What it means
A stockout is the opposite problem to holding too much stock. Too much inventory ties up cash and risks obsolescence, while too little means the business cannot serve demand when it appears.
Finance teams care because both mistakes cost money, and the right balance sits somewhere between them. The direct cost is the profit on the sales that were lost.
The indirect costs are harder to measure but often larger, such as a customer who switches to a competitor for good, a rush order that has to be flown in at premium freight rates, or a production line that stands idle waiting for a part. Stockouts usually come from forecasting errors, supplier delays, poor stock records or reorder points set too low.
A reorder point is the stock level at which a new order is triggered, and it should cover the demand expected during the supplier's lead time plus a cushion known as safety stock. If any one of those inputs is wrong, the shelf can empty before the next delivery arrives.
Businesses track stockouts with simple measures such as the percentage of order lines that could not be filled in full, or the number of days a key item was unavailable. These measures are often reported next to inventory turnover, because pushing turnover up by cutting stock too hard tends to push stockouts up as well.
The nuance is that zero stockouts is rarely the right goal. Carrying enough safety stock to guarantee availability on every item can cost more in cash and storage than the lost sales it prevents, particularly for slow-moving or low-margin lines.
The sensible target is a service level matched to the value of each product.
In practice
Real-world examples
Example 1
A supermarket runs out of a popular breakfast cereal on a Saturday because a delivery was late. Shoppers buy a rival brand instead, and the store loses the margin on that cereal for the weekend. If this happens often, shoppers start to use another store for their whole basket.
Example 2
A car assembly plant runs short of a $14 wiring component from a single supplier. The line stops for six hours, and the cost of idle labour and missed deliveries is far larger than the value of the part itself. The purchasing team qualifies a second supplier afterwards.
Example 3
An online skincare brand has a viral social media post and sells out of its best-selling serum in two days. Orders keep arriving for three weeks, and the company takes pre-orders and sends a delay notice to protect its reputation. The finance team records the pre-order cash as deferred revenue until the product ships.
Think of it
Imagine driving a car and running out of petrol on the motorway. You not only stop moving forward immediately, but you also waste valuable time and money arranging a costly rescue to get moving again.
Formula
Calculation
Lost gross profit = Unfilled units x (Selling price - Unit cost)
Stockout rate = Order lines not filled / Total order lines
A retailer sells a jacket for $40 that costs it $25, so each sale earns $15 of gross profit. During a one-week stockout, 300 customers wanted to buy and could not, so lost revenue was 300 x 40 = $12,000 and lost gross profit was 300 x 15 = $4,500. Across the whole business that month, 450 of 9,000 order lines went unfilled, so the stockout rate was 450 / 9,000 = 5%.Case study
Seen in the real world
Marlowe Home Goods is an illustrative, fictional online seller of kitchen equipment. Its finance director noticed that sales of its top ten products had dipped in the second quarter even though marketing spend had gone up. A review showed that those ten products had been out of stock for an average of 17 days during the quarter.
The team calculated the lost gross profit at roughly $210,000, compared with an extra cost of about $35,000 to hold more safety stock on those ten lines. They raised reorder points on the top sellers only, leaving slow-moving lines alone. The following quarter, availability on the top ten rose sharply while total inventory increased by a much smaller amount than the finance director had feared.
Watch out
Common mistakes
- Counting only the lost sale and ignoring the knock-on costs such as expedited freight, idle production and customers who never come back.
- Setting one safety stock rule for every product, which leaves valuable fast sellers short and fills the warehouse with slow lines.
- Trusting the system stock figure without checking it, so the shelf is empty while the records still show units on hand.
Questions
People also ask
Is a stockout the same as a backorder?
No, a stockout is the empty-shelf event itself, whereas a backorder is a customer order accepted for delivery once stock returns.
Can a stockout affect the financial statements?
Yes, it reduces revenue and gross profit for the period, and extra freight to recover from it can raise costs.
How can a company reduce stockouts without carrying far more stock?
It can improve forecasts, shorten supplier lead times, set reorder points by product value and review the stock records for errors.