5 inventory management techniques to prevent stockouts

Stockouts overview

Stockouts are more than a one-off missed sale. When a customer can’t buy what they need, you risk losing not only that sale’s revenue but also your customer’s trust. The good news is that most stockouts are preventable with better planning, clear data visibility and strong supplier relationships.

A stockout (out-of-stock or OOS) occurs when demand cannot be met because inventory is unavailable to fulfil orders. 

The main causes of stockouts include poor demand forecasting, supply chain disruption, and inaccurate data.

Key takeaways

• Most stockouts occur due to forecasting errors, supplier lead-time variability, or inventory data issues.
• As well as causing lost sales, stockouts can increase operational costs and damage customer loyalty.

Improving demand forecast accuracy, automating reordering, and holding appropriate safety stock levels can help prevent stockouts.

What is a stockout? The meaning of ‘OOS’

Stockouts, also known as out-of-stock (OOS), typically signal misalignment with demand, replenishment or inventory management accuracy, meaning demand for an item cannot be met from a business’s current inventory.  This has a knock-on effect on sales, customer experience and operations.

Common safety stock triggers include supply chain disruptions, unexpected demand surges, inaccurate demand forecasts and poor data management.

The best-case scenario for stockouts is lost sales. The worst-case scenario is unhappy customers, stressed employees, reputational damage, lost market share and a dent in profits.

The good news is that stockouts are preventable. Below, we outline the most common causes, early warning signs and practical ways to reduce the risk.

Common causes of stockouts

Understanding the main causes of stockouts is key to preventing them. We’ve listed some of the main causes below to help you get ahead of the game and prevent stockouts impacting your business.

1. Supply chain disruptions: Supply chain disruptions, such as natural disasters, wars, material shortages, labour strikes, or production problems, can reduce supply or extend lead times due to shipping route closures, leading to major stock issues.
2. Unreliable suppliers: Even if you order cycle stock and safety stock well in advance, late, partial or inconsistent deliveries can create supply gaps.       
3. Poor demand forecasting: Forecasts that rely on rolling monthly averages or fixed re-order points that don’t adapt to seasonality, trends or promotions can lead to underordering.
4. Insufficient working capital: When capital is limited or tied up in excess or slow-moving stock, you might not be able to purchase the stock you actually need to meet demand.
5. Poor inventory management: Manual, disparate replenishment processes, limited visibility, and inconsistent practices make it harder to align inventory with demand.
6. Unexpected demand spikes: Promotions, one-off orders, or sudden demand spikes due to market changes can deplete stock faster than regular reorder cycles can replenish it.
7. Product quality issues: Returns, supplier defects and items damaged in transit reduce available, sellable inventory and disrupt replenishment plans.
8. Item count errors: Inaccurate, manual stock counts can make items appear available when they aren’t. Marketing a product as available when it’s not could lead customers to find alternative suppliers.

How do stockouts damage your business?

Stockouts immediately impact revenue and the bottom line, but they also affect customer loyalty, workloads and reputation, while increasing recovery costs. 

Reputational damage and losing market share

When customers can’t get what they need from you, they will look elsewhere. Over time, repeated stockouts can erode trust, and you could see your market share shift to competitors.

Losing customers

Stockouts can disrupt the buying habits of your most loyal, repeat customers. If they turn to your competitors for availability, winning them back takes time and money.

Rising operational costs

To recover from stockouts, businesses often rely on emergency restocking via express freight or by increasing workloads to allow order reprioritisation. While these measures can be effective, they increase costs across the board. This could include expedited shipping costs, overtime, customer support, replacement orders, promotional campaigns, and time lost to firefighting.

Damage to profits and cash flow

Stockouts often distort cash flow decisions. While increasing capital investment in safety stock to prevent stockouts seems sensible, it can lead to excess stock levels that need to be discounted.

