In the world of online retailing, stock-out rate is a critical KPI that tracks how often a product is unavailable to customers due to out-of-stock conditions. This KPI is essential for managing inventory and ensuring product availability.
By understanding out-of-stocks, companies can reduce missed sales opportunities, improve customer satisfaction, and streamline inventory turns.
Key Takeaways
- Definition: Stock-Out Rate (SOR) is a key performance indicator that measures the frequency with which products are unavailable for purchase because they are out of stock.
- Calculation: SOR is calculated by dividing the number of stock-out events by the total demand and multiplying the result by 100 to obtain a percentage.
- Strategic Importance: Monitoring SOR helps companies manage inventory efficiently, minimize lost sales opportunities, improve customer satisfaction, and refine demand forecasting.
- Optimization Strategies: Reducing SOR can be achieved by implementing real-time inventory tracking, refining demand forecasting, establishing safety stock levels, maintaining strong supplier relationships, and conducting regular inventory audits.
- Limitations: SOR alone does not reflect overall inventory health, can be affected by external factors, does not differentiate between high and low demand products, does not provide insight into replenishment time, and may not directly measure the impact on customer satisfaction.
- Complementary metrics: SOR should be evaluated alongside metrics such as inventory turns, days on hand, and fill rates for a comprehensive view of ecommerce performance.
Why does Stock-Out Rate matter for your business?
The implications of the Stock-Out Rate are manifold for ecommerce ventures:
- Lost Sales Opportunities: A high Stock-Out Rate translates to frequent instances where customers cannot purchase their desired products, leading to lost sales and revenue.
- Customer Satisfaction: Repeated stock-outs can cause frustration among customers, leading to diminished trust and loyalty towards the brand.
- Reputation Management: Frequent stock-outs can tarnish an ecommerce store’s reputation, giving the impression of poor inventory management.
- Operational Efficiency: Monitoring Stock-Out Rate aids in refining inventory management processes, ensuring that capital isn’t tied up in excess stock, while still preventing stock-outs.
- Demand Forecasting: A consistent Stock-Out Rate can serve as a cue for underestimating demand, indicating a need to adjust forecasting models.
How to calculate Stock-Out Rate (SOR)?
Explanation of the parts of the formula:
- Number of Stock-Out Events signifies the number of times a product was not available for purchase when a customer wanted to buy it. Essentially, these events refer to situations where customers were unable to complete their purchase due to insufficient inventory.
- Total Demand represents the total number of orders or requests for a particular product, irrespective of whether the product was in stock or not. This includes both fulfilled and unfulfilled orders.
- The ratio gives us the frequency of stock-out events in relation to the total demand. Like the previous formula, it results in a decimal value between 0 and 1 (or 0% to 100% when expressed as a percentage).
- Multiplying the calculated ratio by 100 converts the decimal value into a percentage.
The stock-out rate is an indicator of inventory management efficiency. A low rate suggests effective inventory management, while a high rate may point to issues with supply chain management, demand forecasting, or other related areas.
Example Scenario
Suppose in a particular month:
- Your store recorded a total of 5,000 orders for a specific product.
- Of these 5,000 orders, there were 500 instances when the product was out of stock.
Insert the numbers from the example scenario into the formula:
- Stock-Out Rate = (500 / 5,000) × 100
- Stock-Out Rate = 0.1 × 100
- Stock-Out Rate = 10%.
This implies that in this month, 10% of the time customers wanted to purchase this specific product, it was out of stock.
Tips and recommendations for improving Stock-Out Rate
Implement real-time inventory tracking
In today’s retail environment, having accurate and up-to-date inventory information is critical. One way to achieve this is to implement real-time inventory tracking systems. These systems continuously update your inventory levels as sales are made and goods are received, providing instant visibility into your inventory across all sales channels. In addition, they can be set to automatically trigger reorders when inventory levels fall below a certain threshold, ensuring that you are always well stocked and ready to meet customer demand.
