Running out of stock is one of the leading reasons for loss of revenue.
In business, there’s one phrase you never want to say:
“We’re out of stock.”
But we’ve all said it.
And every time we say it, we tell ourselves we won’t say it again.
Until we do.
You shouldn’t beat yourself up about it, though. Small business owners like you aren’t the only ones who suffer from stockouts.
Walmart executives reported they were leaving almost $3 billion on the table as a result of going out of stock.
What you should be concerned with is the incredibly high cost of regular stockouts.
In 2015, it was estimated that out of stocks cost retail businesses $634.1 billion in lost sales – 39% higher than in 2012.
And those losses were estimated for just one industry.
Think of the billions lost across all industries due to stockouts…
To help you combat the cost of going out of stock, we’ll show you how stockouts happen and how to prevent them from happening to you.
But first, let’s briefly define “out of stock” and describe in more detail how it hurts your business.
What Does “Out of Stock” Mean?
Being “out of stock,” or OOS means that the inventory for a particular product is completely depleted.
Out of stocks typically occur when a business owner doesn’t order enough inventory to satisfy customer demand.
But not being able to sell when a customer wants to buy is only one major problem of stockouts. Read on to find out more.
What Are the Effects of a Stockout?
There are many negative effects of going out of stock. Here are a few:
- Lost sales
- Lost customers
- Negative customer reviews
- Damaged brand and reputation
- Slow or declining business growth
Now, stockouts aren’t caused by mysterious forces. There are measurable reasons why you run out of inventory. We’ll tell you why you experience stockouts in the section below.
Causes of Stockout Situations
Stockouts have many causes, and understanding the causes will help you find better solutions.
Here are 3 reasons why you run out of stock:
From sales numbers to stocktakes, inaccurate data will always lead to bad decision-making and poor business outcomes.
The numbers will help you predict the future and learn from the past. If they’re wrong, then you’re destined to fail.
Inefficient Product Ordering
Inaccurate data inevitably leads to inefficient product ordering.
If you don’t order enough product, you won’t keep up with customer demand – resulting in stockouts.
If inefficient product ordering is caused by inaccurate data, then what causes inaccurate data?
Excel inventory management, or manual spreadsheets in general
In a study of errors in 25 sample spreadsheets, Stephen Powell from the Tuck Business School at Dartmouth College found that 15 workbooks contained a total of 117 errors.
While 40% of those errors had little impact on the businesses studied, 7 errors caused massive losses of $4 million to $110 million, according to the researchers’ estimates.
One of our customers, Urban Couture, cited manual spreadsheets as the main problem in their business – causing stockouts and other issues.
You can read their story here.
Out of Stock Solutions
Knowing the causes of stockouts will point you in the right direction, but you’ll need actionable solutions if you hope to keep your warehouse well-stocked.
Here are 5 out of stock solutions to help you decrease and prevent stockouts:
Use RFID Tags
Radio Frequency Identification (RFID) tags allow you to easily track every product you store.
It makes your stocktaking process faster and more efficient. You can quickly search and find the products you need to retrieve. And RFID tags allow you to scan any item and find out in real-time how much of that item you still have in stock.
Researchers at the University of Arkansas found that RFID technology helped reduce stockouts by 16%. If you want to reduce stockouts too, then implement RFID tags.
We pointed out earlier that stockouts are caused by inaccurate forecasting.
So, to avoid going out of stock, you should follow demand forecasting best practices.
Some best practices include:
- Determining what to measure and how often (i.e. competitors sales data, POS data, frequency of stockouts, etc.)
- Integrating data from all of your sales channels, especially if you’re running an omnichannel ecommerce strategy
- Creating a repeatable monthly process that analyzes previous forecasts and compares them to actual market results
Use a Reliable Order Point Formula
A reorder point formula tells you approximately when you should order more stock – when you’ve reached the lowest amount of inventory you can sustain before you need more.
You can stop being a victim to market spikes and slumps by using a proven, mathematical equation to help you consistently order the right amount of stock each month.
Here’s the reorder point formula you can use today:
(Average Daily Unit Sales x Average Lead Time in Days) + Safety Stock = Reorder Point
Order Safety Stock Inventory
Safety stock inventory is a small, surplus amount of inventory you keep on hand to guard against variability in market demand and lead times.
It will help you protect against unexpected spikes in demand, compensate for inaccurate market forecasts, add a buffer for longer-than-expected lead times, and ultimately, prevent stockouts.
To help you calculate safety stock, here’s the formula we recommend using if you’re just starting out:
(Max Daily Sales x Max Lead Time in Days) – (Average Daily Sales x Average Lead Time in Days) = Safety Stock Inventory
Use a Cloud-Based Inventory System
A cloud-based inventory management system lets you track your inventory in real-time from anywhere in the world. You’ll know up-to-the-minute when stock is low or sales are high.
With that kind of insight, you’ll be able to send out purchase orders right when you need them.
But if you don’t want to manually send out those orders, you don’t have to. Cloud-based inventory management allows you to set an automated reorder point. Since the software automatically tracks your inventory, it’ll know when to automatically send out a purchase order for you, too.
Plus, it integrates with top business apps like Xero so you don’t need to operate multiple apps on multiple screens – you can do everything on one platform.
What kind of cloud-based inventory management system do we recommend?
DEAR Inventory, of course.
How to Prevent Stockouts for Good
Preventing stockouts isn’t easy and it won’t happen overnight.
The tips we gave you in this post will help you in big ways if you implement them correctly.
Beyond that, you’ll have to continue to test solutions and pay attention to your market.
To do that, you’ll need a tool that can collect and analyze all the data you want to be measured for accurate forecasts.
DEAR Inventory can do that for you. And you can test drive the software for 14-days free. Just click the button below to learn more.
Cloud-Based Inventory Management That Helps You Finally Stay “In Stock”
From real-time inventory tracking to automated sales reports to accurate demand forecasts, DEAR Inventory is the tool you need to effectively manage your supply chain, stock your warehouse, and satisfy your customers.
Start your free 14-day trial of DEAR Inventory today!
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