Since my friend’s birthday is in a few weeks, I took some time off this weekend to look for a birthday gift. It took me almost an hour of browsing online to find what I was looking for, only to figure out, in the end, that the product was out of stock. This left me frustrated and angry at the brand as I decided not to buy from them anymore.
I was ready to buy. They were not ready to sell.
Stockouts means that the inventory for a specific product is completely depleted. It happens when a store doesn’t have enough inventory to satisfy their customers’ demands.
Stockouts are a real pain in the a** for both customers and businesses. For customers, it means a waste of time, frustration, and dissatisfaction. For businesses, it means lost customers and lost sales.
Being out of stock means that your product is selling well and it is such a huge success that you can’t even match the demand, but this has also many negatives effects:
- Losing customers, sales, and revenues;
- A decrease in customer satisfaction, which leads to a damaged brand reputation;
- Bad customer reviews;
- Customer migration to competitors;
- A slow down in growth.
Stock-outs can have a huge impact on your bottom line. In fact, Walmart executives reported they were leaving almost $3 billion on the table as a result of going out of stock (that’s a huge amount).
Actually, 70% of shoppers would shop at a competitor rather than waiting for any length of time for out of stock items. So in order to avoid these unpleasant consequences for your e-commerce, we will share with you some tips on how to prevent stockouts from happening.
1. Understand what are the causes behind stockouts.
Inaccuracies are pretty common when you’re dealing with inventory. With all the different product flows going in and out of your warehouse, it is easy to make mistakes and thus have variances between your real inventory and the numbers you have on paper.
Wrong lead time:
Sometimes the time it takes to deliver all your products from the manufacturer to your warehouse can be a bit longer than you think, which leads to your new products arriving later than planned.
Inaccurate data obviously leads to poor decision making. Having an inaccurate demand forecasting can lead to under ordering and this is a major reason for running out of stocks.
Inaccurate data is mainly caused by manual inventory management. If you’re using Excel to monitor your inventory KPIs, I urge you to change it, because these errors not only lead to stockouts but can also lead to massives losses.
In a study conducted by Stephen Powel from the Tuck Business School, they analyzed 25 sample spreadsheets and found out that 15 workbooks (spreadsheets for work) 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.
Now that we’ve seen the main reasons behind stockouts and the damages it can lead to, let's move on and see what are the solutions to prevent being out of stock:
2. Get real-time data:
As seen previously, inaccurate data is the main cause for all your inventory troubles but thanks to technology, it has never been this easy to get access to real-time data.
So the first step to preventing stockouts is to implement an inventory management system that gives you access to accurate data in as close to real-time as possible.
Having a system that automatically updates your stock levels whenever a product is sold or returned will help reduce errors and accurately monitor your inventory and thus have a better and more accurate decision making.
Make sure to also analyze items velocity, this will help you to know how fast your items are moving. To illustrate, let’s imagine that you have only 20% of your inventory for product X, but this product moves slowly and won’t run out until a few months, thus you might not have to reorder for some time. Contrariwise, if your product Z is a fast-moving item and takes just a few days to get sold out, you will then need to reorder it even if you still have some on hand.
Crossing between stock levels data and item velocity data will help you make better decisions and avoid stockouts.
3. Forecast demand:
To avoid stockouts, forecasting demand is a must-do. It will help you plan your future operations and know approximately how many products you’ll sell.
Knowing the demand you will be having for your products will help you to reorder the right amount of items and thus keep your stock levels safe.
You can base your forecast on historical sales data but you will also need to take into consideration many factors such as marketing campaigns, promotions, seasonality, and velocity. Diving deeper into these numbers will give you some insights on how your products are going to perform.
During your forecast, you should also pay attention to the consumer trends in your market to notice if there’s anything new that people are gravitating towards. This will allow you to anticipate and make sure to be ready in terms of operations.
Finally, don’t forget to create a repeatable monthly process that helps you analyze previous forecasts and compare them to actual results to see how accurate it is and how you can improve it.
4. Set inventory alerts:
After analyzing the velocity of your items, you should be able to forecast when the product will be depleted. Compare that to the time needed to restock and you will be able to know exactly when you should reorder.
Then make sure to set a threshold for each item so that you’re alerted automatically when the limit is reached. This will help you gain time since you won’t have to check your stock levels every 10 minutes and will ensure that you reorder your item on time and thus avoid stockouts.
To calculate safety stock and reorder point, you can use these simple formulas:
Reorder point = (Items sold per day) x (days it takes for new inventory to arrive) + safety stock
Safety stock = (Maximum daily usage * Maximum lead time in days) – (Average daily usage * Average lead time in days).
As an example, let’s imagine you sell 75 bags per day and that it takes 8 days, since the reorder, for new inventory to arrive. During weekends and bank holidays, they can sell as many as 85 bags and maximum lead time in days is 10.
Safety stock = (85 x 10) - (75 x 8) = 250
Reorder point = (75) x (8) + (250) = 850
Make sure to set an alert when your stock level reaches 750 bags so that you can reorder on time and ensure you won’t run out of stock. This way at least, customers won’t have to cancel their purchase and look for birthday gifts elsewhere.
5. Communicate with your customers:
Even if you have the best systems in place, stockouts can still occur. If it happens, being transparent and communicating clearly with your customers is the only way to keep their trust and build a stronger relationship.
Update your products’ pages and clearly show that it is out of stock. Make sure to include the expected date for when the products will be available again and give the opportunity to your customers to register their email address to get notified when the product is back in stock.
You can also showcase similar products as a replacement and offer coupons and discounts to ensure that these customers won’t shop from a competitor's site.
You can also offer free shipping for the people who left their emails and are willing to wait for the product to be back in stock. This will make the wait worth their time. Even if this reduces your profit margins, it is still better than losing the sale and risking that the customer won’t ever come back. (honestly, I would have waited a bit more for my friend’s gift, if shipping was offered)
6. Work with a logistics provider:
If you’re managing your logistics internally and stockouts became a recurrent problem, think of externalizing your logistics to work with a company that has great expertise in this area and could reduce the workload related to supply chain.
Many providers nowadays offer very efficient services and can help you automate all your logistics processes. Bigblue, for example, gives access to real-time data and offers its e-commerce clients a wide variety of features such as automatic inventory alerts and personalized tracking emails.
Externalizing your logistics can help you gain time and focus on your business growth while ensuring that your inventory is always on point.
Preventing stockouts doesn’t happen overnight. It is a hard task that requires a lot of effort.
Through these tips, you will be able to manage your inventory in a more efficient way and prevent potential stockouts.
Remember, taking extra time to forecast and implementing an automated system to have access to real-time data will help you considerably in the long run. Preventing stockouts is a good way to reduce costs and ensure the best possible experience for your customers (and their friends ;))