Stockout lost sales: The most important metric you aren’t tracking

When an item is out of stock, you’re not just risking a single sale—you’re potentially damaging customer relationships and racking up hidden costs. Yet even large, sophisticated companies often fail to accurately track stockout costs, including lost sales. In this article, we’ll explore how to measure these costs, how to turn data into actionable insights, and why this often-overlooked metric is the most important one you aren’t tracking.

Key Takeaways:

Stockout cost is a crucial metric that even large companies rarely track accurately.
Lost sales due to stockouts can be quantified using techniques we explain below.
Measuring stockout cost transforms inventory discussions into ROI-driven decisions.
Fill rates alone are not enough to measure inventory performance because they ignore lost orders on out-of-stock items.

The real cost of stockouts

The actual cost of a stockout includes multiple factors that go well beyond lost revenue for that specific order:

Lost Sales: We intuitively know that customers buy less when products are out of stock. At companies that don’t allow backordering, the lost demand is near 100%. Even in cases where backordering is allowed, demand spill occurs. Later in this article, we’ll teach you how to precisely measure this
Cancellations and Returns: If a customer does decide to buy an out-of-stock item, every day they have to wait for their order increases the chance of a cancellation. The large majority of order cancellations happen while a customer waits for an out-of-stock item to ship. And even among backorders that eventually ship, return rates are typically much higher than average.
Customer Service Overhead: Each time an item is out of stock, customer service teams have to deal with more calls, emails, and follow-ups. This raises operational costs and diverts resources away from proactive tasks like upselling or cross-selling.
Freight Costs: When stockouts occur, orders often need to be split into multiple shipments. Sending multiple shipments (especially from different distribution centers) adds significantly to your freight bill.
Brand and Reputation Risk: Each stockout erodes customer trust. Repeated out-of-stock experiences result in customers looking elsewhere for their purchases, leading to a decline in lifetime value. At some point, customers will stop giving your brand the benefit of the doubt.

Fill rates: A misleading metric

When it comes to inventory performance, most companies focus heavily on fill rates—the percentage of customer orders that are filled from available stock. While fill rates are important, they are a flawed and incomplete measure. Fill rates only account for orders that customer actually place. But what about the orders that were never placed because the customer saw an “out of stock” notification and didn’t even bother adding it to their cart?

This is where stockout lost sales come into play. A fill rate of 95% might look solid on paper, but if your actual sales are 80% lower on out-of-stock days (i.e., a spill rate of 80%), then that 5% fill rate shortfall is driving significantly more lost revenue than you might expect.

Measuring fill rates is important and worthwhile, but we suggest also measuring your in-stock rate. This is simply the percentage of expected sales you were in-stock for at the start of the date (as opposed to fill rate, which measures the percentage of actual sales you were able to fulfill from stock).

Quantifying stockout cost

To accurately measure stockout cost, we need to move beyond fill rates and start measuring spill rate—the percentage of potential sales that are lost when an item is out of stock.

Step 1: Track daily inventory positions

Start by capturing daily inventory position snapshots. This data tells you whether an item was in stock at the beginning of each day. This is critical because most ERP systems don’t archive inventory levels over time, so you need to start collecting this data manually if it’s not already being stored.

Step 2: Determine “Spill Rate”

Once you have daily inventory snapshots, choose a timeframe to compare sales when in-stock vs out of stock. We like to use quarterly data (e.g. ~90 days of inventory history). Filter for items that had at least one in-stock day and one out-of-stock day during the period in question, and compare the average daily sales across all such items when in-stock vs out-of-stock. Let’s say you find that average daily sales per item are $500 when in-stock, and $250 when out of stock. This means your spill rate is 50% – i.e. you are losing half of your potential revenue every day that the item is unavailable.

Step 3: Apply the spill rate to total sales

Now, extend this analysis across your entire product line. To get a high level approximation of lost sales, multiply your spill rate by the inverse of your overall, revenue-weighted in-stock rate. For example, if your annual sales are $100 million, your in-stock rate is 92%, and your spill rate is 50%… you are losing approximately $100 million * 8% stockout rate * 50% = $4 million of annual lost sales.

Step 4: Add in other costs

In addition to lost revenue, you need to account for:

Increased cancellation and return rates: Factor in the increased likelihood of cancellations and returns during backorder lead times.
Customer service overhead: Estimate the additional time and cost your service team spends handling inquiries related to stockouts.
Freight costs: Calculate the additional cost of splitting shipments when items aren’t available from the same location.

ROI-driven inventory decisions

One of the key benefits of tracking stockout cost is that it shifts the conversation from vague “inventory improvement” discussions to a firm ROI-driven analysis. For example, if you estimate that adding $500,000 in inventory will increase your fill rate in the example above from 92% to 94%, this should increase annual sales by ~$2 million (thanks to improved in-stock rates). Depending on your gross margins and cost of capital, the decision to make this investment becomes clearer.

Take action: What you should do next

Now that you understand the hidden costs of stockouts and the importance of ROI-driven inventory management, it’s time to take action. Implementing these strategies can transform your inventory from a source of frustration and lost revenue into a powerful driver of profitability and growth.

Start tracking daily inventory positions: Set up a report that captures your inventory levels for every SKU at the beginning or end of each day.
Track in-stock rate in addition to fill rate: If you aren’t already, start reporting on the in-stock rate of your inventory (i.e. the percentage of expected demand in stock).
Determine current stockout cost: For items that go out of stock, compare sales on in-stock days versus out-of-stock days to calculate your spill rate.
Make ROI-based inventory decisions: You now have the tools to make inventory decisions based on sound, quantifiable financial information, rather than best-guesses.

How Hydrian can help

Our inventory optimization services provide the expertise and technology you need to gain control of your inventory and maximize profitability.

We offer a free assessment to calculate your current stockout costs and identify areas for improvement. Our month-to-month service combines cutting-edge machine learning, AI-powered planning, and expert consulting to deliver a proven ROI, typically 5-10x our fees.

