What is stockout in supply chain?
A stockout or out-of-stock event in supply chain is a situation in which the inventory is exhausted. These stockouts can occur at any link of the supply chain, but the most commonly visible ones are at the retail store level. These are also known as On Shelf Availability (OSA) issues. A stockout is the opposite of an overstock (a situation in which far too much inventory has been retained).
Stockouts are considered to be problems that have to be fixed. There have been many inventory methods that have been created to tackle these issues and control the frequency associated with those events.
Modern supply chains aim to minimize the amount of stock involved. Most supply chains function with stocks at several levels like plants, warehouses, stores. If there is a stockout in a place where stock is expected to be present, there will be some sort of detrimental disruption in the supply chain. The degree of impact caused by the stockout, however, will vary depending on the situation and the type of business.
Basically, a stockout occurs when the orders or demand for a product exceeds the amount of inventory that that link in the supply chain holds on hand. Such a situation arises when the demand is much higher than the expectation and the amount of normal inventory and safety stock is far too low to fulfill all the orders.
A stockout raises the risk of lost sales because the customer might not want to wait till the store restocks, they’d simply look for another store. It could also hamper long-term relationships with your customers and reduce your loyalty rates.
What is a stockout rate?
A stockout rate is essentially the percentage of items that were not available on the requested need date. It helps you measure the inability to deliver products from stock within the advertised or contractually agreed on service level window because of not having sufficient inventory on hand.
This metric can be used to measure how effective the inventory replenishment processes are in retail and distribution networks. It is an indicator of the company’s ability to meet client’s needs with a full range of products and services.
How is the Stockout rate calculated?
Basically, your stockout rate or out of stock (OOS) rate is the inverse of an in-stock rate. It refers to the amount of an assortment that is not in stock.
Your stockout rate can be calculated by dividing the SKUs that are not in stock by the total available SKUs.
The whole point of calculating your stockout rate is to measure the customer shopping experience and to even quantify lost sales. Increased out of stock levels can cause your customers to get frustrated and make you lose their loyalty.
While some believe that stockouts may cause the product to become more desirable due to scarcity, thus leading to higher levels of demand, it could be detrimental to the business. Because of that, stores should aim to have stockout rates under 10% to protect the shopping experience and limit lost sales.
What are the possible outcomes of Stockout?
When there is a stockout, the shoppers might find themselves in a situation where they are forced to take corrective action that is beyond the control of the retailer. When the shoppers can’t find the items that they are looking for they might try another store, buy substitute items (by switching brands, sizes, and categories), postpone their purchase, or just decide not to make the purchase at all. If the customer switches stores or brands, they might become comfortable with the new option and start buying only from that store or brand, going there first without considering the previous store or brand that they used to visit before the stockout.
The outcomes arising from stockouts might vary in severity, but they all tend to have negative consequences for the retailer. Stockouts can make retailers lose sales, cause dissatisfaction among their customers, eat away at customer loyalty, put marketing efforts at risk, and even hamper sales planning due to the fact that substitution hides the actual demand.
Stockouts can be rather annoying to customers because they spend quite a lot of time and energy hunting relentlessly for the products, only to find out that the store isn’t carrying them right now.
Essentially, there are two ways in which stockouts financially impact the company. Firstly, they have to deal with the immediate opportunity loss of making fewer sales because they did not have enough stock in the first place. Secondly, they have to deal with the delayed market response that comes in the form of the customers’ aversion to doing business with an unreliable vendor or provider. In most situations, the second issue is more of a problem than the first one.
How can stockout be prevented?
Shorten your lead times
Your lead time is the time that passes between the date when you raise a purchase order and the date of the actual delivery of goods. Your inventory is supposed to cover the lead times of your suppliers.
If you can find a way to minimize your lead times, you can hold accurate stock levels within your inventory and prevent stockouts.
Improve your demand forecasting
Look at your historical sales data and plan for variables so that you can have a more accurate demand forecast and hold the right amount of inventory without understocking or overstocking.
Hold safety stock
Holding the right amount of safety stock helps you cater to your customers even if you face an unexpected spike in demand.
Set reorder points
Reorder points are levels of stock that you do not want to go below. When you see yourself reaching these points, you place your next order.
You can use this formula to calculate your reorder points:
Reorder point = (Average daily usage rate x Lead time) + Safety stock