck or trailer is delayed. Yes, there’s a big push for a lean supply chain, but lean shouldn’t threaten your ability to fill orders.

In the same light, you’ll want to continually check and record lead times. Verify what’s normal and that your system is accounting for this. You’ll also want to use dashboards to check and see if things are changing. If your vendor starts taking two days instead of three to fill your restock, you can adjust accordingly.

The big threat here is if vendor responses change for the worse. Longer lead times that come without notice, consistent delays, incorrect orders, or other concerns can severely impact your business. Knowing what to look for, tracking it, and verifying that changes or issues are becoming consistent can help you determine when it’s time to look for additional partners who can expedite products or materials to you.

Always walk around the warehouse

Growing is great, but there’s a point where you’re too big your current space. Your mission is to know your warehouse and be able to see the space for what it is, before you’ve outgrown it.

Prepare yourself by monitoring warehouse size as well as the space each product uses. Track shipment and product changes to see what’s taking up more space or moving slowly to see how much room you need today and tomorrow. You want to make your move before your size becomes a constraint.

Set time to walk around your warehouse and look at how things are changing. A dashboard might show you what inventory levels look like, but there’s something you just can’t read in a report—like if your team seems flustered with their locations or if shelves are filling up and harder to see through.

There’s plenty to do in your warehouse as you grow and evolve and being in the warehouse and talking with your team is a smart way to stay on top of things and discover what’s best.

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