It’s the dream of every small business to sell all their stock. After all, what better sign is there of a growing, thriving company than selling every single thing you intend to sell? Then once you start to think deeper, you realize that stockouts are actually pretty bad. Running out of inventory is no joke!
So what do you do to prevent inventory from running out? Furthermore, what can you do when you’re out of inventory entirely, or very close to running out? These questions and more are what we’ll answer below.
What Are Stockouts & How Do They Affect Your Company?
First things first, let’s define stockouts. Also known as out-of-stock events, stockouts occur whenever a given item’s inventory is exhausted. Odds are pretty good that at some point, your business will run out of inventory on some commonly ordered item. This is especially true if your business is doing well.
However, stockouts are really bad. There’s no sugarcoating this simple fact. There are a number of negative consequences to running out of inventory, which we detail below.
1. Some customers will be forced to wait before making a purchase.
One of the most obvious consequences of a stockout is that customers won’t be able to buy the item when they want to. Therefore, some customers will make the note to check back at a later time. If you have alerts that tell people when an item is back in stock, some customers will sign up for those. Otherwise, it’s purely up to your customer to remember.
2. If possible, customers may choose to backorder.
One of the better ways to deal with a stockout is to create a backorder system. That way, customers can still purchase the product, but receive it only when you have it back in stock. This will still provide your company with revenue, although less than normal because some customers are uncomfortable spending money well before receiving an item.
On the accounting side, your company will earn revenue, but it will also have to record “unearned revenue” as a liability on the books.
3. Some customers will cancel their orders.
Some customers will see that you’re out of stock and cancel their orders, or fail to make them entirely. When this happens, your company loses revenue, sometimes even to a competitor.
4. Some customers will leave forever.
Lastly, when customers realize you don’t have an item in stock, you may never hear from them again. Usually, this happens when brand new customers stumble across your store and you have nothing in stock. In other cases, this can happen when current customers just decide they’ve had enough and don’t want to come back.
5. You will incur backorder costs.
Any time you start taking backorders, your company has to deal with a different process than normal, straightforward sales. If you’re caught off-guard, this can involve processing fees and inefficiency as your staff adapts.
6. You will lose revenue.
As a consequence of items 3 and 4, your company will lose revenue. Yes, we’ve stated this in the previous points, but this is so important that it bears repeating as a separate point entirely. Losing a few weeks of revenue can be the difference between success and failure for many small companies.
7. You may receive negative reviews online.
Anytime a company gives customers a bad experience, they are at risk of receiving negative reviews on sites like Trustpilot. Running out of stock leaves customers with a bad taste in their mouth, and a few could end up writing negative reviews online.
How To Prevent Stockouts
Avoiding stockouts is really important. This is easier said than done. There is an elegant dance of supply chain management and demand estimation that determines how much inventory you need at any given time. A misstep can lead you down the road to having too much inventory, or far worse, not enough.
With this in mind, let’s talk about some things you can do to prevent stockouts from occurring in the first place.
1. Remember that reordering requires lead time.
It’s easy to forget in the heat of the moment, but reordering stock takes time. Depending on the nature of your business and its supply chain, it could be as easy as placing an order on Amazon Prime. Alternatively, it could be as hard as manufacturing goods, shipping them by freight to your warehouse, and then going through a receiving and assembly process.
Whatever your process is, make sure to account for the time it takes to get inventory back into stock.
2. Simplify your supply chain.
A lot of companies use dated and inefficient methods of supply chain management. That leaves companies more prone to weather delays, shipping damage, and other negative occurrences that happen when inventory is moved from the supplier to the warehouse.
The answer to all this? Eliminate wasteful processes, or, as many say, “go lean.”
3. Implement responsive supply chain management techniques.
If your business is especially prone to stockouts, look into responsive supply chain management. You may be able to better refine your internal processes to meet changing demands.
4. Focus on more accurate demand estimation.
Want to prepare for demand? Get better at estimating it!
It seems like the flippant response, but the truth is that better demand estimation makes life a lot easier for companies. Thankfully, many of the techniques used by large organizations to forecast their sales revenue can be coopted by smaller ones.
5. Keep an eye on market trends.
Good demand estimation will help you prevent stockouts, but you can still be thrown for a loop if you don’t pay attention to your industry at large. If you’re in a growing industry, you may see an increase in demand for your products even if you do nothing differently.
6. Vet your logistics companies carefully.
If you’re not careful, logistics companies can indirectly cause stockouts. Let’s say your freight company damages your stock. Then you might not have enough to sell. If your warehousing company is careless, you could end up paying the price in lost revenues.
7. Find a fulfillment company with inventory management software.
Lastly, if you want to prevent stockouts, you need to keep an eye on inventory levels. If you don’t store your own inventory, it can be easy to lose track of how much you have on hand. For this reason, if you use a third-party fulfillment company, make sure they have a system that lets you track inventory levels.
What To Do If You’re About to Run of Stock
Of course, none of the above helps if you’re close to running out of stock. Treating the root cause of stockouts takes time, and sometimes, you don’t have that luxury.
If you’re very close to a stockout, here are four things you can do that will immediately improve your situation.
1. Cut your ad spending.
With a stockout looming, the first thing you should do is cut your ad spending. There is nothing as damaging as running out of stock while ads are still running. When that happens, you’re hit with the double-whammy of pointless expenses and lost revenues.
2. Temporarily increase price.
Some sources recommend temporarily increasing the price of your products to reduce demand. This is another valid way to handle the risk of stockouts, but it’s not always appropriate.
3. Close listings on sites like Amazon or eBay.
If you have listings on Amazon, eBay, and other sites like that, take them down. That way, people won’t be placing orders that you can’t fill in a timely manner.
4. Order some emergency stock for the next time.
Last but not least, put this close call to use. Go ahead and order additional stock. Hopefully, you won’t run out before the stock arrives and you can just keep emergency stock for next time.
What To Do If You Run Out of Inventory Anyway
Last but not least, let’s say you’ve already run out of stock. Now what?
You can immediately take these five steps to ameliorate your situation.
1. If you’re in a big rush, ship some of your inventory by air freight.
By far, the fastest way to get some stock back in your warehouse is through air freight. By having some of your inventory shipped by air freight, the idea is that the revenues you would gain by having inventory back in stock earlier than normal would be enough to offset the cost of the air freight itself.
2. Close listings on sites like Amazon or eBay.
We mentioned this above, but it bears repeating. If you’re out of stock, close your listings!
3. If you run your own store, use a pre-order or backorder system so you can keep revenue coming in.
You can’t always take backorders on other eCommerce sites, but you always can on your own. It’s a good idea to have a backorder system in place so you can keep earning revenues while waiting on new inventory to arrive.
4. Bump up your ad spending as soon as the inventory is back in stock.
As soon as the inventory arrives, bump your ad spending up higher than normal. Doing so can stoke demand and help you recapture some of the revenues you lost during the stockout period. That way you can pick up as if nothing ever happened at all.
5. In all communications to the customer, be honest, upfront, and decent.
By stocking out, you have inconvenienced your customers. That’s okay. It happens sometimes. But you have to be honest about it!
Put up a page, send out an email, and generally do whatever you need to do to make sure your customer is taken care of. If you do an exceptionally good job of taking care of your customers, the minor stumble of a stockout might even make them like you more.
Running out of inventory isn’t the end of the world. There are ways you can handle stockouts if they happen, and even more ways to prevent them.
Using this advice, we hope you go forth and sell all but the last remaining 3-5% of your inventory!