Stockout Cost
Definition
The cost incurred when demand cannot be met from available inventory, including lost sales, expediting, penalties, and damaged customer relationships. It is the counterweight to holding cost in service level decisions.
In Practice
Stockout cost has visible and invisible components. Visible costs include lost margin on cancelled orders, premium freight to expedite recovery, contractual service penalties, and production line-down charges when a component runs out. Invisible costs, lost future business and eroded loyalty, are harder to measure but often larger, especially in retail where shoppers quietly switch brands.
Planners rarely know stockout cost precisely, but even a rough estimate disciplines service level setting. If a stockout on an item costs little, a 90 percent service target may be rational; if it stops an automotive line at thousands of dollars per minute, near-100 percent availability and generous safety stock are cheap insurance.
Example: a contract manufacturer estimates each day of a critical resin stockout costs 30,000 dollars in idle labor and late penalties. Holding two extra weeks of the resin costs 4,000 dollars a year, so the buffer decision takes about a minute.
Related Calculators
Related Terms
The target probability of not stocking out during a replenishment cycle, or more broadly the standard of product availability promised to customers. It is the key input for sizing safety stock.
Safety StockExtra inventory held beyond expected demand to protect against variability in demand or supply. It acts as a buffer that keeps orders flowing when forecasts miss or deliveries run late.
Fill RateThe percentage of customer demand satisfied immediately from available stock, measured by units, lines, or complete orders. It captures how much demand you actually fulfilled, not just whether a stockout occurred.
BackorderA customer order, or portion of one, accepted for fulfillment despite the item being out of stock, to be shipped when inventory becomes available. Managing backorders means tracking, prioritizing, and clearing this unmet demand.