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:
Understanding these causes and differentiating between avoidable and unavoidable stockouts is critical for minimizing disruptions. Here’s how to tackle each one.
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.
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.
Some demand spikes can be anticipated with proper planning, while others are truly unpredictable. Understanding this distinction is crucial for developing effective prevention strategies.
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.
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.
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.
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.
Even with perfect demand forecasting, businesses can still face stockouts and backorders if suppliers don’t deliver on time.
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:
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.
As with demand forecasting issues, some supplier delays are preventable, while others are truly beyond anyone’s control.
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.
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.
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.
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.
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.
Inventory control policies are not one-size-fits-all. They need to be tailored to each product’s unique characteristics, including:
When these policies are not aligned with current business realities, they can lead to excess inventory or stockouts.
As with other causes of stockouts, some inventory control issues are more preventable than others.
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.
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.
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.
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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