You probably know this situation well: you pop into a store to quickly buy your favorite product, only to find an empty shelf instead. Disappointment is sure to follow, and this very disappointment can lead to significant business losses in the long run. In retail, out-of-stock items mean lost sales and additional risks.
Key Takeaways
Preventing stockouts protects sales, loyalty & brand reputation.
Lost sales often exceed 30% in OOS.
Customers switch to rivals quickly.
Safety stock cushions demand spikes.
Real-time tracking stops hidden OOS.
Forecasting is core to prevention.
What is a stockout?
When an item is out of stock, it means that a particular item is not available when a customer wants to buy it. This happens if the available volume of goods falls below the level of demand or if the inventory is completely depleted. The situation can be localized (one store) or affect the entire network. Either way, running out of inventory can result in immediate customer frustration, missed sales opportunities, and reputational damage which is clearly a serious problem. According to the IHL Group, retailers lost $349 billion in 2022 on this, and that's just retailers from the US and Canada!
Not every shortage is a retailer's problem
A subtle but essential difference must be distinguished between out-of-stock and general unavailability of goods. For example, when Apple released the long-awaited iPhone X in 2017, its customer demand was so great that most retailers quickly ran out of gadgets to place on their shelves. The company had to acknowledge the problem officially, and buyers waited for deliveries until the end of the year. This is an example of the general unavailability of a product.
However, let's imagine this smartphone is available in three retail chains, and the fourth is out of stock. That's not about how many people run to the store, but it's about insufficient quantities because its supplier did not deliver the goods on time. That's talking about a specific item being out of stock.
Common causes of stockouts
Out-of-stocks occur for a variety of reasons. It can be an isolated problem related to popular items, but more often than not, it's a combination of several factors.
Discrepancies between stocks on paper and in reality
These are the most common culprits, and some things are out of stock. Let's say you have a documented quantity of goods and an actual quantity of goods, and these numbers differ. Why? There are three main factors:
- Human error during manual inventory counts.
- Technical failure of the system during synchronization.
- Loss of goods due to theft or damage.
There is also a fourth factor, ‘everything’. That happens, too.
Errors (both human and computer) occur significantly often during active sales periods when money changes hands fast, and supplies run low because there's no time to restock the shelves.
Incorrect demand forecasting
Often, goods go out of stock due to a rapid, unforeseen increase in consumer demand. However, more often than not, it's the other way around: the increase could have been foreseen, but it wasn't (or at least not correctly). This happens in retail chains and individual stores that still use the classic demand planning methods based on previous sales data only. This is critically insufficient: to predict consumer behavior and optimize stocks, many factors must be considered in today's environment, including market trends, competitor behavior, and more.
Lack of money
The apparent reason for stockouts is the lack of sufficient working capital to purchase goods in bulk, possibly due to incorrect financial policies or poor cash flow management.
Logistical problems
Logistics providers are tough to control. These are the cases of goods being out of stock caused by delivery delays. The supplier can have many reasons for this: either they choose other networks first, lose goods during transport, or simply cannot cope with the supply chain disruptions. The result is the same: customer disappointment.
Inefficient inventory management
To ensure that you always have the right product at the right time and in the right quantities, you need to manage your inventory correctly. If you don't prepare for the holiday season and don't replenish your stock, shortages and all the other negative consequences of empty shelves are just disasters waiting to happen.
What does stockout cost a business?
In the short term, out of stocks lead to lower sales and customer frustration. However, if the absence of goods becomes a chronic ailment, running out of inventory can result in crushed profits:
- Costs will increase not only due to lost sales but also due to inefficient replenishment;
- The reputation of the company will suffer, and the number of customers will drop;
- Some disappointed customers will switch to competitors: those who have no problems with the availability of goods.
Additional problems include the risk of negative online reviews due to the chronic lack of the right products, increased costs, and extra workload for staff due to the urgent need to solve the shortage problem.
This is the harsh reality for many retailers as out-of-stock issues cost the average retailer $1.1 million a year, according to Worldmetrics.org.
