How can you optimize inventory levels using stockout rates?

1 What is stockout rate and why does it matter?

Stockout rate is the percentage of times that a customer requests a product that is not available in your inventory. It indicates how well you are meeting the demand for your products and how efficient your inventory management system is. A high stockout rate means that you are losing sales opportunities, customer satisfaction, and market share. It also means that you are wasting money on excess inventory holding costs, such as storage, insurance, and obsolescence. A low stockout rate means that you are satisfying your customers, increasing your revenue, and optimizing your inventory costs.

2 How to calculate stockout rate?

To calculate your stockout rate, you need to track two variables: the number of stockouts and the number of sales orders. A stockout occurs when a customer orders a product that is out of stock or when you cannot fulfill an order within the expected delivery time. A sales order is any request for a product that you receive from a customer. You can use the following formula to calculate your stockout rate:

Stockout rate = (Number of stockouts / Number of sales orders) x 100%

For example, if you receive 100 sales orders in a month and 10 of them are stockouts, your stockout rate is 10%.

3 How to set a target stockout rate?

No single stockout rate is optimal for all businesses; it depends on various factors such as industry, product type, customer expectations, and competitive advantage. To set a realistic and achievable target, you should analyze historical data and industry benchmarks to understand current and average stockout rates and their impact on sales and profits. Additionally, identify customer segments and their preferences, evaluate product categories and demand patterns, determine inventory replenishment lead time and frequency, and assess inventory risk and cost tolerance. Finally, based on these factors, you can set a target stockout rate that balances customer satisfaction and inventory efficiency goals. For example, you may aim for a lower stockout rate for high-value products with high demand or a higher stockout rate for low-value products with low demand.

4 How to reduce your stockout rate?

To reduce your stockout rate, you need to improve your inventory forecasting, planning, and control processes. A demand forecasting method should be selected that suits your product characteristics and market conditions; this could include historical data, trend analysis, market research, or customer feedback. Additionally, a safety stock formula should be applied that accounts for demand variability and lead time variability; this could be done using the standard deviation, service level, or fill rate methods. A replenishment policy should also be adopted that aligns with your target stockout rate and inventory turnover rate; this could involve the economic order quantity, reorder point, or periodic review methods. Finally, you should monitor your inventory performance and adjust parameters as needed; key performance indicators such as stockout rate, inventory turnover rate, fill rate, or service level can be used to measure effectiveness and efficiency.

5 How to leverage stockout rate data?

Stockout rate data can provide you with valuable insights and opportunities to optimize your inventory levels and business performance. For instance, you can identify your best-selling and worst-selling products and allocate your inventory resources accordingly. Additionally, analyzing customer behavior and feedback can help to improve customer service and retention. Furthermore, evaluating supplier performance and reliability can lead to better terms and conditions. Finally, experimenting with different pricing and promotion strategies can enable you to optimize revenue and profit margins. All in all, stockout rate data offers a range of opportunities for optimizing business performance.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?