Calculating The Cost of a Stockout

It is no secret that companies have been keeping their inventories extremely “lean” in an effort to contain costs .But when sales are lost, there is a such thing as “too lean.”

I was recently reminded of this when I went to have my car tires replaced and my preferred retailer was out of my size of tires and couldn’t get them in before my state inspection was due to expire. So, I had to buy another set of tires from this retailer’s competitor.

Tires aren’t cheap – I spent about $700. I wondered if the tire retailer’s headquarters is calculating the cost of its stockouts in order to realize the need to improve its inventory levels. Calculating the cost of stockouts can be done using a formula like this:

CS = (NDOS x AUSPD x PPU) + CC

Where,

CS = Cost of a Stockout

NDOS = Number of Days Out of Stock

AUSPD = Average Units Sold Per Day

PPU = Price Per Unit (some use Profit Per Unit)

CC = Cost of Consequences

Cost of Consequences generally will apply only to stockouts of raw materials or subassemblies, not finished goods. These consequences includes costs associated with a production line that has been idled or must be switched over to accommodate another process due to the stockout. They can also include penalties payable to customers for failure to deliver on time.

Most experts agree that carrying costs – the downside of having extra inventory – are 18 – 35% of an item’s value for a year. This translates to 0.05% to 0.1% per day. Though profit margins are certainly tight in this economy, getting a sale is many times more profitable than avoiding inventory carrying costs.

The moral of the story is that, when it comes to inventory levels, be lean. But don’t be too lean. Stockouts negatively impact your organization’s revenue and put money in its competitors’ pockets.

To learn more about warehouse and inventory management, consider NLPA Learning’s online course “Profitable Inventory Management and Control.”

Recommended reading:

Stockout Costs: Beyond The Calculations

Are you tired of not getting enough opportunities, respect, and money out of your procurement career? Well, guess what? Nothing will change unless you take action towards becoming a world-class procurement professional.

Earning your SPSM Certification is the action to take if you want to bring the most modern procurement practices into your organization and achieve your career potential. Download the SPSM Certification Guide today to learn how to get started on your journey to a more rewarding procurement career!

Are you a procurement leader whose team isn’t achieving the results you know are possible? Maybe it’s not enough cost savings. Or frustrating performance from the supply base. Or dissatisfied internal customers.

You need a performance improvement plan that’s easy to implement and quick to produce results. The NLPA can help.

Download our whitepaper “The Procurement Leader’s Guide To A More Successful Team.” You’ll learn the 7 steps for transforming your staff into a results-producing, world-class procurement team.

Members of the NLPA get more than just articles like this by email. As a member, you also get access to:

• The Procurement Training & Certification Starter Kit
• The latest Purchasing & Supply Management Salaries Report
• Leading-Edge Supply Management™ magazine
• Members-only webinars 10x per year
• And more!

If you haven’t been taking advantage of these benefits, why not log in and start now?