How to put a price on a stockout.
Lost margin is only the first line. A practical method to estimate the full cost, and why it changes your buffer decisions.
Most companies can tell you their inventory value to the dollar. Very few can tell you what their stockouts cost last quarter. That asymmetry biases every inventory decision toward cutting stock, because only one side of the trade-off has a number.
The components
- Lost or delayed margin on orders that couldn't ship.
- Recovery cost: expedited freight, overtime, spot buys at premium prices.
- Penalties: contractual service fines and chargebacks.
- Disruption cost: changeovers and schedule breaks caused by firefighting.
- Customer risk: harder to value, but real for key accounts.
A workable estimate
Start with the first three, which are in your ERP and finance systems. Estimate the fourth from schedule changes. Treat the fifth qualitatively. Even a conservative estimate usually changes the conversation about buffers.
Once stockouts have a price, safety stock stops being a cost to minimize and becomes an investment to size.
Using it
With a cost per stockout event per SKU class, you can compare the carrying cost of additional buffer with the expected stockout cost it avoids, and set service targets by class rather than one number for everything.
One supply-chain shock, decoded in numbers, and what a data-driven plant does about it.
