Stockout Cost
This article covers meaning, importance & steps of Stockout Cost from operations perspective.
What is Stockout Cost?
Stockout cost is the cost associated with the lost opportunity caused by the non-availability of the inventory. Since the inventory is out of stock, stockout cost hampers the business production and hence stockout costs are not good for business.
Importance of Stockout Cost
The exhaustion of inventory could be a result of various factors. The most notable amongst them is defective shelf replenishment practices. Stockouts could prove to be very costly for the companies. The subtle responses could be postponement of purchase. The more disastrous ones are the consumers may get frustrated and switch stores or even purchase substitute items (brands). Various retailers follow the concept of “Safety Stock” in order to avoid the situation of Stockouts. Stockouts could occur at any point of the supply chain.
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Formula for Stockout Cost
The formula to understand stockout rate is as below:
Stockout Rate = (Number of Stockouts) / (Total Sales) × 100
For example, if you have 8 stockouts for every 200 total sales, the stockout rate is
= (8/200) x 100 = 4%
Steps to Safeguard from Stockout Cost
A few ways to make sure a company doesn't run out of inventory stocks are as follows.
1. Effective Inventory management is the solution to avoid stockouts.
2. Regular audits of the inventory are carried out to check the frequency of stockouts of different items.
3. Advanced modelling tools and frameworks are used to determine the economic order quantity that will minimize the stock out and also the inventory carrying cost.
4. Keep safety stocks as a backup plan to be prepared for any unforeseen circumstances.
Hence, this concludes the definition of Stockout Cost along with its overview.
Browse the definition and meaning of more similar terms. The Management Dictionary covers over 1800 business concepts from 5 categories.
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