Contact us today to learn how we can help you transform your inventory into a strategic asset that drives sustainable growth.

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We’re so confident in our results, we offer a free performance assessment to all prospective clients. This isn’t a canned sales deck – it’s a bespoke presentation that takes 10-20 hours of our time. Whether we work together or not, we promise you’ll walk away with useful insights that will improve your business.

What causes stockouts and backorders? (And how to avoid them)

Stockouts and backorders are among the most frustrating challenges for distributors and online retailers, leading to lost sales, unhappy customers, and various overhead costs. Over 95% of stockouts can be traced back to three core causes:

Customers purchased more than expected (demand forecast was too low)
Vendors took longer to deliver than expected (lead time forecast was too low)
Inventory controls (e.g. reorder points or safety stock) were misconfigured

Understanding these causes and differentiating between avoidable and unavoidable stockouts is critical for minimizing disruptions. Here’s how to tackle each one.

1. Customers purchased more than expected

In inventory management, one of the most persistent challenges is accurately predicting customer demand. Even with sophisticated forecasting tools, businesses are often caught off guard when customers purchase more than anticipated, leading to stockouts and backorders and creating a ripple effect throughout the supply chain.

The demand forecasting dilemma

At its core, the issue stems from the inherent difficulty in predicting human behavior and market trends. Demand forecasts can be thrown off by various factors, including sudden shifts in consumer preferences, unexpected economic changes, viral trends on social media, competitor actions or stock issues, and weather events or natural disasters.

When these factors align to drive demand beyond expectations, businesses find their carefully planned inventory depleted, leading to stockouts and disappointed customers.

Distinguishing between avoidable and unavoidable demand spikes

Some demand spikes can be anticipated with proper planning, while others are truly unpredictable. Understanding this distinction is crucial for developing effective prevention strategies.

Avoidable demand problems

These are situations where better internal processes could have prevented the stockout. For example, running a flash sale on a product without informing the inventory management team can catch the warehouse off-guard, leading to backorders and delayed shipments. This scenario is entirely preventable with improved communication between marketing and operations teams.

Unavoidable demand problems

Sometimes, external factors create truly unpredictable demand spikes. A classic example is the Oprah Effect, where a product featured on Oprah Winfrey’s show would see astronomical demand overnight. Such events can wreak havoc on inventory management. Similarly, sudden changes in weather patterns or unexpected global events can create demand surges that are difficult to anticipate.

The gray area

Between these two extremes lies a gray area where demand is higher than expected, but not dramatically so. In these cases, well-calibrated safety stock should absorb the increase without stockouts. The challenge lies in maintaining the right balance — too little safety stock leads to stockouts, while too much ties up capital and increases carrying costs.

Strategies for better demand forecasting and stockout prevention

Monthly forecasting error report: Create a monthly report of the top 10 SKUs with the highest-dollar forecasting misses where stockouts or backorders occurred. Have a demand planner review each item, identifying any preventable errors.
Sales and marketing sync-up: Hold regular meetings between demand planning and marketing teams to discuss upcoming promotions and events that could impact demand. Promotional buys must happen at least one lead time cycle ahead of the promotion start date, and demand history must be edited to avoid overbuying coming out of the promotion (and to avoid artificially inflating demand variance, and thus excess stock).
Adjust safety stock: Calculate safety stock to cover unexpected surges. There are many approaches here, but a key concept to keep in mind is the variability of demand over lead time. If your supplier can deliver in a matter of days, you can react faster to unexpected changes in demand. If your supplier is across an ocean, however, your buffer stock will need to be ready to cover multiple unexpected demand events.

By implementing these strategies, businesses can significantly improve their ability to anticipate and meet customer demand, reducing the occurrence of stockouts due to underestimated purchases.

Remember, the goal isn’t perfect prediction — it’s building a system resilient enough to handle the inevitable surprises that come with serving a dynamic market.

2. Vendors delivered later than expected

Even with perfect demand forecasting, businesses can still face stockouts and backorders if suppliers don’t deliver on time.

The complexity of supplier lead times

Supplier lead times — the time between placing an order and receiving the goods — are critical in inventory management. However, these lead times can be affected by several factors:

Production bottlenecks
Transportation delays due to weather, traffic, or logistical issues
Customs holdups for international shipments
Raw material shortages
Labor disputes or workforce issues

When any of these factors cause delays beyond the expected lead time, it can result in stockouts if safety stock levels aren’t sufficient to cover the extended wait.

Distinguishing between avoidable and unavoidable supplier delays

As with demand forecasting issues, some supplier delays are preventable, while others are truly beyond anyone’s control.

Avoidable supplier delays

These are often the result of poor communication or inadequate planning. For instance, if a supplier consistently delivers late but lead time assumptions haven’t been updated in the inventory management system, the resulting stockouts are preventable. Another example is failing to account for predictable seasonal delays, such as the Chinese New Year affecting production schedules in Asia.

Unavoidable supplier delays

Some events are unpredictable and can cause unavoidable delays. Examples include natural disasters affecting production facilities, sudden geopolitical events disrupting trade routes, or global crises like the COVID-19 pandemic causing widespread supply chain disruptions.

The gray area

Many supplier delays fall into a gray area. For instance, occasional production delays due to equipment breakdowns or minor shipping delays due to port congestion. A robust inventory management system should be able to absorb these occasional hiccups without resulting in stockouts.

Strategies for managing supplier lead times and preventing stockouts

Supplier performance scorecard: Create a scorecard that tracks supplier delivery times against expectations. Share this with suppliers and collaboratively review exceptions.
Lead time variability buffer: Increase lead time buffers when variability is high. For example, if a supplier’s lead time commonly fluctuates by 10 days, reorder points must account for those potential delays.
Diversify suppliers: For critical items, spread orders across multiple suppliers. This helps reduce dependency on a single vendor and mitigates the impact of any one delay.

By implementing these strategies, businesses can better manage the uncertainties associated with supplier lead times, reducing the risk of stockouts and backorders due to late deliveries.