Early warning signs of a stockout

You can pre-empt stockouts by watching for the following:

• Declining supplier OTIF (On-time In-full): A drop in OTIF is your first hint that your supply is becoming unreliable. Late or short deliveries indicate that your stock levels won’t keep up with demand.
• Upcoming promotions or product launches: Demand spikes from promotions need to be reflected in forecasts and replenishment activity.
• Seasonal profiles: Monitor demand for seasonal patterns that could result in stockouts if orders don’t reflect potential demand spikes.
• Frequent backorders or repeated stock alerts: Regular stockouts of the same items show your inventory management processes aren’t aligned with actual demand and lead times.

How to prevent stockouts

Stockouts can sometimes be unavoidable; however, there are measures you can take to make them far less likely. Here are some practical methods for preventing stockouts:

1. Maintain accurate item and supplier data

Precise inventory and data management are critical to ensure accurate forecasts and reorder points, avoiding stockouts. Keep lead times, minimum order quantities, pack sizes and item status up to date. Regular data checks ensure your master data remains effective and reliable.

2. Improve demand forecasting and planning

Manual forecasting makes it hard to maintain accuracy. Rolling averages and static reorder points cannot account for stage in the product lifecycle, seasonality, promotions and market trends. To improve demand forecast accuracy, you should also consider demand types, qualitative inputs, demand outliers, and forecast periods. We discuss this in more detail in our blog – 8 Demand forecasting techniques for better inventory management.

3. Strengthen supplier relationships

One of the most effective ways to prevent stockouts is to strengthen supplier relationships, starting with sharing accurate forecasts to ensure they have enough time to obtain necessary materials and stock. Work with your suppliers to align lead times and delivery calendars, and track their performance to identify issues before they cause stockouts.

4. Establish safety stock levels carefully

Safety stock should be calculated to reflect demand variability and lead-time risk for each SKU, rather than using a blanket level. You can find out more about how to calculate safety stock in our blog – How to calculate safety stock to save money.

5. Move stock from elsewhere in the business

If you have stock across multiple sites, move items from warehouses with excess stock and low demand to those with higher demand and lower stock.

KPIs to help mitigate stockouts

After using the methods listed above to help prevent stockouts, the KPIs below will help you spot issues early and identify areas for improvement.  

• Number of stock days – how many days current stock will last at expected demand levels
• Shortfall time – the total number of days you will be out of stock 
• Max shortfall time – the longest period you will be out of stock
• Shortfall quantity – the total amount of units you will be short
• Maximum shortfall quantity – the highest number of units you will be out of stock
• Supplier OTIF – the percentage of orders delivered when promised without missing items.

How inventory software can help prevent stockouts

Managing thousands of SKUs, multiple warehouses, variable demand, and volatile lead times is more challenging when relying on manual processes. Automation tools like EazyStock’s inventory optimisation software reduce manual intervention, saving time and improving efficiency and consistency.

EazyStock can automate forecasting and consider more variables than manual forecasting. The software continuously analyses historical data, demand patterns, seasonality, and trends to generate and adjust forecasts, maintaining accuracy and enabling you to make data-driven inventory decisions.

EazyStock maintains optimal safety stock levels for your business by dynamically calculating buffer stock for each item, using advanced algorithms that account for demand variability, lead times, and target service levels.

Tools like EazyStock can incorporate supplier lead times and order calendars into their recommendations, so you’re not just forecasting demand, you’re forecasting supply readiness too.

With EazyStock’s simple dashboard, you can track KPI performance without relying on outdated spreadsheets. It also highlights items at risk of stockouts or excess stock, facilitating a proactive approach to inventory management to reduce the risk of stockouts.

Summary

Stockouts are usually the result of predictable issues such as demand volatility, lead-time variation or inaccurate data management. By improving your data management and forecasting, coordinating with your suppliers and setting appropriate safety stock levels, you can pre-empt stockouts, protect availability and avoid tying up unnecessary cash.

If you’d like to know more about how EazyStock can support your inventory management processes and help better manage supply chain disruption please request a demo.