What Is a Stockout? Definition, How To Avoid, & Calculators

A stockout occurs when a company runs out of available inventory for a product.

Stockouts prevent a business from making sales until goods are replenished. They can damage your brand reputation, send customers shopping elsewhere, and directly impact your bottom line.

This article explains what a stockout is, the events that lead to stockouts, and some best practices you can follow to avoid running out of stock.

What is a stockout?

Many situations can cause a stockout. Common examples include when a business fails to correctly forecast demand, maintain accurate inventory records, or prepare for an unexpected boost in sales.

Stockouts lead to lost sales and a poor customer experience. 

By mitigating the risk of stockouts, your business will be in a better position to capitalize on revenue potential and improve customer satisfaction rates.

Why stockouts should be avoided

When a stockout occurs, it affects multiple stakeholders in the supply chain.

The customer doesn’t get the product they wanted. Your business misses out on potential revenue and brand loyalty. And if your suppliers are at fault, they could lose you as a customer.

Negative consequences of a stockout include:

An omnichannel trends report from February 2024 found that 23% of omnichannel shoppers will shop somewhere else when an item is out of stock.

7 common causes of a stockout

A stockout can be caused by poor planning, inaccurate inventory records, or a delay in supply. Accurate sales forecasting can help, but unexpected surges in demand can still leave even the most prepared businesses high and dry.

Seven common causes of stockouts:

When your recorded inventory levels don’t match what’s available on the shelves, you risk overselling products. This can result in items going out of stock before they can be replenished.

This can happen when a company uses spreadsheet- or paper-based systems instead of perpetual inventory management software.

For businesses selling online, the issue isn’t just a stockout. 

Customers may still be able to purchase your out-of-stock items because there is availability showing in your ecommerce store. That means you’ll have to spend time explaining that you aren’t able to fulfill their order in the time they’re expecting, resulting in canceled orders and extra administrative work.

Inaccurate demand forecasts, or a lack thereof, lead to overstocking and understocking of inventory.

Excess inventory is a problem in itself. It takes up valuable real estate in your warehouse or retail store and increases your inventory carrying costs.

Understocking can be an even bigger problem. You won’t just be dealing with stockouts, you’ll also have higher shipping costs and lost revenue taking bites out of your profit margins.

Unexpected disruptions in the supply chain are one of the most common causes of stockouts.

They can happen for several reasons, from botched production during the manufacturing process to late deliveries due to unforeseen circumstances such as natural disasters or customs clearance issues.

When inventory replenishment is delayed, and you don’t have any safety stock, there’s a good chance you’ll run out of stock before new inventory arrives.

Businesses use safety stock, also known as buffer inventory, as a method of preventing and mitigating stockouts.

If your company doesn’t carry a surplus of extra stock and there’s an unexpected surge in demand or late delivery from your supplier, you’re at a much higher risk of experiencing a stockout.

Inventory shrinkage refers to inventory that is lost because of events like theft, damage, supplier fraud, and receiving errors. It reflects a discrepancy between your recorded inventory levels and the actual quantities of saleable stock.

If shrinkage goes unnoticed before an item sells out, it causes a stockout.

Suppliers are often to blame for stockouts. In some cases, their promised lead times don’t match reality. Other times, vendors fail to take ample measures to ensure products aren’t damaged on the way to your warehouse.

It’s not uncommon for a supplier to send customers the wrong goods—or the right goods, in the wrong quantities—because of mistakes made during the packing process.

One of the most common challenges businesses face is ensuring there is enough available capital to pay for necessary expenses, including staff wages and inventory replenishment.

Without effective cash flow management, a company is likely to be unable to afford to purchase stock when it’s needed. As a result, inventory runs low before enough revenue has come through the business to enable reordering.

How to avoid stockouts

Let’s be clear: any business selling physical goods will probably experience a stockout at some point. Even with the right mitigation strategies in place, you’d need a fortune teller to accurately predict and plan for every unexpected shift in supply and demand.

The good news is that you can greatly reduce your risk of stockouts by following a few easy-to-implement best practices.

Nine strategies to prevent stockouts:

Safety stock refers to extra inventory held by your business in case of fluctuations in supply and demand. It acts as a buffer that allows you to continue making sales until replacement stock arrives.

To calculate how much safety stock you need, use this formula:

And here’s a helpful calculator:

It’s important to mention that safety stock comes with a few downsides.

Purchasing additional stock means spending more capital and using up more storage space. You could also end up with too much inventory you can’t get rid of for a specific product.

To reduce risk, some businesses only hold safety stock for their most popular products.

Stockouts commonly occur when your inventory records don’t accurately reflect what’s available in the warehouse or shop.

An accurate inventory management system is essential for ensuring you replenish stock at the right times, in the right quantities, based on likely demand and lead times.

There are a few techniques you can use to improve inventory accuracy:

• Invest in inventory management software.
  Cloud-based inventory management systems allow you to track stock levels in real time, as updates occur.
• Synchronize your inventory data with your store.
  Connecting your inventory data with your ecommerce store prevents overselling by ensuring products display as ‘Out of stock’ as soon as you run out of saleable inventory.
• Perform regular stocktakes.
  Inventory shrinkage and obsolescence mean that even live data isn’t always good enough. Conducting frequent stocktakes will help prevent discrepancies caused by these events.
• Use inventory tracking technology.
  Tools such as a barcode scanner and RFID tags reduce the risk of human error when recording stock levels while saving you time by automating the process of manually counting stock.