3. Inventory controls were misconfigured

Even with accurate demand forecasting and reliable suppliers, businesses can still face stockouts and backorders if their inventory control policies are not properly configured. Inventory controls such as reorder points, min/max levels and safety stock calculations are the backbone of an effective inventory management system.

The complexity of inventory control policies

Inventory control policies are not one-size-fits-all. They need to be tailored to each product’s unique characteristics, including:

Demand patterns (steady, seasonal, or erratic)
Lead time variability
Profit margins
Storage requirements
Shelf life
Criticality to operations or customer satisfaction

When these policies are not aligned with current business realities, they can lead to excess inventory or stockouts.

Distinguishing between avoidable and unavoidable inventory control issues

As with other causes of stockouts, some inventory control issues are more preventable than others.

Avoidable inventory control issues

These often stem from a lack of regular review and updating of inventory policies. For instance, if reorder points haven’t been updated to match a higher sales velocity or longer lead times, the resulting stockouts are entirely preventable. Similarly, failing to adjust safety stock levels for seasonal products before peak season is an avoidable error.

Unavoidable inventory control issues

In highly volatile demand or supply cases, even properly configured inventory controls may not fully prevent stockouts. For example, a sudden and unprecedented spike in demand might deplete even a well-calculated safety stock.

Strategies for optimizing inventory controls and preventing stockouts

Regular review: If you don’t have an automated tool for doing so, it’s critical that your team reviews and adjusts 100% of your inventory controls each month (unless demand and lead time have not changed, which will be rare). This can seem like an overwhelming task, but once a process is in place, this review and updating can largely be automated. 3rd party tools (which are included with a service like ours) can help optimize this process.

Safety stock: Safety stock acts as a buffer against the inherent uncertainty in demand and lead times. Think of it as a cushion that catches you when things don’t go as planned. Safety stock is generally a part of your reorder point or “min” for each item, so we consider safety stock adjustments to go hand-in-hand with regular inventory control maintenance and adjustment.
Conduct a root cause analysis: For a sample of stockout events, perform a weekly root cause analysis to determine if inventory policies were a factor. Use these insights to improve future settings.

Inventory management is not a “set it and forget it” process. It requires ongoing attention and adjustment to keep pace with changing business conditions and maintain optimal performance.

Final Thoughts

Stockouts and backorders are symptoms of deeper inventory management challenges. By addressing the three main causes we’ve explored — demand fluctuations, supplier delays, and inventory control issues — businesses can significantly reduce their frequency and impact.

Inventory management is an ongoing journey of optimization and adaptation. With persistence and the right strategies, you can turn it from a constant challenge into a significant competitive advantage.

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Impact of import tariffs on U.S. distributors of building and home improvement materials

Over the past few years, U.S. distributors of building materials and home improvement products have been caught in the crossfire of fluctuating trade policies and tariffs. While these measures are often aimed at protecting domestic industries and encouraging U.S. manufacturing, their impact on distributors is significant and not always obvious at the beginning. This article explores the effects of import tariffs, weighing whether they improve profitability or create more challenges for firms caught between suppliers and end customers.

Why tariffs

Import tariffs are typically imposed to safeguard domestic industries by making imported goods more expensive and thereby less attractive to buyers. Theoretically, higher tariffs should boost demand for domestic products, as import prices become less competitive. However, for distributors specializing in building and home improvement materials, shifting to domestic suppliers is not always feasible. Domestic production capacities for certain materials, such as specialty wood products or advanced insulation materials, may be limited, and establishing new supply chains can be both costly and time-consuming.

Tariffs and price hikes

The first and most immediate impact on U.S.-based distributors is a sharp increase in product costs. In many cases, domestic producers also raise their prices in response to tariffs on imports, knowing that distributors have few alternatives. This erodes the intended advantage and creates a scenario where distributors end up paying more, whether they source domestically or continue to import.

For firms dealing in building materials, which already face tight margins, even a slight uptick in tariffs can result in significant price hikes. For example, in March 2018, under Section 232, a 25% tariff was imposed on steel imports, leading to a big hike in their cost and squeezing the profitability of every company reliant on these inputs. Distributors, especially those without the leverage to pass these costs onto customers, often bear the brunt of these price changes.

Distributors and the challenge of demand forecasting

Tariffs don’t just raise costs — they introduce a high degree of unpredictability. Distributors rely on precise demand forecasting and inventory management to ensure they have the right products in stock when customers need them. When tariffs are imposed or modified, sudden price changes can disrupt planned orders, making it difficult to manage inventory efficiently.

Oftentimes, manufacturers require distributors to provide monthly purchasing forecasts so they can plan production accordingly. In some cases, these are contractual obligations! To get this forecast accurate, you must account for seasonality and manufacturer lead times.

Adding tariffs into the mix complicates matters further. The question “How much should we buy?” becomes, “How much should we buy from each supplier — and when?”

Distributors may have long-standing processes in place to address some of these obstacles, but more often than not, “the way we’ve always done it” is not agile enough to optimally address these problems. As a result, there is often a need to rethink processes and adopt more flexible forecasting and planning tools that can quickly adapt to changes in cost, availability, and delivery schedules.

Strategic adaptations

Theoretically, higher tariffs should boost demand for domestic products, as import prices become less competitive. However, for distributors specializing in building and home improvement materials, shifting to domestic suppliers is not always feasible. Domestic production capacities for certain materials, such as specialty wood products or advanced insulation materials, may be limited, and establishing new supply chains can be both costly and time-consuming.

In many cases, domestic producers also raise their prices in response to tariffs on imports, knowing that distributors have fewer alternatives. This erodes the intended advantage and creates a scenario where distributors end up paying more, whether they source domestically or continue to import.

Many firms have shifted to a more diversified supplier base, seeking partners in regions not affected by tariffs. Others have embraced technology to improve forecasting, optimize inventory, and increase their pricing agility to react more swiftly to changes in cost. Yet, these adaptations come with their costs, requiring investments in new systems and additional time to restructure supplier relationships.

