Stock-outs are serious supply disruptions that can hurt customer relationships, negatively impact revenue, and even weaken your business’s competitive positioning. The good news is that stock-out risk probability can be easily determined with a standard formula, and using data-driven solutions can further decrease the chance of this happening again.
If you’re dealing with frequent shortages or just want to improve your processes and reduce future risks, this guide is for you. These strategies will help you balance service levels and costs, keeping customers happy and shelves full.
Key Takeaways
- The probability of a stock-out can be calculated with a standard formula (PS = ES / ED * 100). This lets businesses measure shortage risks and make better inventory decisions using data.
- The five core strategies that can help reduce stock-out risk include improved demand forecasting, setting the right safety stock levels, optimizing reorder points, diversifying supply chains, and using real-time inventory tracking.
- Advanced tools like AI-powered demand planning, predictive analytics, and automated replenishment systems significantly reduce how often stock-outs happen.
- By calculating stock-out probability, businesses can focus on high-risk items, manage holding costs, and make informed decisions about safety stock and reorder points.
- Purpose-built inventory management solutions like Netstock combine multiple stock-out prevention strategies in one platform. Machine learning helps keep inventory optimized by learning from real-time data.
What is stock-out risk and why it matters
Picture going to your favorite store for something you’ve wanted, only to find it’s out of stock. The store loses a sale and maybe your loyalty. This shows the risk of running out of inventory when customers need it.
A stock-out happens when a business can’t meet customer demand as all the inventory has been sold or used. Stock-out implications can ripple throughout the organization, from loss of sales and revenue to dissatisfied customers and damaged brand reputation. Ultimately, the company can lose market share.
In this blog, we’ll explore quantitative approaches to cutting the stock-out risk and strategic measures to overcome challenges and reduce stock-out risk using advanced technologies.
How to reduce stock out frequency
Making stock-outs a rare occurrence requires both quantitative analysis and strategic action. Knowing the stock-out probability formula helps you measure risk. Implementing proven inventory management strategies helps businesses address the root causes of stock-outs and maintain healthy inventory levels.
1. The stock-out probability formula
Here’s the formula for calculating the probability of stock-out: PS = ES / ED * 100
In this stock-out probability formula, variables represent:
- PS = Probability of stock-out (%).
- ES = Number of expected stock-outs.
- ED = Number of expected demand requests.
Example calculation:Here’s an example: Based on past data and forecasts, a company expects to run out of stock 20 times (ES) in a period. They expect 750 demand requests (ED) for an item each month. Using the formula, we can find the stock-out probability:
Substitute the numbers in the formula:
PS = 20/750×100 = 2.67%
The probability of stock-out is 2.67%.
How to reduce stock-out probability: 5 data-driven and strategic solutions
Regular stock-outs are a disaster for businesses. Stock-outs cause lost sales, upset customers, and reputational damage. Companies must find solutions to reduce disruptions and optimize stocks. Below are five proven strategies to reduce stock-out frequency.
1. Improve demand forecasting
All planning is based on demand forecasts. A poor forecast will upset all subsequent plans for procurement and production.
Advanced machine learning technologies analyze historical data and market trends. This software integrates sales data with market conditions and exogenous factors, producing more accurate forecasts.
The formula used to calculate the probability of stock-out typically factors in demand variability by including safety stock. More accurate forecasts reduce the need for safety stock, cutting unnecessary inventories.
2. Set appropriate safety stock levels
Safety stock is buffer inventory businesses hold to protect against volatility and potential stock-outs. In 2025, 55% of SMBs reported holding at least 20% in excess stock, intended to absorb unexpected demand spikes and supply chain delays. Lead time, demand variability, and product criticality all influence the size of the safety stock, as does the desired service level.
The goal is to set safety stock levels that balance the desire to supply a particular service level with the cost of holding excess stock. Sufficient safety stock reduces the ES (expected stock-outs) in the formula, lowering the stock-out probability.
The ideal safety stock levels balance the desired service level with the cost of holding excess stock. Sufficient safety stock reduces the ES (expected stock-outs) in the formula, lowering the stock-out probability.
