Also known as an out-of-stock or OOS, a stockout is a situation in which a vendor or provider has exhausted the available inventory of a given product and must wait to replenish the stock before filling a pending customer order. Companies typically seek to avoid this type of event if possible, since the inability to fill an order quickly often translates into lost revenue, both in terms of the specific order and the placement of future orders by that customer. Stockouts are the opposite of overstocks, in which the supplier has high inventories that greatly exceed current demand for those items.
There are several reasons why a stockout may take place. In manufacturing, a company may experience downtime in the production cycle, resulting in the delay in producing a steady flow of finished goods needed to fill pending orders. The potential for this type of delay leading to a stockout is increased when the company operates on what is known as a just-in-time schedule, meaning goods are produced in response to pending orders in order to keep inventory levels as low as possible. Downtime in the production cycle may occur because of a delay in receiving raw materials, temporary failure of equipment used in the manufacturing process, or even some type of natural disaster that prevents the facility from operating for a period of time.
When a stockout does occur, customers are typically provided with two alternatives. Clients may choose to accept the temporary delay, and approve the placement of the order into what is known as backorder status. With this approach, the order is still pending and will be filled as soon as the products are in possession of the supplier. Typically, the suppliers will provide periodic updates regarding anticipated shipping dates for the order as part of the communication process with the customer.
A customer may also choose to simply cancel a pending order when advised of the stockout. This particular scenario is one that suppliers prefer to avoid if at all possible, since it represents an immediate loss of a sale and the revenue generated by that sale. In addition to the immediate loss, the stockout may also prompt customers to seek similar products from competing companies. Should competitors provide the desired items quickly and with no delays, there is an excellent chance the client will switch alliances and begin to do business regularly with that competitor.
Part of the supply chain management process is geared toward preventing stockout situations from occurring. This involves making sure inventories of raw materials, replacement parts, and other resources needed to maintain production levels are obtained according to a schedule that always allows time for additional materials and parts to be ordered and received before a production delay is experienced. Retailers also use supply chain management to avoid a stockout situation by gauging the typical pattern of sales for items carried in the stores and structuring orders with their vendors to make sure the shelves are adequately stocked at all times.