Refine demand forecasting
The key to managing inventory efficiently and reducing out-of-stocks is to accurately forecast customer demand. By regularly reviewing and adjusting your demand forecasting models, you can make more informed inventory decisions. This process should take into account historical sales data, current market trends, seasonality, and any upcoming promotions or events that may impact demand. By refining your demand forecasts, you can ensure that you have the right amount of inventory at the right time, reducing the risk of out-of-stocks and overstocks.
Establish a safety stock level
Unexpected surges in demand can lead to stock-outs, affecting customer satisfaction and potentially your bottom line. To mitigate this risk, it’s a good idea to establish a safety stock level. This is an extra amount of inventory you hold to protect against sudden increases in demand or delays in delivery. While it may tie up some of your capital, a safety stock level ensures that you can fulfill customer orders without having to rush to replenish inventory, providing a buffer against unpredictability.
Working with suppliers
A strong relationship with your suppliers is key to maintaining good inventory levels. Open channels of communication allow for a better understanding of each other’s needs and capabilities. For example, if your suppliers are aware of your replenishment needs and the importance you place on timely deliveries, they’re more likely to accommodate quick reorders and prioritize your shipments. This proactive engagement can help prevent stock-outs and keep the supply chain running smoothly.
Regular inventory audits
While real-time tracking systems provide valuable data, regular physical audits of your inventory remain important. These audits validate the data from your tracking system against actual inventory levels and help identify discrepancies caused by issues such as theft, damage, or administrative errors. By conducting routine inventory audits, you can ensure that your inventory levels are accurate and that any discrepancies that could potentially lead to out-of-stocks are promptly addressed.
Examples of use
Promotional Campaigns
- Scenario: An ecommerce fashion retailer experiences stock-outs during its annual summer sale.
- Use Case Application: By analyzing the Stock-Out Rate post-sale, the retailer can ascertain which items were in highest demand. This insight can guide them in stock preparation for the subsequent sale season, ensuring popular items are adequately stocked to meet demand.
Product Launches
- Scenario: An electronics ecommerce site introduces a new gadget, but underestimates its popularity, leading to a high stock-out within days of the launch.
- Use Case Application: Analyzing the Stock-Out Rate and customer feedback, the company can refine its demand forecasting for future product launches, ensuring adequate stock levels to cater to initial demand surges.
New Product Bundles
- Scenario: A beauty ecommerce store decides to bundle a few of its best-selling products at a discounted rate. However, they do not anticipate the increased demand for these bundles, leading to stock-outs of some of the individual products within the bundle.
- Use Case Application: After reviewing the Stock-Out Rate for the individual products, the store recognizes the appeal of the bundle deals to its customers. To address this, they adjust their inventory levels, ensuring that they have sufficient stock for both the bundles and individual product sales in the future.
Seasonal Trends
- Scenario: An online gardening store faces stock-outs of certain plants and gardening tools during the spring season each year, failing to account for the seasonal surge in gardening interest.
- Use Case Application: By monitoring the Stock-Out Rate and correlating it with the gardening season, the store realizes the need to adjust its inventory based on seasonal trends. This leads them to increase stock for popular items in anticipation of spring and offer early-bird promotions to spread out the demand.
Flash Sales
- Scenario: An online shoe retailer conducts an unannounced flash sale, offering a 50% discount on select models. Due to the unexpected nature and deep discount of the sale, they quickly run out of stock on several popular sizes and designs.
- Use Case Application: Post sale, the retailer examines the Stock-Out Rate to identify which sizes and designs were most affected. Armed with this knowledge, they adjust their inventory strategy for future flash sales, ensuring that they have adequate stock levels to meet the increased demand.
Stock-Out Rate SMART goal example
Specific – Reduce stock-out rate by 30%.
Measurable – Stock-out rate will be evaluated monthly against previous periods.
Achievable – Yes, by improving inventory management practices, implementing just-in-time replenishment, and improving the accuracy of demand forecasting.
Relevant – Yes. This objective is consistent with the overall business strategy of improving customer satisfaction and sales.