Conclusion: Do tariffs support or hinder growth?

For many U.S. distributors in the building and home improvement sectors, the overall impact of tariffs is more negative than positive. While some distributors have managed to pass on costs to end customers or renegotiate contracts with suppliers, others have been forced to absorb higher expenses, cut into already thin profit margins, or delay expansion plans.

The imposition of tariffs has also led to greater volatility in pricing and supply, complicating logistics and increasing the costs of maintaining adequate inventory levels.

Ultimately, the firms that have fared best are those that have taken proactive steps to build flexibility and resilience into their supply chains, viewing tariffs as just one of many factors in a constantly shifting economic landscape.

Whether these measures improve the lot of U.S. distributors or exacerbate their challenges largely depends on each firm’s ability to adapt. In a globalized economy with complex and interconnected supply chains, a single change in policy can have far-reaching consequences. For now, the jury is still out on whether tariffs will truly benefit the industry in the long run.

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The hidden costs of a low fill rate (and how to fix it)

Half-empty shelves, unfulfilled orders, and disappointed customers. These are the hallmarks of a business struggling with a low fill rate.

Fill rate is a critical metric that directly impacts your bottom line and customer satisfaction. Yet, many distributors underestimate how much a subpar fill rate is costing them until the damage is already done.

In this article, we’ll dive into the world of fill rates and uncover:

What is fill rate and why it matters
The different types of fill rates you should be tracking
How to calculate your fill rate
The hidden costs of a low fill rate
Practical strategies to boost your fill rate

By the end of this article, you’ll have a clear understanding of how fill rate impacts your business and actionable steps to improve it.

What is fill rate?

Fill rate is a key metric in supply chain management that measures the percentage of customer orders fulfilled from available stock. It’s calculated by dividing the number of an item’s sales order lines shipped by the total number of lines ordered (businesses might choose to use units, COGS or other metrics instead of lines, but the idea is the same). For example, if a distributor receives 5 orders for an item and has the stock to completely fulfill 4 of those orders, they have an 80%
fill rate.

This metric provides valuable insights into the efficiency of a company’s inventory management and order fulfillment processes. A high fill rate indicates that a large portion of customer demands are being met, maximizing customer satisfaction and revenue potential. Conversely, a low fill rate suggests missed opportunities and potential customer dissatisfaction. Low fill rates also come with lots of related costs, including split shipments, canceled orders, and customer service overhead.

By monitoring and optimizing fill rate, businesses can identify areas for improvement in their supply chain and maximize their operational efficiency.

Types of fill rates

There are various types of fill rates, each measuring different aspects of order fulfillment.
These metrics provide insights into the efficiency and effectiveness of different stages in the supply chain process.

Order Fill Rates

This metric measures the percentage of customer orders where all units on all lines are fulfilled completely on the first shipment. It’s calculated by dividing the number of complete orders shipped by the total number of orders received. Order fill rate provides a high-level picture of overall order fulfillment efficiency. This is also called the “perfect order” rate.

Line Fill Rate

Line fill rate is the percentage of sales order lines filled completely in the first shipment. This metric helps identify specific products or categories that may be causing fulfillment issues. A low line fill rate might signal inventory shortages or picking errors for certain items. By tracking line fill rate, businesses can pinpoint problem areas in their inventory or fulfillment processes.

Unit Fill Rate

Unit fill rate assesses the number of cases shipped compared to the number of cases ordered. It’s particularly relevant for businesses dealing with bulk orders or case-packed items. This metric helps evaluate the accuracy of case-level inventory management and order fulfillment processes.

COGS Fill Rate

COGS fill rate assesses the number of sales order dollars (at cost) shipped compared to COGS ordered.

Warehouse VS Network-Wide Fill Rates

For businesses with multiple warehouses, it’s critical to ensure that you track both the network fill rate (i.e. the percentage of demand available at the time of order, including stock at all facilities) as well as each facility fill rate (i.e. the percentage of local demand that is available at the time of order at your nearest shipping origin). Many businesses only track their network fill rate, causing them to significantly under-count the financial and customer service impact of failing to ship material from the closest location to your customer.

Measuring Fill Rates By Vendor

Grouping items by their preferred vendor allows you to measure your own fill rate at the vendor level. This can businesses to assess vendor reliability and spot performance trends that are the result of vendor performance. While vendors are only partially responsible for your outbound fill rates, tracking this can help you make informed decisions about supplier relationships and inventory sourcing strategies. A consistently low vendor fill rate might signal the need to diversify suppliers or work closely with existing ones to improve performance.

Calculating fill rate

Calculating fill rate involves a straightforward formula that measures the percentage of demand fulfilled from available inventory.

Fill Rate Formula

The fill rate formula is:

Fill Rate = (Total Units Shipped / Total Units Ordered) x 100

This formula calculates the percentage of units successfully shipped compared to the total units ordered. A higher fill rate indicates better inventory management and customer satisfaction.

Example Calculation

Consider an automotive parts distributor receiving an order for 500 brake pads:

Total units ordered: 500
Units shipped: 475
Units not fulfilled: 25

Fill Rate = (475 / 500) x 100 = 95%

In this example, the distributor’s fill rate is 95%, which suggests effective inventory management and order fulfillment processes. However, there’s still room for improvement to achieve a 100% fill rate and maximize customer satisfaction.

What Should The Fill Rate Be?

A common question distributors ask is “What should my fill rate be?” The truth is, there’s no universal answer. Some businesses have profit-maximizing fill rates in the 80% range, while others exceed 99%. Several factors influence the ideal fill rate for a business.

The key is to avoid setting a single target fill rate for every item. Instead, distributors should consider certain factors when determining appropriate fill rate targets for each product they sell.

Profitability is a key factor. Prioritizing higher fill rates for items with higher gross margins ensures that companies maintain consistent revenue streams from their most valuable products.

