You’re familiar with all the costs of running your grocery store: staffing costs, utilities, space rental, and inventory costs… but what about stockout costs?
Imagine this scenario: A customer comes to your store looking for a specific item. When they arrive at the shelf where that item should be… they find the shelves cleared out. You’re out of stock. The customer drove all the way to your store specifically for this item.
Now that you don’t have it, they’re forced to leave your store empty-handed and frustrated. Not only did you lose the sale that day, but what are the chances that the customer returns to your store?
This post will walk you through the basics of stockout cost. We’ll explore what it is, the elements contributing to the cost of running out of stock, and give you some tips on reducing your risk of stockouts.
What Is Stockout Cost?
A stockout refers to when your grocery store runs out of stock of a particular product, indicating customer demand exceeds the inventory you have on hand. Stockout cost is the lost revenue and other consequences you suffer when no stock is available to purchase. Costs can add up quickly, especially for popular, fast-moving items.
Let’s say you run out of a staple like bread. You’ll miss out on bread sales until you replenish inventory. Meanwhile, frustrated customers will go elsewhere. This results in lost sales, and considering 21-43 percent of your customers will go to another store to buy the item, you can lose nearly half of the intended purchases.
We mentioned above that they might not return to your store, especially after repeated stockouts. Beyond lost sales, stockouts will damage customer loyalty — dissatisfied customers might voice their frustrations through negative reviews — costing you not only regular customers but potential future customers, too.
Last, there are operational costs. Expedited reorders, overtime labor, and rushed delivery fees to urgently restock put a strain on your operations and finances.
All of this adds up to costs you can do without. Adopting measures to reduce stockouts is key to happy customers, a thriving grocery store, and profitability. Let’s explore strategies!
Calculating Stockout Cost
Because stockouts involve quantifiable and non-quantifiable elements, it's hard to calculate the actual cost. However, for the quantifiable part, consider factors like the margin on the lost sale, expediting costs, and the potential lost revenue if the customer doesn't return.
Here’s a quick guide:
- Determine your cost of goods sold (COGS), or the cost you incur to produce and sell your products.
- Calculate the cost of lost sales due to stockouts. For example, if a particular product usually brings in $1,000 per day and it’s out of stock for three days, the cost of lost sales would be $3,000.
- Calculate the additional costs of stockouts, like lost productivity, expedited shipping, and customer service.
- Add together the COGS, cost of lost sales, and additional costs.
While this won’t be completely accurate, you’ll have a better understanding of stockout costs and how they impact your grocery store.
1. Demand Forecasting Reduces Guesswork
It’s not quite a crystal ball, but demand forecasting helps align inventory with upcoming needs. You can analyze sales patterns and historical data to inform your purchasing strategies and keep up with customer demand.
For each product, consider seasonality, bestselling weeks, and demand fluctuations. This gives you a baseline to work from. Also factor in external data like upcoming holidays, competitor promotions, weather forecasts, and local events that may impact sales.
Your point of sale (POS) system is a goldmine of data and helps tie together operations:
- Historical data enables granular analysis of sales patterns and trends.
- All your data is centralized in one location across online and offline channels.
- You can generate prebuilt, custom reports to analyze sales by product, time period, location, and segment.
2. Inventory Optimization Minimizes Shortages
To stay on top of stockouts you need real-time access to your inventory across brick-and-mortar and online channels. In addition to demand forecasting, optimizing inventory management helps minimize stockout risks.
POS systems with real-time visibility enable you to streamline operations.
Related Read: Automated Inventory Management: Why It’s Critical
For example, automated tracking updates stock levels across channels. Your POS can also trigger alerts when products hit a threshold — some POS systems automatically reorder for you — to ensure continuous availability. Last, you could implement just-in-time inventory practices, and receive new key inventory just as existing stock nears depletion.
3. Strong Supplier Relationships Safeguard Supply
Developing strong relationships with reliable suppliers is key to avoiding stockouts. It’s essential to have vendors you can rely on to deliver on time, consistently.
Be sure to ask questions that will help you decide which suppliers you want to work with. For example, what are their lead times? Long lead times result in out-of-stock gaps. What are their minimum order quantities? You don’t want to over-order and tie up excess capital; flexible minimums are ideal.
Candid conversations will ensure your replenishment requirements align. Vendor relationship management is a two-way street, however. Let’s say you’re planning an ice cream promotion over the summer; give your suppliers a heads-up so they know to expect a bigger order.
It’s best practice to have a couple of backup suppliers in case your main supplier has any hiccups. You can manage multiple suppliers through a POS system, as well as:
- Track order status, expected delivery dates, backorders, and more to monitor progress.
- Coordinate with suppliers from a centralized database.
- Generate reports on purchases, inventory turnover, sales by supplier product, and other purchasing metrics.
Supplier and inventory management capabilities in POS systems help retailers collaborate with vendors, streamline purchases, and prevent disruptions.
4. Real-Time Inventory Monitoring Prevents Surprise Stockouts
We touched on this above, but real-time inventory management systems are the future! When you only have periodic snapshots of stock levels in legacy inventory systems, you are vulnerable to stockouts, so a modern inventory management system is a must.
Continuous inventory tracking across all locations and channels allows you to see what is available at any moment. Counts are adjusted as soon as items are sold. Employees can quickly update inventory when items are received or transferred using handheld scanners with barcode readers, and this real-time data feeds into the POS.
Related Read: How Do Grocery Stores Keep Track of Inventory? 5 Essential Tools
How To Minimize Stockout Cost
The four tips above can help you manage your inventory appropriately and effectively, minimizing your risk of running out of stock of popular items and incurring those dreaded stockout costs!
The easiest way to minimize the risk of stockouts is by investing in an advanced point of sale system capable of helping you with the four tips listed in this post.
IT Retail’s point of sale solution offers advanced inventory management features like purchase order generation and low stock reports. These features and more can help you keep tabs on your inventory and quickly restock in the event that you’re running low.
Schedule a free software demo today to see if IT Retail is the right solution for your grocery store!
