Inventory Stock Out: Everything You Need to Know in 2023
In this article, we explain what inventory stockout is and why it happens. We also share our simple 5-step process to help you prevent it, with real-world examples. Read on to learn more.
What Is Inventory Stockout?
An inventory stockout occurs when an item that is typically available is not on hand when a customer or employee looks for it.
Example: Tech Guru Electronics normally sells 500 units of a particular smartphone model every month. However, in May, they only had 300 units in stock, and by mid-month, they were unable to meet customer demand.
Why Does Inventory Stock Out Happen?
Inventory stock outs can happen due to a variety of reasons. Some of these include:
Inaccurate Demand Forecasting: If a business underestimates the demand for a product, it can lead to insufficient stock levels.
Supplier Delays: Delays from suppliers can disrupt restocking processes and lead to unavailable items.
Inefficient Inventory Management: Not tracking inventory levels or having outdated systems can cause stock discrepancies.
Economic Factors: Unexpected economic shifts can suddenly increase or decrease demand for certain products.
Quality Issues: If a batch of products is found defective, they might be pulled out, leading to a stockout.
Logistical Challenges: Transportation delays or issues can prevent stock from reaching the store or warehouse on time.
5-Step Framework to Prevent Inventory Stockout
Preventing inventory stockout is crucial for maintaining sales and customer trust. To do this, simply follow our 5-step process below:
Step 1: Accurate Demand Forecasting
By analyzing past sales data, seasonal variations, market trends, and other influencing factors, businesses can more accurately predict future demand.
Example: "BlueWaves Swimwear" uses past sales data and upcoming fashion trends to estimate they'll sell 10,000 units of a new swimsuit design.
Step 2: Build Strong Supplier Relationships
Establishing good rapport, regular communication, and mutual trust with suppliers ensures timely restocking and prompt handling of any supply chain issues.
Example: "GreenLeaf Teas" achieves a constant supply by collaborating closely with multiple reliable suppliers.
Step 3: Use Modern Inventory Management Systems
Leveraging technological advancements, such as RFID or barcode systems, allows businesses to track inventory in real-time and receive instant notifications when stock levels dip below a set threshold.
Example: "AutoGear Motors" deploys an RFID system that alerts them the moment a specific car part falls below the desired stock count.
Step 4: Regularly Review and Adjust
Continuously monitoring stock levels, sales data, and market trends helps businesses adjust their procurement strategies to better match the prevailing demand.
Example: "LitBooks Store" holds monthly stock reviews and modifies orders in line with observed seasonal reading habits.
Step 5: Maintain a Safety Stock
Keeping a buffer or surplus of high-demand items safeguards against unexpected spikes in demand or potential supply chain disruptions.
Example: "CrispySnack Foods" consistently stores an extra 5,000 packets of their top-selling chips to counter unpredictable surges in demand.
Case Study
EcoBuild Hardware has been experiencing stockouts of their eco-friendly paint range. To address this, they decided to follow our step-by-step framework:
Step 1: Accurate Demand Forecasting
They analyze past sales and find that the demand for eco-paints increases by 20% during spring. So, they forecast a need for 12,000 cans for the upcoming season.
Step 2: Build Strong Supplier Relationships
EcoBuild strengthens their relationship with "NatureTint Paints," their primary supplier, ensuring consistent communication and faster response times.
Step 3: Use Modern Inventory Management Systems
They implement a barcode system, enabling them to track every paint can that comes in or goes out.
Step 4: Regularly Review and Adjust
After the spring season, they review their sales data and adjust their forecast for summer.
Step 5: Maintain a Safety Stock
To safeguard against sudden demand or supply chain issues, EcoBuild decides to maintain a safety stock of 2,000 cans.
We hope this article has given you a better understanding of what an inventory stock out is and how to avoid it.
