Knowing how to avoid stockouts can spare your customers frustration while saving you money.
With that in mind, here are 10 effective stockout prevention methods. We’ll cover what stockout is, what its consequences are and how you can use inventory-management strategies and technology to prevent it.
What Is Stockout?
Also known as out-of-stock events, stockouts refer to situations when your inventory drops lower than what you need to meet customer demand.
There are several scenarios when this can happen, including:
- You miscounted your inventory and you have less in stock than you thought
- Sales demand surges during the holiday season because an item suddenly becomes popular
- A customer unexpectedly orders a bulk supply of an item
- Supplies run short because of a natural disaster or another event that triggers shipping problems
- Your supplier gets delayed
- You don’t have enough cash available to replenish your inventory
Any of these factors and others can create situations where your customers want items that you don’t have in stock.
What Are the Consequences of Running Out of Stock?
Stockouts can create a number of negative consequences for your business:
- Sales revenue suffers when you can’t sell items because you don’t have them
- Customers who came to your store or website to buy an item may become frustrated, especially if they came in response to a sales offer or if they already paid for the item
- You may need to issue refunds for orders of items that are out of stock
- Customers who couldn’t get what they wanted from you may end up going to your competitors
- Customers may post negative reviews of your brand, harming your reputation
These costly consequences make it desirable to avoid stockouts.
How to Prevent Inventory Shortage: 10 Effective Strategies
While stockouts can’t always be prevented, knowing how to avoid a lack of stock can help you minimize their frequency.
Methods for avoiding stockouts include:
- Counting inventory accurately
- Using inventory-management software
- Tracking demand cycles
- Maintaining safety stock
- Identifying reorder points
- Monitoring and managing lead times
- Using just-in-time inventory management
- Utilizing vendor-managed inventory
- Using consignment inventory
- Maintaining sufficient cash flow to restock inventory
Here are 10 tactics for implementing these strategies.
1. Count Inventory Accurately
Understocking inventory may reflect problems with your stock counting procedures. If you don’t have an inventory management system that includes standard counting procedures, the place to start is to adopt one.
The most common methods of inventory counting are:
- Physical inventory counting
- Cycle counting
With physical inventory counts, you periodically conduct a count of your entire inventory by assigning groups of employees to cover different areas of your store. Employees may use bar-code readers, index cards or sheets of paper to record inventory. Physical inventory counts typically are done at the end of financial reporting cycles, usually annually at year-end, but in some cases quarterly or monthly.
Because physical inventory counts are time-consuming, many retailers prefer cycle counting. With this method, you spread your inventory count out over the course of a reporting cycle by dividing your inventory into segments. You also may save time by counting samples of items rather than counting every item. With some cycle-counting systems, you count items that account for a larger proportion of your sales more frequently than you count lower-selling items.
Which inventory counting method is right for depends on a number of variables, including the size of your inventory, the availability of your staff to conduct inventory counts and your financial reporting requirements. Your accountant can help you determine whether you need to use a particular inventory-counting system for tax purposes.
2. Use Inventory-Management Software
You can increase the efficiency of your inventory counting by using inventory-management software. Inventory software can allow you to sync your point-of-sale software with your inventory database, updating your inventory count automatically each time you make a sale.
You also can sync your inventory database with your accounting software, saving you time updating the value of your inventory on your financial statements. Popular inventory management apps include Fishbowl, Oracle NetSuite and AltheaSuite.
3. Track Demand Cycles
Another advantage of inventory software is that it helps you track your inventory data so you can predict more accurately when you’ll run out of stock and when you should reorder. Inventory software can use your historic sales data to predict future sales trends and their impact on your stock levels.
This information can be useful for anticipating how you should manage your inventory during holiday sales seasons.
4. Monitor and Manage Lead Times
Lead time is the lag between the time you place an order with a supplier and the time your order arrives. Knowing how long it takes you to reorder stock can help you plan ordering schedules to avoid stockouts.
