Despite concerted efforts, out-of-stock events still occur in the F&B industry at a rate of around 3-8%, depending on the specific category. In CPG, the rate has been studied multiple times and has hovered around 8.1-8.3% since about 1996. Up to an 8% out-of-stock rate is considered “acceptable” in the US grocery industry.
Based on 21st-century data, some reports calculate retailers’ losses at around 4% of annual revenue due to stockouts, with others reporting up to 7.4%. During promotions, direct revenue losses due to out-of-stock events may exceed 10%, and the residual fallout due to retailer and consumer dissatisfaction and lost sales can last for years and is difficult to estimate… but is certainly significant.
In this article we’re going to explain what causes F&B out-of-stocks and their impact on manufacturers, distributors, retailers, and consumers, and then go over some key strategies and tools organizations can use to reduce these events.
Nearly all consumers felt the effects of frequent and widespread stockouts during the global COVID-19 pandemic of 2020-2023. However, out-of-stock events certainly didn’t originate during that period, and have been a significant factor in every retail supply chain since caveman Grog opened up his first organic rock and club boutique.
The Food Industry Association reports that out-of-stocks remain one of the most frustrating experiences for both in-store and online shoppers, stating that in some industry verticals, shoppers experience stockouts as frequently as every third shopping trip.
One early-2020s global study on grocery/supermarket stockouts found that approximately 47 percent of out-of-stocks were caused by inadequate store ordering/forecasting and 25 percent by poor shelf management. This report surmised that 70-75 percent of worldwide out-of-stock products are triggered – and must be fixed – at the retail level. These factors certainly may still be playing a part, particularly for groceries. However, across the broader F&B industry, the following are the primary contributors to stockouts.
Predicting consumer demand is always a bit nebulous, as consumer preferences can and do change rapidly. The increased speed of social media’s impact on specific items or brands is a recent challenge, especially when these or other promotional events or campaigns are not carefully planned and managed.
Even “normal” demand fluctuations can result in significant supply chain issues when misunderstood or unpredicted, as demonstrated by the bullwhip effect: Imagine a theoretical grocery store that typically sells 100 boxes of a particular cereal per week.
In this way, a normal (and small) 10% increase in actual consumer buying can potentially snowball into a 100% production surge at the F&B manufacturer level.
Additionally, holidays and local events often create demand spikes and stockouts. For example, smart F&B businesses work hard to prepare inventory for things like the Super Bowl, World Cup games, large concerts or festivals, and similar events. Memorial Day, Independence Day, and Labor Day weekends are famously huge for grocery stores, and those that don’t plan ahead will get caught out (literally).
Rainy weather is notoriously good for New York City’s sidewalk umbrella vendors, but severe weather events can create significant, long-lasting supply chain disruptions and costly out-of-stock events. Volcanic eruptions, earthquakes, tsunamis, tornados, and hurricanes cause billions of dollars of losses annually, not just due to physical damage to structures and businesses but also due to supply chain impacts, many of which may last months or even years in some cases.
Even well-intentioned forecasting can create stockouts when conditions differ from predicted paths, and small forecast errors can amplify as they move throughout the supply chain, as noted above. Inaccurate or inadequate demand planning can lead to shortages as well as excess inventory, both of which are costly.
Poor demand forecasting may result from a planner’s stubborn reliance on historical averages, failure to account for promotions or seasonal variations, a lack of causal forecasting inputs, and/or a general reliance on outdated demand planning tools, technology, and methods.
Inaccurate inventory records, delayed reporting from warehouses and distributors, and a general lack of real-time insight into vital processes across the supply chain are just three inventory-visibility issues that contribute to food and beverage industry stockouts. Some other factors may include Ineffective inventory replenishment policies, poorly managed safety stock levels, outdated reorder triggers, or overly long replenishment cycles.
Naturally, retailers can only sell products if manufacturers can source and make them quickly enough. Food and beverage producers may inadvertently contribute to stockouts due to ingredient shortages, packaging constraints, supplier-related transportation delays, local labor shortages, and other factors.
Poor cross-department coordination can influence or create stockouts as well. When sales, operations, procurement, and finance teams operate in silos, bad things happen. Conflicting priorities among company and team leads, delayed/incorrect decision-making, and poor S&OP and execution inevitably have negative effects all along the supply chain.
So now let’s talk about the primary ways you can improve your planning/forecasting and S&OP process to help reduce or prevent out-of-stock events.
At the foundation of any effective demand planning strategy is the need for more accurate, complete, and timely data. The right demand-planning software allows teams to improve forecast accuracy by incorporating multiple demand signals, including historical sales, promotion calendars, retailer POS data, weather and other disruptions, market intelligence, product segmentation, aggregate drivers, and machine learning/statistical modeling. Effective leaders use AI-driven scenario planning to prevent stockouts, since they can run simulations that take into account variables such as ingredient shortages, unforeseen demand surges, promotional events, supplier- or distributor-level disruptions, dynamic safety stock calculations, lead-time variability considerations, and risk-based inventory segmentation.
Inventory control and management must be thoroughly vetted and optimized, ensuring that all inventory levels, orders, sales, and deliveries are being accurately tracked. Using the updated demand forecast and available data/analytics as a basis, inventory is then restocked in a timely manner and at the appropriate volume. Effective inventory control helps prevent out-of-stocks and overstock situations, both of which result in unnecessary expenses and other problems.
Sales and operations planning (S&OP) is vital to any modern business, and remains one of the most powerful tools for aligning business strategy with execution. However, its success depends entirely on how it is implemented and managed. To optimize S&OP, inoculate themselves against volatility, and help prevent stockouts, F&B organizations (and every other company that wants to be successful) must:
This optimization of the S&OP strategy results in superior resiliency, less waste, greater revenue, fewer stockouts, and better alignment of all teams toward overall company goals. Food and beverage companies that effectively connect demand planning, supply planning, S&OP, and executive decision-making are better positioned to improve service levels, reduce stockouts and lost sales, and build more resilient supply chains. ORI helps organizations connect demand planning, supply planning, financial planning, S&OP, and executive decision-making within a unified process.
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