Timed – Within the next fiscal quarter.
Limitations of using Stock-Out Rate
While Stock-Out Rate (SOR) is an important metric for understanding product availability in an e-commerce environment, it has limitations when used for business analysis:
- Doesn’t Reflect Overall Inventory Health: SOR only provides a snapshot of the products that are out of stock at a specific point in time. It doesn’t capture the whole picture of inventory health, like turnover rate or carrying costs, which could be more indicative of efficient inventory management.
- Can Be Influenced by External Factors: Various external factors such as supply chain disruptions, logistical issues, or unexpected demand surges can influence SOR. These factors might not be directly related to the business’s performance but can affect the SOR.
- Doesn’t Differentiate Between High and Low Demand Products: SOR doesn’t tell you if the out-of-stock products are high-demand items or low-demand ones. This differentiation is critical as running out of high-demand products can have a significantly larger impact on sales and customer satisfaction.
- No Insight into Restock Time: A high SOR could potentially be mitigated if restock times are quick. Without information on how long it takes to restock, the impact of a high SOR is hard to measure.
- Subject to Seasonal Variations: SOR can vary seasonally, especially during sales or holiday periods. It’s important to compare SOR from similar periods to get an accurate picture.
- Not Indicative of Customer Satisfaction: While a higher SOR might suggest potential lost sales, it does not directly measure the impact on customer satisfaction. Customers might turn to competitors if frequently confronted with out-of-stock products.
- Overemphasis Can Lead to Overstocking: While trying to maintain a low SOR, businesses might end up overstocking other products, leading to increased carrying costs and potential wastage.
- Lacks Context Without Additional Metrics: SOR in isolation doesn’t provide a full picture. For example, a high SOR might be concerning, but if the business has quick restock times and effective communication strategies, it might not be a major issue.
In summary, while SOR is a valuable metric in the arsenal of ecommerce KPIs, it should be used alongside other metrics to gain a comprehensive understanding of a company’s performance. It shouldn’t be the only metric used to make strategic decisions.
KPIs and metrics relevant to Stock-Out Rate
- Inventory Turnover: This metric indicates how often a business sells and replaces its inventory within a given period. A high turnover rate combined with frequent stock-outs may imply insufficient stock levels.
- Days of Inventory on Hand: This measures how many days, on average, inventory is held before it’s sold. High days on hand with frequent stock-outs can indicate discrepancies in inventory data or issues in demand forecasting.
- Fill Rate: Representing the percentage of customer orders that can be fulfilled with the current inventory, a low fill rate often correlates with a high Stock-Out Rate.
By monitoring stock-outs in conjunction with these other KPIs, your company can maintain optimal inventory levels, minimize lost sales opportunities, and improve overall customer satisfaction.
Final thoughts
The stock-out rate is a critical metric for e-commerce businesses, revealing potential operational inefficiencies and lost sales opportunities. By strategically managing inventory and refining demand forecasts, companies can reduce their stock-out rate, ensure consistent product availability, and build customer confidence.
Stock-Out Rate (SOR) FAQ
What is Stock-Out Rate?
Stock-Out Rate is the percentage that denotes the frequency at which products are unavailable for purchase due to being out of stock.
Why is a low Stock-Out Rate vital for ecommerce businesses?
A low Stock-Out Rate ensures product availability, minimizing lost sales opportunities, and enhancing customer satisfaction.
How can I reduce the Stock-Out Rate?
Implementing real-time inventory tracking, refining demand forecasting, establishing safety stock, and maintaining strong supplier relationships can aid in reducing the Stock-Out Rate.
How does Stock-Out Rate impact customer loyalty?
Frequent stock-outs can lead to customer dissatisfaction, potentially driving them to competitor sites for their purchases, thus diminishing brand loyalty.
If I experience frequent stock-outs, what should I reconsider in my business operations?
If stock-outs are common, reconsider your demand forecasting models, inventory management processes, and supplier relationships to ensure timely restocking and product availability.