Watch: The benefits of setting safety stock levels
3. Optimize reorder points
Another way to reduce stock-out frequency is by optimizing reorder points (ROP). This helps you keep enough stock to meet demand without overstocking. Automated systems can set and adjust the ROPs using real-time data and predictive analytics. These systems track inventory, sales, and lead times in real-time and then immediately update information based on the trends. They use predictive analytics to forecast future demand accurately.
Using a purpose-built inventory management solution like Netstock reduces human error.. This means you can rely on regular, reliable stock replenishment. The system ensures that stock is always available by matching orders to actual demand.
A precise reorder strategy helps your business meet demand without dipping into safety stock too often. It reduces ES through lower safety stock requirements.
4. Diversify your supply chain
Dependence on a single supplier increases your vulnerability to disruptions, like geopolitical circumstances and natural disasters. Supply diversification reduces this risk. Risk spread across two or more suppliers promotes a more robust supply chain and reduces expected stock-out frequency, ES in the formula.
Strategically selecting several suppliers locally and abroad helps businesses achieve a more flexible, cost-efficient supply chain and improved service levels.
Additionally, many businesses find it helpful to monitor supplier performance. This practice helps identify potential supplier issues before they cause stock-outs, which means planners can further diversify as needed.
5. Leverage real-time inventory tracking
A key to avoiding stock-outs is knowing how much inventory you have and where it is stored. You can achieve inventory transparency across locations with real-time inventory tracking.
Inventory visibility reduces oversights and stock calculation errors. Real-time systems can quickly alert you and your team to pending stock problems as they become evident. Integrated with predictive analytics, these systems forecast demand and can raise potential stock-out alerts before you run out of stock.
Radio Frequency Identification (RFID) facilitates real-time tracking. RFID tags attached to items transmit inventory data to a central database, tracking inventory movements as they happen.
Cloud-based inventory systems gather information from various locations and warehouses to create a central database from which all employees work.
Plus, automatic replenishment, an integral feature of Netstock’s inventory management solution, lets planners quickly move inventory between locations, ensuring no warehouse is overstocked while another stocks out.
More advanced techniques for reducing stock-out risk
Stock-outs disrupt operations, upsetting the supply chain and impacting sales. However, modern technologies can help your business install advanced techniques to reduce stock-out risk and optimize inventories. These solutions go further than standard stock-out reduction strategies. The role of technology in this process is significant, providing reassurance and confidence that these disruptions can be effectively managed.
Use a stock-out risk report
Stock-out risk reports track items at risk of stock-out. They can calculate the stock-out probability for each item, so you can focus on critical items before they cause a problem.
These reports highlight the items that are most likely to cause a problem. Use them to adjust the ROPs of high-risk products.
Vendor-Managed Inventory (VMI)
VMI is a strategy that allows suppliers to manage inventories and ensure that stocks are always available. According to Netstock’s 2025 Benchmark Report, VMI is even becoming more popular to mitigate inventory risks. In 2024, only 29% of SMBs reported utilizing this technique. The number jumped to 44% in 2025.
The most common VMI use is merchandising in stores. The supplier sends a representative to check the stock levels regularly, topping up stock at a pre-set level.
VMI reduces administration, improves stock accuracy, and reduces inventory stock-out risk.
Implement Just-In-Time (JIT) Inventory Management
JIT is famously used in the automotive industry as well as several other sectors. The strategy seeks to keep stocks at the lowest possible level by arranging regular deliveries as goods are needed. JIT ensures low stocks, cutting holding costs, but your suppliers must be reliable since there is a tiny margin for error.
Why calculating stock-out probability matters
You may wonder what the point of calculating the stock-out is. Here’s why it matters:
1. Reducing stock-outs enhances customer satisfaction
A high stock-out probability may lead to disappointed customers, lost sales, and reputational damage. When the stock-out risk is known, managers can adjust inventory levels to meet customer demand.
2. Knowing what’s at risk makes data-driven decisions possible
Managers can make better decisions based on the stock-out probability. They can use this knowledge to plan order placements and deliveries. The importance of accurate forecasting cannot be overstated, as it enables decisions on safety stock holding and forecast model adjustments.
3. The calculation helps optimize costs
Balancing stock-out risk and holding costs leads to better inventory management. Lowering the chance of stock-outs can reduce lost sales, but it might raise storage costs.