Before investing in new technologies or software, consider your budget and speak to an accountant or business advisor to be sure the extra spending is justified.

Measure how quickly suppliers fulfill and deliver your orders. Compare average lead times to the expectations discussed during your contract negotiations. Do they frequently fail to deliver on time and in full (OTIF)? How does one vendor compare to another?

Monitoring average supplier lead times and OTIF rate will help you improve your inventory forecasting accuracy while providing data that can be used to renegotiate supplier contracts or justify changing suppliers.

Demand forecasting isn’t just about accuracy—frequency matters too.

When planning for demand, take into account all the usual forecast ingredients:

It’s also important to consider other factors—such as ongoing or planned marketing campaigns.

Discovering a shipment is late on the day it was supposed to arrive is never ideal. Suddenly you’re scrambling to source a last-minute vendor to avoid missed sales—or typing out a dozen apology emails to customers who expected their backordered goods to be shipped today.

This happens when you don’t have a clear line of communication with your suppliers.

The solution is to communicate regularly and establish a system of receiving order updates as they happen—whether it’s good news or bad.

At Red Stag Fulfillment, we frequently speak with retailers struggling to stay on top of inventory management and order fulfillment while keeping operational costs down. A common challenge is correctly determining the optimal amount of stock to keep on hand to avoid a stockout.

Outsourcing these tasks to a third-party logistics (3PL) specialist will mean you no longer have to worry about how much inventory to order and when to order it.

Partnering with a 3PL also frees time to focus more on growth activities, such as marketing, sales, and product development.

Connecting your inventory records with your ecommerce store helps ensure items listed on your website don’t mislead customers. Products will display as ‘Out of stock’ when inventory is no longer available, preventing customers from placing an order you can’t fulfill.

Look for inventory management software that integrates with the platforms you use to sell goods—whether that’s Shopify, Amazon, WooCommerce, eBay, or Etsy.

If you don’t have sufficient space to carry the necessary volumes of inventory to meet demand, it might be time to upgrade your storage capacity.

Optimizing vertically—that is, increasing the height of your shelves to accommodate more inventory—is one solution that’s easy to implement. In some cases, you may need to get rid of dead stock to free up space in your warehouse or retail shop.

Cash flow management requires tactical planning and accurate data. When you have good control of your working capital, you’ll be better positioned to avoid stockouts.

Some easy ways to improve cash flow in your business include:

How to handle stockouts

How you handle a stockout determines its impact on your business.

Damage control for stockouts means prioritizing customer communications, analyzing the event that caused the stockout, and implementing a risk mitigation strategy to prevent it from happening again.

A stockout can have detrimental long-term consequences on top of the immediate issue. Unless handled correctly, you risk losing a customer forever—and their lifetime revenue with them.

These best practices can help reduce your risk:

To prevent future stockouts, you need to determine what caused the last one. Did your demand forecast miss the mark? Have you neglected to invest in safety stock? Is one of your suppliers to blame?

Work out what went wrong and why, then implement a risk mitigation plan to stub out future stockouts triggered by the same event.

Unless you’ve got a bespoke product that can’t be found elsewhere, consider looking for an alternative supply of inventory to hold you over until replenishment stock arrives.

For example, if an out-of-stock item typically has a lead time of three weeks, you might pop down to a local supplier and pick up a temporary batch to hold you over until it arrives.

Even if you can’t make a profit with local suppliers’ prices, it can still be worth it to avoid missed sales from high-value customers.

What are stockout costs?

Stockout costs represent the money your business loses as a result of running out of stock. To calculate the total cost of a stockout, add up any expenses required to manage it along with the total profit loss directly resulting from the stockout.

Types of stockout costs include:

There may be other costs unique to your business and your approach to managing stockouts. For example, if your solution to a stockout is to replenish out-of-stock items from a different supplier with higher prices, there will be a price-difference cost to consider.

Stockout probability: How to calculate your risk

To calculate the probability of a stockout, divide the average number of stockouts you experience by the expected demand for a product in the same period.

Let’s say you average three stockouts per month and sell—on average—fifty products in the same period. In this example, your stockout probability would be 6%.

The stockout probability formula can be represented as:

If you don't want to crunch the numbers manually, use this calculator:

Eliminate stockout stress with Red Stag Fulfillment

Stockouts are just one of the challenges companies face when self-fulfilling orders. If you don’t have the time or expertise to efficiently manage your inventory, you run the risk of providing a poor customer experience and facing increasing operational costs.

At Red Stag Fulfillment, we combine decades of experience with an unwavering commitment to ensure your orders go out on time and keep your customers returning. Our best-in-class warehouses and fulfillment processes are designed to help you maintain optimal stock levels all year round—while ensuring maximum order accuracy.

Contact us today to learn more about how our third-party stock management and fulfillment services can help your company stay ahead.