Holding costs are also important. Items that are less expensive to store, such as small, compact goods, can justify higher fill rates as they take up less warehouse space.

Sales volume and variance should be considered as well. Aiming for higher fill rates on
high-volume items is essential, but it’s equally important to consider sales variance. Items with consistent, predictable demand are easier to manage and can achieve higher fill rates efficiently.

Lead time is another factor that affects fill rate targets. Items with longer or more variable lead times naturally require higher safety stock levels to compensate for potential delays. This can justify slightly lower fill rate targets for these items.

Finally, some items, regardless of their profitability or volume, are strategically important to a business. These products might be essential components of larger orders or represent the company’s own brand. Ensuring high fill rates for these strategic products is crucial for maintaining customer satisfaction and brand reputation.

Importance Of Fill Rate

Fill rate is a key performance indicator that impacts various aspects of your business.

Impact on customer satisfaction

This is a metric that directly affects customer satisfaction by ensuring timely order fulfillment. Companies with consistently high fill rates often see:

Fewer customer complaints
Increased repeat purchases
Improved customer retention rates
More word-of-mouth referrals

Operational insights

There are plenty of good reasons to keep track of fill rates, especially because it can facilitate smoother operations. Monitoring fill rates helps businesses:

Identify supply chain bottlenecks
Optimize inventory levels
Improve forecasting accuracy
Streamline order processing
Enhance warehouse management practices

Furthermore, a high fill rate can significantly impact your bottom line. It can lead to:

Increased revenue through improved customer satisfaction
Reduced costs associated with stockouts and backorders
Lower inventory holding costs
Improved cash flow management
Enhanced profitability through efficient resource allocation

Strategies to improve fill rate

From unexpected demand spikes to supplier delays, a myriad of factors can wreak havoc on your fill rate, leading to frustrated customers and lost revenue. Improving your fill rate requires a multifaceted approach that addresses various aspects of your business operations. Here are key strategies to enhance your fill rate performance:

Optimizing Inventory Levels

Businesses implement just-in-time (JIT) inventory systems to reduce excess stock while ensuring product availability. Advanced inventory tracking software helps monitor stock levels in real-time, triggering automatic reorders when supplies run low.

Implementing ABC analysis categorizes products based on demand, allowing for tailored inventory strategies for each category. Regular cycle counts and periodic audits ensure accuracy in inventory records, preventing stockouts and overstocking.

Enhancing Supplier Relationships

Establishing clear communication channels with suppliers facilitates better coordination and faster issue resolution. Implementing vendor-managed inventory (VMI) programs allows suppliers to monitor and replenish stock levels directly.

Performance-based contracts incentivize suppliers to maintain high service levels. Collaborative forecasting involves sharing demand predictions with suppliers, enabling them to adjust production schedules accordingly. Regular supplier performance reviews help identify areas for improvement and foster long-term partnerships.

Streamlining Order Fulfillment

Implementing warehouse management systems (WMS) optimizes picking, packing, and shipping operations. Cross-docking techniques reduce handling time and storage requirements for fast-moving items. Automated sorting systems and conveyor belts speed up order processing.

Batch picking methods increase efficiency for multi-line orders. Implementing pick-to-light or voice-picking technologies reduces errors and improves accuracy. Regular analysis of fulfillment metrics helps identify bottlenecks and opportunities for process improvements, ensuring timely and accurate order completion.

Fill Rate VS In-Stock Rate

Fill rate is a crucial metric, but it’s not the only one to consider when assessing inventory performance from a customer service perspective. Another important metric is the in-stock rate. Both measure different aspects of your ability to meet customer demand, and understanding their nuances can help you make more informed decisions about inventory management.

The primary difference between an in-stock rate and a fill rate is that in-stock rates measure expected demand, while fill rates focus on actual customer orders. In-stock rates are typically based on sales forecasts, meaning that if an item hasn’t sold recently and has a zero forecast, having zero units on hand won’t affect your in-stock rate.

However, this doesn’t mean a customer won’t buy it. This highlights a key advantage of fill rate as a customer service metric. Your customer doesn’t care about your forecast. If they want an item, they expect you to have it, regardless of your predictions. Consequently, a fill rate accurately reflects customer satisfaction, as it considers every instance where you couldn’t fulfill an order.

The Advantages of In-Stock Rate

On the other hand, in-stock rate has its own advantages. It acknowledges that even if no one buys a product, being out of stock still represents an inventory failure with direct consequences for your top line. For example, if you have a sales forecast of 30 units but are out of stock, your in-stock rate will reflect this failure, even though your fill rate won’t be affected because no sales
were attempted.

This difference becomes even more critical when dealing with products or businesses where customers are highly sensitive to stock status. If a customer won’t even place an order if an item is out of stock, both your backorder rate and fill rate will remain unaffected, providing a false sense of security. In such situations, the in-stock rate provides a more accurate picture of potential
lost sales.

Given these advantages and disadvantages, tracking both fill rate and in-stock rate is essential for a comprehensive understanding of your inventory performance. They offer different perspectives on customer service and inventory efficiency, enabling you to address potential shortcomings in your supply chain.

Conclusion

Fill rate is a critical indicator of your business’s health and efficiency.

Fill rate is about meeting customer expectations, optimizing inventory management, and streamlining your entire supply chain.

But word to the wise: improving your fill rate isn’t a one-time fix. It requires a multifaceted approach, involving strategies like optimizing inventory levels, enhancing supplier relationships, and streamlining order fulfillment processes.

So, take a close look at your fill rate. Analyze it, understand its impact, and implement strategies to improve it. Your customers — and your bottom line — will thank you.

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Maximizing efficiency through PO optimization

Featuring Josh Bartel and Drew Roth

Guest-at-a-glance

Josh Bartel

CEO

Hydrian Inventory Optimization

Josh graduated from Stanford and previously co-founded Sanitopia.

Drew Roth

Director of Product Engineering

Hydrian Inventory Optimization

Experienced software engineer focused on inventory optimization.

