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

Written by Josh Bartel

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:

  1. Customers purchased more than expected (demand forecast was too low)
  2. Vendors took longer to deliver than expected (lead time forecast was too low)
  3. 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

  1. 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.
  2. 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).
  3. 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

  1. Supplier performance scorecard: Create a scorecard that tracks supplier delivery times against expectations. Share this with suppliers and collaboratively review exceptions.
  2. 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.
  3. 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

  1. 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.
  1. 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.
  2. 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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