Profit losses are the most apparent consequence of out-of-stock. Even if the customer doesn't go to a competitor (which is evident in the short term because they trust your brand), they are more likely to buy a cheaper analog. The potential loss of profit can be calculated. The formula is as follows:
Let's say a retail shop sells an average of 20 notebooks with the NY logo per day, with a profit of $15 per notebook. Due to a supply chain problem, the notebooks were out of stock for 4 days.
Calculation:
SC = (4 days x 20 notebooks/day x $15/notebook) = $1200
That's how much less the company earned because of an out-of-stock issue that took only four days to fix. Imagine applying this calculation to multiple problematic product groups and their actual price. The potential losses may begin to amount to dizzying millions.
How running out of inventory can result in long-term losses
Running out of inventory can result in more than immediate lost sales—it triggers operational inefficiencies, distorts planning, and degrades the customer experience. Emergency replenishments disrupt workflows, increase transportation and inventory costs, while stockouts create misleading sales data that complicate future demand planning.
Over time, recurring out of stock issues affect more than operations: they frustrate loyal customers, spark negative online reviews, and drive shoppers toward competitors with better availability. In the end, these disruptions lead to higher retention costs, reduced margins, and a weakened brand reputation—problems no retailer can afford in today’s competitive market.
5 steps to solve your out of stock problem
The best way to deal with goods going out of stock is to prevent such situations. It's like with fires: it's better to follow the rules than to run around to put the fires and deal with damages. Our tips are aimed at doing just that - preventing the problem from happening.
#1 Increase the accuracy of demand forecasting
The higher the forecast accuracy, the lower the chance of out-of-stocks. This is obvious, but in real life, many events make accurate forecasting difficult:
- demand changes (sometimes unpredictably);
- manufacturers change their product range;
- new products are introduced;
- a new product ‘eats up’ the sales share of the old one (cannibalization);
- the range of products expands significantly.
To cope with the challenges, you need to make a fundamental forecast for each product in the range and then adjust it, considering planned factors (marketing campaigns, seasonal items) and unplanned ones.
The foundation for this must be high-quality, accurate data. It would help if you started by analyzing historical sales data: it will help you identify demand trends and patterns, as well as establish data from marketing and sales departments to anticipate all possible fluctuations or prepare for sales and advertising campaigns promptly. Be sure to consider general market information and share the forecasts with suppliers to make your data more complete.
Also, look into using specialized AI-based demand forecasting software to create multiple models and make accurate forecasts based on a large amount of data. This is something beyond the capability of any human.
#2 Optimize safety stock
No forecast is 100% accurate. Something is needed to help the retailer cope with the challenges in such cases. Safety stock is a kind of commodity buffer required to respond to unexpected problems promptly: increased demand, supply disruptions, etc. You should create a safety stock after classifying your inventory and establishing relationships with suppliers.
To do this, you need to calculate the risk profile of each SKU, calculate how much safety stock will ensure optimal availability, and set reorder points. This depends on forecasting, lead time, and other factors. To support the launch, you need to track demand and supply and consider the company's current business goals.
#3 Automate stock replenishment
Manual inventory management is a losing strategy, even for small stores. Could it be easier for large chains? Therefore, it is worth integrating the appropriate software, which will allow the retailer to make forecasts, indicate the optimal inventory levels, and automatically order the next batch as soon as the number of goods decreases to the specified level (stock alerts). In addition, Automated Replenishment Software provides accurate real-time inventory data (and eliminates the risk of human error).
As a result, you significantly increase the efficiency of business processes and save time. AI and machine learning software cannot only analyze data but are constantly improving and adapting to demand patterns and unique situations. This means that accuracy and efficiency only increase over time.
#4 Monitor your suppliers’ performance
The supply chain is the weak spot because you have little or no influence over your suppliers and their distribution centers. Therefore, you need to measure their performance to better control the lead time of your orders so that you can change the terms and conditions or partner alternative suppliers if necessary.
To measure your suppliers' reliability, you need data on past purchases, the status of each order, cost, and planned orders. Performance data will help you understand where you need to diversify your supply chain management. This way, if the main link in the supply chain fails, you will have alternative ways to order the goods you need.