Episode summary

In this episode, Josh Bartel and Drew Roth discuss PO (Purchase Order) optimization, a crucial component of inventory optimization services. They explain how PO optimization focuses on improving the “how” of placing purchase orders, aiming to minimize inventory while maintaining high customer service levels and reducing labor costs.

Josh and Drew highlight common issues in traditional PO processes, such as long closure times and multiple receipts per order. They introduce key principles of PO optimization, including building orders unique to each fulfillment facility and matching quantities to vendor stock levels. The duo emphasizes the benefits of this approach, including reduced lead times, fewer errors, and labor savings through improved unit of measure rounding.

The conversation also covers the advantages for suppliers, the data requirements for implementing PO optimization, and the significant improvements seen in clients’ operations. Josh and Drew share examples of how this process can lead to more efficient truck loading and drastically increase the percentage of order value arriving in the first receipt. They conclude by noting that PO optimization is part of Hydrian’s broader service offering, aimed at enhancing coordination between clients and their vendors.

Key insights

Understanding PO Optimization

Understanding PO optimization means making sure we use less inventory and spend less on labor while still making customers happy. It’s all about getting better at how we order things from our suppliers.

Factors in Purchase Order Creation

Factors influencing PO creation include tailoring each order to suit specific ordering and fulfilling facility lanes. By customizing POs in this manner, companies can optimize logistics, minimize errors, and ensure smoother operations throughout the supply chain. Additionally, verifying that ordered quantities align with vendor stock levels is crucial to prevent fulfillment complications, such as backorders or delays.

Vendor Benefits and Collaboration

Optimized PO has advantages for both clients and suppliers. By enhancing the efficiency of order fulfillment, vendors may experience significant cost savings and operational streamlining. Importantly, these benefits can be achieved without disruption to existing workflows, fostering a positive collaborative environment between parties. Overall, optimizing purchase orders fosters mutual gains and strengthens relationships within the supply chain ecosystem.

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Product sourcing challenges in the automotive industry

Featuring Josh Bartel and Drew Roth

Guest-at-a-glance

Josh Bartel

CEO

Hydrian Inventory Optimization

Josh graduated from Stanford and previously co-founded Sanitopia.

Drew Roth

Director of Product Engineering

Hydrian Inventory Optimization

Experienced software engineer focused on inventory optimization.

Episode summary

In this video, Josh Bartel and Drew Roth discuss product sourcing in the automotive industry. Josh and Drew explore the challenges faced by distributors, wholesalers, and online retailers when dealing with multiple sources for each product.

The conversation covers key considerations for selecting the most suitable source, including drop-shipping capabilities, cost and margin analysis, and lead times. They emphasize the importance of balancing profitability with maintaining stock availability to retain customer trust. Josh and Drew also discuss the concept of “gap buying” — making smaller domestic purchases to bridge inventory gaps while waiting for larger, more cost-effective overseas shipments.

The duo highlights the significance of understanding stock-out costs and maintaining good relationships with multiple vendors. They stress the value of diversifying supplier relationships, even with competitors or smaller partners, to ensure business continuity and flexibility in sourcing. Josh and Drew conclude by addressing the complexities of dealing with “gray market” products and the benefits of having access to vendor inventory data for making informed sourcing decisions.

Key insights

Understanding Product Sourcing Dynamics

The podcast delves into the complexities of product sourcing, particularly within the automotive and automotive aftermarket industries. It highlights the challenge of selecting the best source for each product, considering factors beyond just profitability.

Considerations for Selecting Sources

Drew outlines three primary considerations for selecting sources: drop shipping feasibility, cost analysis including margins, and lead time assessment, with a focus on domestic suppliers’ quicker turnarounds compared to potentially cheaper but slower overseas options.

Importance of Vendor Relationships

They emphasize the importance of maintaining good relationships with vendors, even with secondary or smaller-scale suppliers. These relationships can prove crucial during stock shortages or if primary suppliers become unavailable.

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AutoZone’s supply chain expansion: A case study

Featuring Josh Bartel and Drew Roth

Guest-at-a-glance

Josh Bartel

CEO

Hydrian Inventory Optimization

Josh graduated from Stanford and previously co-founded Sanitopia.

Drew Roth

Director of Product Engineering

Hydrian Inventory Optimization

Experienced software engineer focused on inventory optimization.

Episode summary

Drew Roth sits down with Josh Bartel to discuss the challenges and opportunities of supply chain expansion. Using AutoZone’s ambitious plan to build 200 new distribution centers as a case study, Josh explores the potential benefits and downsides of multi-echelon networks.

While expanding a company’s geographic footprint can lead to faster delivery and increased sales, Josh cautions listeners about hidden costs. Internal freight costs, outbound shipping expenses, and the complexity of managing inventory across multiple locations can cut into any potential gains.

Josh emphasizes the importance of focusing on local fill rates as a key performance indicator. He advises companies to prioritize optimizing inventory at existing facilities before expanding their network. This episode offers practical advice for any business leader looking to improve their supply chain strategy.

Key insights

Don’t confuse network fill rate with success

While expanding your distribution center network might look good on paper — increasing your overall in-stock rate — it can mask inefficiencies. Josh cautions against focusing solely on network-wide fill rates. He stresses the importance of local fill rates, meaning the percentage of orders fulfilled from the DC closest to the customer. A high network fill rate alongside a low local fill rate often indicates an imbalance requiring attention.

Hidden costs can undermine expansion benefits

Before embarking on an ambitious DC expansion project, businesses need to fully grasp the potential hidden costs. Josh highlights internal freight expenses as a common culprit. Moving inventory between DCs to fulfill orders adds up quickly and often goes unnoticed as it’s grouped with general transportation costs. Additionally, increased inventory carrying costs and the added complexity of managing a larger network can significantly impact the bottom line.

