Stockout

By Joannes Vermorel, February 2020

A stockout, or Out-Of-Stock (OOS) event, happens when the inventory is exhausted. Stockouts can happen at any stage of the supply chain, but the most visible ones are the ones at the store level, also referred to as On Shelf Availability (OSA) issues. Stockouts are usually treated as problems to be fixed, and many inventory methods, such as safety stocks, have been devised to control the frequency associated with those events. Stockouts are the opposite of overstocks where too much inventory is retained.

missing products in warehouse



The impact of stockouts

While modern supply chains strive to minimize the amount of stocks involved, most operate with stocks at multiple levels such as plants, warehouses, stores… When stocks are expected to be present, a stockout usually introduces a detrimental disruption of some kind in the supply chain. However, the degree of impact varies greatly from one situation to another:

  • In a fashion retail store, if a product is missing, given that multiple alternatives remain available, and assuming that the alternatives have the proper size available, a certain fraction of customers may still take another product as a substitute.
  • In aviation maintenance, if a NO-GO part is missing, it can cause an Aircraft On Ground (AOG) incident, which delays the maintenance operations, and disrupts the airline’s entire flight schedule, causing a cascade of delays for the passengers.
  • In the chemical industry, the stockout of a compound can cause a plant to undergo an emergency production interruption, damaging equipment in the process. Resuming production afterward may take several weeks of intensive repairs.
  • In the pharmaceutical industry, the stockout of a drug treating life-threatening conditions that do not have known alternative treatments can lead to the loss of lives, and also in the loss of trust from healthcare institutions, who might be less inclined to rely on this drug in the future.

The financial impact of a stockout is typically twofold: first, the immediate opportunity loss associated with fewer transactions, second, the delayed market response as a form of aversion for unreliable providers. In most situations, the later impact is dwarfing the former. However, quantifying the financial impact associated with intangible phenomenons like “loss of trust” is difficult.

Methods to reduce stockouts

There are several popular approaches to reduce stockouts associated with the SKU perspective, however, each approach tends to also have drawbacks of its own.

MethodProsCons
Increase stocksMost direct way to reduce stockoutsIncreased inventory costs
Reduce lead times, and lead time variabilityNo upfront investment, better overall agilityIncreased transportation costs, more expensive (local) suppliers
Improve demand forecasting accuracyRelatively low-touch “software” methodRarely works in practice, tech undertakings are risky
Improve inventory accuracyBenefits extend beyond reducing stockoutsNot always applicable; too expensive when applicable
Increase price when getting close to stockoutIncrease overall ROI on inventoryMay confuse or antagonize recurrent customers

However, the SKU perspective is relatively narrow, and usually does not properly reflect the end-to-end supply chain perspective. Thus, while the available options to reduce the stockouts associated to a given SKU are limited, the options available to mitigate the impact of a stockout on any given SKU are much broader. These approaches are beyond the scope of this article.

Limits of the stockout perspective

The stockout perspective emphasizes that the exhaustion of the stock accurately reflects the perceived quality of service from the client perspective, with regards to the inventory. However, this perspective is frequently overly simplistic, and does not reflect the subtleties associated to most supply chains:

  • In fashion retail, a piece of clothing can be stained or slightly damaged (a loose thread for instance), and while it is still counted as one unit of stock, clients examine the piece and put it back on the shelf, thus misleading the inventory management system into “believing” that there is a unit left to be sold.
  • In food retail, products close to their expiration date are an inconvenience to customers, as well as an incentive to take another product with a later expiration date. This behavior can also lead to an incorrect electronic representation of the state of the stock.
  • In DIY retail, if the client needs a certain quantity of floor tiles, the client may be very unwilling to purchase anything if the stock in the store is not sufficient to address their entire need, as the client is uncertain that they will find the remainder elsewhere while ensuring a perfect color match.
  • In light manufacturing, the stockout of a given component may not have any overall impact on the total manufacturing time if the component is not on the critical section of the production flow, that is, if the component can be replenished faster than the manufacturing process of other components that are also needed.
  • In the automotive aftermarket, many repairs can be performed using one part among multiple mechanically compatible alternatives, typically provided by competing OEMs. Thus, the stockout status of any given part does not give any direct indication whether the repair of any vehicle is actually going to be delayed.
  • In aviation maintenance, repairable parts (rotables) frequently come with limits expressed in flight hours and flight cycles. While a serviceable part might be available, if its remaining flight hours are too low, this part will force the aircraft to undergo an extra maintenance operation ahead of its original schedule.

Thus, stockouts should be considered as the first step to understand the inventory’s quality of service, but depending on the nature of the supply chain, the quality of service should be refined with further indicators that more closely reflect the real-world frictions associated with servicing inventory.

Desirable stockouts

While stockouts are usually considered undesirable, they can be nevertheless an essential mechanism for supply chains in order to achieve the desirable final state of the inventory, which minimizes waste. For example:

  • When dealing with fresh food, ideally, the inventory should be exactly exhausted at the very end of the day, as goods are highly perishable, and will be wasted unless consumed on time.
  • Fashion brands are driven by novelty, which implies that the products from the former collection must be liquidated at the end of the season in order to make space for the products from the new collection.
  • Consumer electronic brands usually try to bring their stock levels near exhaustion before launching the next-generation phase of products when the market is expected, post announcement, to swiftly shift to the next-generation products.

Articulating the end-of-life of a product, aiming for a controlled journey to stockout, with the methods - listed above - intended to prevent stockouts is a difficult exercise.

Lokad’s take

The stockout perspective is primarily of historical interest. Modern approaches focus on supply chain decisions and their economic outcomes. The difference might seem small, but in practice decisions optimized against economic drivers end up vastly superior, because they are more closely aligned with the nuances of the quality of service as perceived by the customer.