What is a Stockout?

A stockout occurs when customer orders for a product exceed the amount of inventory kept on hand. This situation arises when demand is higher than expected and the amount of normal inventory and safety stock is too low to fill all orders. A stockout can also arise due to delays in the supply chain, as well as stoppages in a company's production process. A stockout causes an increased risk of lost sales, since customers are more likely to look elsewhere for the necessary items. This can have a negative impact on long-term customer relations.

A stockout condition may be intentional. For example, a seller may not have access to sufficient capital to invest in inventory, so it maintains a low inventory level and accepts the consequences of frequent stockouts. Or, a firm knows that there are occasional spikes in demand, but it does not want to to maintain a large inventory investment to meet these occasional demand spikes.

Stockout Costs

There are several costs associated with a stockout. These costs can add up to a substantial amount, which forces some companies to go to great lengths to ensure that they always have some inventory on hand. These costs are as follows:

Rush order costs. A major stockout cost is the cost of rush ordering replacement products from suppliers, which may include the cost of an overnight freight delivery service.
Administration costs. Another cost is the extra administrative cost of placing orders for replacement goods. These orders may have to be expedited, which means that the staff has to stop whatever they were doing in order to place these orders, which can cause a great deal of disruption.
Lost lifetime value. Another cost is the loss of the lifetime value of customers who have chosen to take their business elsewhere as a result of the stockout. This can be the largest cost of all, especially when customers tend to make repeat purchases over an extended period of time.