Important: the supplier is not an enemy. They have their own problems and risk factors. Retailers need to understand this and establish strong partnerships.
#5 Optimize inventory allocation
If you have a network and one link is out of stock, but another link has more inventory than needed, it is essential to establish a distribution process. This is not easy. First of all, you need to understand how many units are in each point of sale at a given time, and you also need to consider dozens of other factors: the actions above of competitors, seasonality, promotions, cannibalism, etc.
Only software can help with this. It considers thousands of variables, automatically accounts for plans and external and internal factors, and provides data on the recommended inventory levels at each point in the network. Using AI-powered Inventory Management Software, you can avoid a situation where one retail store has too much of a specific product while another is completely sold out.
Use LEAFIO AI to optimize inventory management
LEAFIO Inventory Optimization is a powerful tool that can improve the inventory management process in retail. Owing to its innovative algorithms and analytical capabilities, it provides accurate demand forecasting, automates ordering, and optimizes the distribution of stocks between different outlets.
The main advantages of using LEAFIO AI inventory management software:
Accurate demand forecasting
LEAFIO AI's artificial intelligence algorithms analyze large amounts of data on sales, seasonality, market trends, and other factors that affect demand. This allows us to accurately predict how much stock will be needed in each store in a certain period.
Automated order generation
The system automatically generates orders based on the forecasted data and available stock. This significantly reduces the time retailers spend on manual order processing and reduces the number of errors.
Intelligent stock distribution
LEAFIO AI's intelligent algorithms distribute stock between different stores based on each store's demand. The system also factors in aspects such as delivery speed, seasonality, and local conditions.
Advanced supply chain analytics
LEAFIO AI's analytics module allows you to quickly identify problems in supply chain management, such as delivery delays, out-of-stocks, or excess inventory. The system also helps to identify the causes of problems and propose solutions to eliminate them.
For example, AgroHub, a leading organic supermarket in Georgia, has significantly improved its inventory management by implementing LEAFIO AI. It reduced the average inventory levels by 12%, increased sales by 18%, and reduced overstocks by 39%. This not only reduced losses due to spoilage but also increased inventory turnover and ensured that popular products were always available for sale.
Key takeaways
- Out-of-stock issues remain a significant challenge for retailers. Running out of inventory can result in not only lost profits but also customer churn, reputational damage, and reduced long-term customer loyalty. Effective inventory management, accurate forecasting, and effective supplier collaboration can mitigate these challenges.
- Integrating AI-based automated systems significantly improves forecasting accuracy, ensures proper stock replenishment, and enables quick responses to market challenges, providing retailers additional competitive advantages.
- Choosing the right inventory management software provider is essential for uninterrupted operations. The right provider ensures that the tools and support align with your business needs, helping to streamline operations, minimize risks, and provide the stable functioning of your company in a competitive environment.
FAQ:
What causes a stockout?
More than one factor frequently plays a role. For example, errors in inventory management, an unexpected increase in demand, a lack of funds for goods, and incorrect forecasting lead to retailers finding their store out of stock.
If a store doesn't stock enough inventory of a product, what problem may the store face?
In the short term, a disappointed customer will simply leave the store or try to buy an analog. In the long term, this results in a major customer outflow, a decline in reputation, and a loss of revenue.
How to prevent stock outs?
To do this, you need to establish an inventory management system and learn how to accurately anticipate demand. It is also important to find reliable suppliers and cooperate with them effectively. All of this is possible in today's environment only by employing specialized software.
What is the stockout rate?
It's the percentage of cases when a customer requests a product that is not in your inventory. It shows how well you meet the demand for your products and the effectiveness of your inventory management system.
What is the risk of running out of inventory?
Running out of inventory can result in lost sales, higher replenishment costs, and disrupted operations. It damages trust and customer satisfaction, leads to negative reviews, and drives buyers to competitors. Additionally, it skews future demand forecasts, making inventory planning less accurate and perpetuating stock issues that impact long-term profitability.
Have a question?
Have inquiries about retail automation or optimization? Talk to our expert for solutions!
Jack Larson
Retail Optimization Expert