Prioritize inventory optimization before expansion

Josh advises companies to exhaust inventory optimization strategies at existing facilities before investing in new distribution centers. Often, companies can achieve significant improvements in delivery speed and customer satisfaction by simply improving inventory management practices at their current locations. This might involve implementing demand forecasting tools, optimizing safety stock levels, and streamlining warehouse operations for greater efficiency.

Test new markets with 3PLs before full expansion

For companies considering expanding their geographic reach, Josh recommends a cautious approach. Instead of immediately investing in new facilities, he suggests partnering with a third-party logistics provider (3PL). This allows companies to test demand and gauge the market’s response to faster delivery times in a new region without the significant upfront costs associated with building or leasing a DC.

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Optimize your offering: Item level net profitability

Featuring Josh Bartel and Drew Roth

Guest-at-a-glance

Josh Bartel

CEO

Hydrian Inventory Optimization

Josh graduated from Stanford and previously co-founded Sanitopia.

Drew Roth

Director of Product Engineering

Hydrian Inventory Optimization

Experienced software engineer focused on inventory optimization.

Episode summary

Josh Bartel and Drew Roth tackle the crucial question: which items should distributors and wholesalers carry? They explore the pros and cons of common inventory strategies including stocking, just-in-time ordering, dropshipping, and removing items from your catalog entirely.

Drew emphasizes the need to analyze factors beyond gross margin when determining true item profitability. Minimum order quantities, vendor performance, shipping costs, and even customer order composition can significantly impact an item’s financial viability.

Discover how one client achieved impressive results by embracing a “SKU diet.” By strategically reducing their product catalog by 40% based on Hydrian’s data-driven analysis, they unlocked revenue growth and increased overall profitability. This episode offers valuable insights and advice for anyone interested in optimizing their inventory.

Episode summary

Key insights

The "SKU diet": Less can be more

Distributors and wholesalers often feel pressure to offer vast product catalogs. However, carrying too many SKUs can negatively impact profitability and customer experience. Josh and Drew advocate for a “SKU diet” – strategically reducing your catalog by eliminating underperforming or unprofitable items. This simplifies operations, reduces inventory costs, and can even lead to sales growth by improving customer focus.

True profitability: Beyond gross margin

Don’t be seduced by a product’s seemingly attractive gross profit margin. Drew emphasizes the importance of considering all costs associated with an item, including inbound freight, storage, outbound shipping, and potential obsolescence. By calculating the true net profitability, businesses can make more informed stocking decisions.

Vendor performance: A key factor in dropshipping

Dropshipping can be an attractive alternative to stocking inventory, but vendor reliability is paramount. Drew and Josh advise carefully evaluating potential dropship partners on factors like shipping speed, packaging quality, and inventory accuracy. Inconsistent vendor performance can damage customer relationships and negatively impact your brand.

Data-driven decisions: The key to inventory optimization

Making sound inventory decisions requires more than intuition. Josh highlights the power of data analysis in identifying underperforming SKUs, optimizing inventory levels, and ultimately improving profitability. By leveraging tools and insights, businesses can move away from gut feelings and towards objective, data-supported inventory strategies.

Want to learn more? Check out this blog post.

Master item-level profitability and maximize your product portfolio's potential

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Navigating inventory management challenges for SMEs

Running a small to medium-sized enterprise (SME) is no easy feat. You’re constantly juggling priorities and resources, all while trying to stay ahead of the competition. One area that’s become increasingly complex is supply chain management, particularly inventory management.

While powerful inventory software tools are available, they often come with a learning curve and require specialized skills. This leaves SMEs with a tough decision: invest in training, hire new talent, or outsource?

This article explores the challenges SMEs face and offers potential solutions for navigating the evolving landscape of inventory management.

The rise of inventory software tools

Inventory management software has come a long way from basic spreadsheets. Today’s solutions offer a range of advanced features designed to streamline and optimize inventory control:

Real-time tracking: Provides a constant view of inventory levels, allowing businesses to track stock movements, identify low-stock items, and monitor incoming shipments. This real-time visibility helps prevent stockouts and ensures timely replenishment.
Predictive analytics: Leverages historical data, market trends, and other variables to forecast future demand. This empowers businesses to anticipate customer needs, optimize inventory levels, and minimize the risks of overstocking or understocking.
Automated reordering: Simplifies the replenishment process by automatically generating purchase orders when inventory levels fall below predetermined thresholds. This automation saves time, reduces manual errors, and ensures a consistent flow of inventory.

The skill set dilemma

The availability of advanced features is undeniably beneficial but presents a new set of challenges for SMEs. Implementing and using these sophisticated tools requires a skilled workforce. This leads to a critical decision-making point for SMEs: should they train their current staff, hire new talent, or outsource specific functions?

Training existing staff

Training existing employees is often the most cost-effective option, but requires significant time investment and may impact productivity. SMEs must consider if their team has the bandwidth to learn the new software while managing their current responsibilities. Can existing workflows be adapted to incorporate new systems without overburdening employees?

Hiring new talent

Recruiting specialized talent for complex inventory management presents significant hurdles. Finding individuals with expertise in data analysis, forecasting, and supply chain management is challenging and costly. SMEs must weigh the financial implications of expanding their workforce against the potential benefits of a dedicated inventory management team.

The case for outsourcing

Given the challenges of training and skill development, outsourcing certain supply chain functions can be an attractive option for SMEs. By leveraging the expertise of third-party providers, companies can mitigate the time and cost associated with implementing and maintaining complex inventory systems. Outsourcing can also provide access to cutting-edge technologies and best practices that may be beyond the reach of smaller firms.

However, outsourcing is not without its challenges. Companies must carefully select partners who understand their specific needs and can deliver consistent, high-quality service. Additionally, outsourcing can lead to a loss of control over certain aspects of the supply chain, which can be risky if not managed properly.

Conclusion

Successfully navigating the complexities of today’s supply chain environment demands a strategic and adaptable approach, especially for SMEs facing resource constraints. While advanced inventory software tools offer significant potential benefits, implementing them effectively requires careful consideration.