Use your inventory management software to help you track your lead time for different products.
5. Maintain Safety Stock
Safety stock is an excess amount of an item kept in inventory to reduce the risk of stockout. How much safety stock you need to keep for a given item is based on a combination of your daily sales volume and your lead time. You need to keep enough safety stock on hand so that you can continue selling the item for however many days it takes for your supplier to fill a restocking order.
Logistics experts use a complex formula to calculate safety stock which takes into account your sales demand and lead time. A logistics consultant can help you calculate the right safety stock levels for your inventory items.
6. Identify Reorder Points
Your reorder point is the stock level which represents the lowest amount of stock you should allow your inventory to reach for a given item before placing an order to replenish it. It can be calculated by multiplying your daily sales demand for the item times the number of days of lead time you need to restock the item and then adding the result to your safety stock level.
A logistics consultant can help you identify your reorder point. You can set up your logistics software to notify you automatically when your inventory reaches your reorder point or even to place a reorder automatically.
7. Use Just-in-Time Inventory Management
Just-in-time (JIT) inventory management is an approach that minimizes the amount of inventory kept on hand by only placing orders from suppliers when they are required to fill customer orders. Coupled with precise demand forecasts, this can allow you to avoid stockouts without maintaining large quantities of safety stock.
A downside of JIT, however, is that a disruption to the system can trigger stockouts. For example, a demand spike that exceeds projections can leave you low on inventory. To make JIT work as a solution to stockouts, you need to rely heavily on automation for accurate demand projections. Also, you need reliable suppliers.
8. Use Vendor-Managed Inventory
Vendor-managed inventory (VMI) is an approach that effectively outsources responsibility for avoiding stockouts to your vendor. Your vendor agrees to maintain a set stock level and tracks your inventory data to ensure sufficient stock is on hand. This reduces your inventory management burden because the bulk of the work is done by your vendor based on the inventory data you share with them.
VMI depends on a reliable vendor, so conduct some due diligence when choosing partners with this method. Research online reviews, talk to industry peers and study the details of vendor contracts when selecting partners.
9. Use Consignment Inventory
As with VMI, consignment-inventory management shifts responsibility for avoiding stockouts to a third party. With consignment inventory management, your vendor or wholesaler retains ownership of your inventory until items have been sold. You don’t pay for orders until products have been bought.
This relieves you of the management burden for avoiding stockouts. As with VMI, a key to effective consignment inventory management is choosing a reliable partner.
10. Maintain Sufficient Cash Flow to Restock Inventory
Cash-flow problems can contribute to stockouts. Even if you know how much inventory you need to supply customer demand, you can’t maintain sufficient stock if you don’t have enough cash.
If low cash flow is putting you at risk of stockout, better financial planning and financing may be a solution.
For example, merchant cash advances are a form of financing which lends you money on the strength of your projected sales, which can enable you to cover inventory costs while you’re waiting for sales turnaround. Loans and lines of credit are other business financing solutions that may help you cover inventory costs.
Avoid Inventory Stockouts to Keep Sales Flowing
Stockouts can happen when your inventory levels fall short of customer demand for any reason, whether it’s because of:
- A surge in demand
- A supplier delay
- Insufficient cash flow to replenish stock
These types of inventory shortage situations can cost you sales, frustrate your customers and hurt your business.
A strategic approach to avoiding stockouts starts by improving your inventory counting and forecasting through better manual and automated methods. Using automation to monitor and analyze your inventory data can help you predict demand surges, estimate reordering lead times, determine how much safety stock you need to maintain and identify when you need to reorder. Adopting alternative inventory management methods such as JIT, VMI and consignment also can help reduce stockouts.
When stockouts are caused by cash-flow issues, better financing methods may help. Taking a few minutes to fill out our free, no-obligation prequalifying application can help you identify financing resources you can use to avoid stockout problems.