What is Stockout - How to calculate the stockout cost?

Definition

A stockout occurs when sufficient inventory is unavailable at any point in the supply chain, blocking the purchase or shipment of an item. It's a nightmare scenario for a warehouse or inventory manager, and it comes at a high cost to the business. Customers are more inclined to go elsewhere for the necessary supplies if there is a stockout, which not only increases the risk of missed sales but also hampers the long-term consumer relationships. Stockouts are typically considered problems that must be resolved, and several inventory strategies, such as safety stocks, have been developed to bring down its frequency and maintain stable sales.

Stockout: Technical Definition

ClickPost defines Stockout, also known as an Out-Of-Stock (OOS) event, as a business cycle phenomenon that occurs when the inventory is exhausted, i.e., when demand is higher than expected, and standard inventory and safety stock are insufficient to meet all customer orders. However, Stockouts can also happen due to delays in the supply chain or halts in a company's manufacturing process. Consider a scenario where a seller lacks adequate resources to invest in inventory, keeping inventory low and accepting the implications of frequent stockouts.

What causes a stockout? 

Stockouts can occur due to a number of factors. Inadequate estimation of customer demand, forecasting and inaccurate reporting, supplier delays, inefficient stock replenishment, and a lack of regular funds to purchase new inventory are some of the most common but avoidable factors that lead to stockout. However, stockouts can also occur due to inevitable factors such as production delays, delivery and logistics issues, unpaid invoices, human error, etc., all of which can impact inventory levels.

What is a stockout cost?

Halt in business operations due to stockout restricts order fulfillment, reduced sales, and revenue loss. This lost income and expense associated with an inventory shortage constitute the Stockout cost. This stockout cost can arise in four ways. First, sales-related losses, when a company loses the gross margin connected with a sale due to insufficient inventory. Second, the added administrative cost of rush ordering and replacement products with additional logistics expenses. Third, internal process-related things like smooth production run.  Finally, there is a permanent loss of valuable customers as well as the scope of future sales.

How to calculate the stockout cost? / How is the stockout rate calculated?

Businesses will want to know how a stockout will affect their financial performance. For assessing the cost of a stockout, four key variables must be identified: 1. Days Out of Stock (D), 2. Average Units Sold per Day (S), 3. Price per Unit (P), and 4. Cost of Consequence (C). The overall cost of a stockout may be computed using the formula Stockout cost = (D x A x P) + C when these parameters have been determined.

What is stockout management? 

Stockout management is the process of managing the goods and inventory to sustain the sales for your business. Acquiring, storing, organizing, and tracking product information and maintaining inventory accuracy are all part of Stockout management. Keeping track of inventory fluctuations over time aids in keeping the optimal volume of supplies in stock to meet consumer demand. Besides, stockout management entails sales forecasting, cash flow management, and buffer stock maintenance.

How to prevent stockout?

The financial losses associated with the event of stockout are significant. Take the following procedures to prevent stockouts from affecting your business's success. 1. Use historical inventory data to forecast demand more accurately. 2. Optimise the safety stock and automate stock replenishment. 3. Get built-in inventory management solutions for effective order fulfillment services by investing in inventory management software or a tech-enabled 3PL. 4. Use pricing to influence demand to lower demand and increase profits on the product. 5. Have a ready-to-go list of backup suppliers in case of logistical issues.

What is the impact of stockout on consumers?

Stockouts can significantly impact the business in multiple ways. 1. First and foremost, stockouts hamper customers’ experience. 2. Disappointed customers can also post negative reviews on your site or third-party review sites damaging brand reputation. 3. Losing an existing customer plus potential customers to a competitor. 4. Stockouts with the added cost of canceled orders lead to a loss in revenue. 5. Increased operational costs.