4. Stock-out risk knowledge supports overall demand planning
Stock-out probability provides demand planners with valuable insights. Planners can use this data to refine forecasts, matching them more closely with actual demand. Better stock alignment reduces the likelihood of overstocking and understocking.
Common causes of stock-outs
Knowing the most common causes of stock-outs can further support planners striving to avoid them as they maintain service levels. These are some of the most common inventory issues and insights on how they increase the risk of stock-outs.
| Common causes of stock-outs | |
|---|---|
| Frequent challenge | How it increases the risk of stock-out(s) |
| Supply chain disruptions | These may be caused by delayed transport or production problems like machine breakdowns or material shortages. |
| Inaccurate demand forecasting | Manufacturing and purchase orders are all placed according to the demand forecast. If the forecast is incorrect, stock-outs may occur. |
| Lead time variability | Reorder points are calculated according to the demand during lead time. If the lead time fluctuates, the stock may run out before it is replenished. |
| Insufficient safety stock | Safety stock must cover demand spikes, or a stock-out is likely. |
Handling stock-outs when they occur
No matter how good your planning is, stock-outs will occur from time to time. How you handle the problem can enormously affect how quickly you recover.
| Ways to handle a stock-out | |
|---|---|
| Action | Result |
| Communicate proactively with customers | Transparency will maintain trust and loyalty. |
| Offer alternatives or backorders | Provide options to keep customers happy. |
| Emergency replenishment strategies | Fast-track orders, move inventory from other locations, or find alternate suppliers. |
The role of technology in reducing stock-out probability
Modern technologies like Netstock can produce stock-out probability reports and improve stock management, reducing the probability of stock-outs. Managers can use the available tools to predict stock shortfalls, reducing the risk of lost sales.
Artificial intelligence analyzes vast data sets, including real-time and historical sales, actual supplier lead times, and external factors like economic indicators. AI and predictive analytics in stock management produce highly accurate forecasts and reduce the need for safety stocks.
“If we want 120 days of forecast on our shelf, Netstock lets us do that easily. If we have limitations in capacity, the planners can see that right away and adjust the safety stocks downward, reducing the order across all sizes. It helps us to balance sales, financial, operational, and service requirements.” Steven Allgood, Director of Inventory Management – Edwards Garments
Stock-out probability formula in action: case study
Using the formula listed above (PS = ES / ED * 100), where PS is the percentage probability of a stock-out, ES is the number of expected stock-outs, and ED is the number of expected demand requests, we can apply the calculation to almost any business that manages inventory.
Example CalculationBased on historical data and other forecast inputs, the business predicts running out of stock 20 times (ES) over the period. The business expects 750 demand requests (ED) for an item monthly.
Using the formula:
PS = 20/750×100 = 2.67%
The probability of stock-out is 2.67%, so there is a 2.67% chance that the item will not be out of stock when a customer wants to buy it.
The business can reduce the probability of stock-out in several ways. One such way is to increase safety stock. This reduces ES in the following way. Let’s assume the number of stock-outs ES drops to 10.
Then:
PS = 10/750×100 = 1.33%
The probability of stock-out has halved, but the stock will have risen by the appropriate amount of safety stock, increasing holding costs.
“Being able to adjust safety stock based on statistical modeling using history and forecast deviation instead of just several days coverage has improved our inventory fill rate from 90.9 to 98%.“ Philip Yu, Senior Sales and Operations Manager – The Little Potato Company
Improving forecasting accuracy is another way to lower a stock-out risk. This has a similar effect to increasing safety stock, as it reduces demand variability. Let’s assume that an improved forecast shows that demand is likely to be closer to 825 than 750. Greater accuracy also reduces expected stock-outs and improves overall supply performance.
PS = 15/825×100 = 1.82%
Build business resilience by reducing stock-out risk
Modern businesses compete in increasingly complex markets. Intricate supply chains and demanding customers don’t make the task any easier. Having the knowledge and tools to reduce the risk of inventory shortages is one way to pull ahead of the pack, maintain service levels, and grow your business.
With Netstock, you can reduce stock-out risk and gain a competitive edge. Advanced demand and supply planning technology will help you optimize inventory and improve forecasting. Leverage real-time data and cloud-based tools to streamline efficiency.