Balancing the need for specialized skills with available resources is crucial for optimizing supply chain operations and maintaining a competitive edge in the market. By carefully evaluating their options — whether investing in training for existing staff, hiring new talent, or outsourcing specific functions — SMEs can leverage the right tools and expertise to navigate inventory management effectively.

Ultimately, the chosen approach should align with the specific needs, resources, and long-term goals of each SME to ensure efficient, cost-effective, and adaptable supply chain management.

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AutoZone’s push for more distribution centers: when does expanding your DC network have diminishing returns?

AutoZone has recently made headlines with its aggressive construction of new distribution centers (DCs) referred to as “mega hubs.” These mega hubs are designed to replenish nearby stores more efficiently and enhance inventory availability, and the retailer intends to build 200 of them over the next few years. While expanding a distribution network offers numerous benefits, it also raises the question: When does this expansion start to yield diminishing returns?

Benefits of expanding distribution centers

Improved delivery speed: By having more DCs closer to retail locations and their end users, AutoZone can reduce delivery times, leading to faster replenishment and order fulfillment, with higher customer satisfaction.
Increased inventory availability: Single, large locations can afford to stock a longer “tail” of lower-volume items, allowing each AutoZone store to offer a broader selection of products.
Sales growth: As delivery speed and availability improve in new geographic markets, there is almost always a corresponding increase in sales.

Downsides of expansion

Operational costs: As the number of DCs increase, so do the operational costs, particularly internal freight costs as material is shuttled between hub locations and retail stores. Each new DC also requires investment in infrastructure, staffing, and various carrying costs. All of these costs can be very hard to quantify.
Inventory management complexity: Managing inventory across a larger network of DCs becomes increasingly complex. For each location, for example, supply chain planners must decide whether or not each supplier should replenish directly into a facility, or use a hub- and- spoke system. This complexity can lead to inefficiencies and higher costs.
Market saturation: There is a point at which adding more DCs does not significantly improve market coverage. Beyond this point, the additional benefits of new DCs are minimal.
Complexity in demand routing: If a customer places a multi-line order and one item is out of stock at the nearest shipping location, the order may need to be split and shipped from different locations. This increases outbound transit costs and affects the customer experience, as parts of the order may arrive on different days.

Global vs local fill rates

Many companies focus on their network-wide or “global” fill rate. For example, if a customer in California orders a product that is out of stock at a nearby DC but has availability in a DC across the country, you might think that you have successfully filled that order from stock. However, the customer experience (having to wait several days for a separate shipment) and the financial implications (an added shipment, with a high transit time or zone count) likely mean that the order didn’t add much to your bottomline.

Moreover, some sales channels, such as Amazon, won’t even display a product to customers (or will significantly downgrade its ranking) if it isn’t available at a location that can deliver within a target timeframe.

Keeping a focus on local in-stock rates is critical — and as those rates rise, network-wide in-stock rates will naturally increase as well.

Hub-and-spoke vs direct replenishment

With multiple facilities, you now have the option to replenish one location from another, larger location, rather than the supplier. Such a hub-and-spoke relationship can create substantial savings, especially for suppliers with high order minimums or incentive requirements.

However, internal freight and labor costs will increase, and the marginal change in these costs due to hub-and-spoke replenishment can be tough to isolate. Furthermore, high order or free freight minimums can make it impractical to use this model for some suppliers/facilities.

Ideally, you constantly monitor these factors and update your direct buy vs hub-and-spoke settings for each supplier in each facility.

Testing the waters

Before committing to a new facility, it may make more sense to use a 3PL or other non-owned infrastructure to test the impact of stocking products in new locations. If the program is successful, a more substantial investment (in inventory, facilities, staff, etc.) can be scaled up over time.

Conclusion

A strategic, data-driven approach is essential for distributors looking to optimize their distribution networks. Hydrian has several tools to assist in network planning, transition into new facilities, and ongoing operation and replenishment.

Want to learn more? Check out the complete video episode.

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Library

Demand Planning

Distribution

E-commerce

Inventory Management

Stock Optimization

Supply Chain

Video

Stockout lost sales: The most important metric you aren’t tracking

Key Takeaways:

The real cost of stockouts

Fill rates: A misleading metric

Quantifying stockout cost

Step 1: Track daily inventory positions

Step 2: Determine “Spill Rate”

Step 3: Apply the spill rate to total sales

Step 4: Add in other costs

ROI-driven inventory decisions

Take action: What you should do next

How Hydrian can help

Master item-level profitability and maximiz﻿e your product portfolio's potential

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Library

Demand Planning

Distribution

E-commerce

Inventory Management

Stock Optimization

Supply Chain

Video

What causes stockouts and backorders? (And how to avoid them)

1. Customers purchased more than expected

The demand forecasting dilemma

Distinguishing between avoidable and unavoidable demand spikes

Avoidable demand problems

Unavoidable demand problems

The gray area

Strategies for better demand forecasting and stockout prevention

2. Vendors delivered later than expected

The complexity of supplier lead times

Distinguishing between avoidable and unavoidable supplier delays

Avoidable supplier delays

Unavoidable supplier delays

The gray area

Strategies for managing supplier lead times and preventing stockouts

3. Inventory controls were misconfigured

The complexity of inventory control policies

Distinguishing between avoidable and unavoidable inventory control issues

Avoidable inventory control issues

Unavoidable inventory control issues

Strategies for optimizing inventory controls and preventing stockouts

Final Thoughts

Master item-level profitability and maximiz﻿e your product portfolio's potential

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Want to see how your inventory management stacks up?

Library

Demand Planning

Distribution

E-commerce

Inventory Management

Stock Optimization

Supply Chain

Video

Impact of import tariffs on U.S. distributors of building and home improvement materials

Why tariffs

Tariffs and price hikes

Distributors and the challenge of demand forecasting

Strategic adaptations

Conclusion: Do tariffs support or hinder growth?

Master item-level profitability and maximize your product portfolio's potential

Master item-level profitability and maximize your product portfolio's potential

COGS Fill Rate