- Circana
- 9 minutes ago
- 6 min read
Thomas Elliot, Senior Director, Business Development
John Kacedan, SVP, Client Sales and Insights
Table of Contents:
Stockouts cause frustration across the supply chain, from vendors’ missed opportunities to retailers’ inability to fill shelves and shoppers’ irritation at not finding what they need or want. Indeed, stockouts are more than just empty space where products should be: They lead to lost revenue and eroded brand loyalty.
To prevent shared friction from stockouts in today’s complex ecosystem, businesses can take steps to mitigate the fallout from such situations and, importantly, head off inventory issues before they become a headache.
What Are Stockouts, and Why Do They Happen?
Simply put, a stockout is what happens when a retailer runs out of inventory for a certain product, and it is not available for purchase. Stockouts can stem from a variety of factors within the supply chain, such as internal planning oversights, labor shortages, production or transportation disruptions, seasonal fluctuations, or capacity constraints stemming from limited shelf space for high-velocity items. Inventory gaps can also be a side effect of successful sales and promotions.
There are nuances in these kinds of inventory glitches. For example, a true stockout means that there is zero inventory in the facility.
A “not true” stockout, on the other hand, can be linked to other problems. A product may not be visible to a shopper on the shelf because it was placed in the wrong location or hidden behind other items. Backroom issues can also contribute to invisibility at the point of sale if products are buried under other stock or not yet processed. “Phantom” inventory can also result in stockouts and stems from inaccuracies in the store’s ordering system, where the system shows inventory levels higher than what is actually in the store.
What Are the Consequences of Stockouts in the Supply Chain?
Of course, sales are lost if products are not visible to customers. In addition to missed revenue, other ripple effects extend across the supply chain.
Damage to brand loyalty is one longer-term consequence of stockouts, especially if they are not rare occurrences. Frequent unavailability of product compels shoppers to switch brands or retailers. They may permanently defect to a competitor that can consistently meet their needs.
On a broader level, stockouts contribute to operational inefficiencies, breaking the rhythm of the supply chain. Stores incur additional labor costs to restock shelves and businesses pay more in shipping fees to replenish stock. Managing backorders also takes time and increases operational expenses. As stockouts persist, order quantities tend to increase to account for the lagging inventory potentially leading to excess when shipments finally arrive.
Stockout Prevention: Useful Forecasting Strategies for Stockout Management
Because there isn’t always a single failure that causes these issues, curbing stockouts requires a collaborative, proactive approach that moves beyond reactive replenishment.
One practical strategy is to adjust planograms to reflect real-world sales velocity. For example, if a store sells 24 units of strawberry yogurt every Sunday morning, but the shelf only holds 24 units, the risk of a stockout is imminent. Stores can increase or reallocate labor to restock within the day or expand the facing for that high-demand SKU. Another solution is to move merchandise directly from the delivery truck to the sales floor, thereby bypassing backroom storage, where product can be lost, stolen or damaged.
Alerting systems can be helpful as well. Implementing automated alerts that flag potential low-stock situations allows store associates or field teams to intervene before the shelf goes empty.
Seasonality comes into play with stockouts, so forecasting should account for time-based spikes in demand. For example, turkey gravy may be an everyday item but sees massive sales surges in November and December. Overlooking these seasonal realities inevitably leads to shortages during peak revenue.
Data, including POS data and details on inventory levels, is crucial in identifying gaps to prevent future stockouts. For optimal effectiveness, data should be used in tandem with feedback from stores to know whether or not an item is actually on the shelf.
How to Respond to Stockouts in Supply Chains
Despite best efforts, stockouts happen. The difference between a minor hiccup and a major disruption hinges on the response.
Transparency mitigates damage. Vendors must proactively communicate supply issues to retailers, outlining the extent of a shortage and the expected recovery timeline. Manufacturers and retailers can also collaborate on items that are chronically out of stock, using data to balance the right amount of product needed instead of overcorrecting and causing another potential problem of excess inventory.
It is also helpful to have a shared understanding about allocation across the chain. When supply is constrained, manufacturers must make decisions regarding allocation. This often involves prioritizing strategic partners, who often receive a greater share due to their volume and market influence. Manufacturers who participate in collaboration programs increase their strategic value by offering retailers guidance on where to put limited inventory by using retailer data to proactively identify high-risk stores.
Finally, closing the gap between data and reality is essential. Utilizing tools that provide visibility into the size of the opportunity helps field teams understand the true extent of a loss. Combining data with physical store checks ensures that what the system sees matches what the customer experiences, capturing sales that would typically be lost and reducing or eliminating shopper friction.
Partner with Circana to Manage Stockouts
Brands and retailers can turn potential losses into opportunities for optimization if they understand the root causes of stockouts and leverage insights as part of their strategy to combat the problem. Circana partners with businesses across the supply chain to maximize inventory data and planograms through solutions such as Liquid Supply Chain™. Our supply chain data platform is combined with our deep industry knowledge and experience, transforming data into actionable insights. Our platform empowers manufacturers to collect retailer data and use it effectively, and it likewise allows retailers to communicate clearly with their manufacturers by sharing near real-time results and ensuring there is clear visibility down to the item and store, daily.
Frequently Asked Questions About Supply Chain Stockouts
What causes supply chain stockouts?
Stockouts are complex and are typically caused by multiple contributing factors. Some common factors include supply chain disruptions, inventory management errors, unforeseen demand surges, and poor demand forecasting. Over-reliance on antiquated demand forecasting methods is often the catalyst for stockouts. The most successful brands rely on a combination of their historical data and cutting-edge technology that can organize and analyze that data while also incorporating other contextual signals. Likewise, having access to tools that provide clear, near real-time visibility into on-shelf performance, empowers brands to handle short-term issues and improve long-term strategies.
What is the 80/20 rule in inventory management and demand forecasting?
The 80/20 rule, which is also referred to as the Pareto Principle, suggests that there is often a minority of inputs that account for the majority of outcomes. It is frequently used by businesses but is usually an oversimplification and should not be used when real sales data and inventory data can be used. In principle, the 80/20 rule could suggest that 80% of inventory value is determined by only 20% of the items. The true value in the principle is to showcase that the relationships between inventory, consumer demand, sales, and revenue are not 1:1. If a completely new startup brand sent the same amount of product to every retailer, or the same amount of every varietal to a single retailer, they’d likely start to see trends emerge regarding which items leave the shelves quickest. By working with the right tools, you can analyze retailer data to improve supply chain operations and prevent stockouts.
What is the best way to communicate with customers about stockouts?
Communication is key for manufacturers and retailers when there are stockouts. To prevent retail leakage to competitors or negative impacts on how consumers view either the retailer or the brand, you should always act quickly when possible, provide details, and give options either to potential cross-sells or to methods where consumers can be alerted when an item is back in-stock. This clear communication helps improve your brand positioning, while also decreasing potential buyer churn.
