Inventory planning · Step 4 of the chain
What does running out of stock actually cost me?
A stockout is rarely free, but it is rarely as expensive as the full sale price either. Some demand walks away, some waits, and some damage you never see on the invoice. Put in your numbers to turn one stockout into a rupee figure, then build it up to a cost per event and an expected cost over a year.
Your result
What one stockout period costs you
₹9,600
Falling 120 units short costs you about ₹9,600 for this one stockout. Of that, ₹7,200 is margin lost on the 60% of demand that walks away, and ₹2,400 is the cost of expediting the 40% your customers are willing to wait for.
Recommendation: the lost-sale share is doing most of the damage here. Anything that converts a walk-away into a willing-to-wait back-order (a quick ETA, a partial shipment, a substitute offer) cuts this cost sharply. If a stockout this size is a regular event, compare it against the yearly cost of a little more safety stock.
Your numbers
Lost-sale cost
₹7,200
Back-order cost
₹2,400
Cost per unit short
₹80
A stockout also costs you future business you never see on the invoice: the let-down customer who quietly shifts away. It is real but hard to measure, so add it as a deliberate allowance on top of the direct cost above. Enter it whichever way you can defend.
A judgement figure for the future business one stockout like this costs you.
Carry goodwill as a percentage on top of the direct cost, say 25%, to reflect that the true cost runs a quarter higher than the invoice damage.
You do not stock out every cycle, only when demand outruns your buffer. Tell us how often a stockout like this is expected and we will scale the per-event cost into an annual figure, the number that justifies how much safety stock to carry. Enter the frequency directly, or build it from your order cycles and the chance of a stockout in each.
How many stockouts of roughly this size you expect across a year.
Replenishment cycles in a year, times the chance you run dry in any one cycle. A 95% service level means a 5% stockout risk per cycle.
What stockouts cost you at each service level
The red line is your expected stockout cost across a year at each service level: it falls as you push service higher, because a higher service level means you run dry less often. Where you set it is the trade-off; every step up cuts this cost but costs you more safety stock to hold. To see the carrying-cost side and the point where they balance, you need two figures this page doesn't collect: your holding cost per unit (from the EOQ tool) and your demand variability and lead time (from the Safety Stock tool).
Where these numbers come from, and where they sit in your planning system
The three layers
Stockout cost is built up in three steps, each consuming the one before it. The first is the cost of a single out-of-stock period. The second adds lost goodwill to give a cost per stockout event. The third multiplies by how often stockouts happen to give an expected cost over a year.
One stockout period
Split the units you fall short by into a lost part and a back-ordered part. The lost part costs you the contribution margin you would have kept on each unit; the back-ordered part costs you the extra to fulfil it late. In symbols, with U units short, a lost fraction f, margin m and expediting cost e:
The lost-sale part uses margin, not selling price, because you never bought the goods you failed to sell; costing it at the full price overstates the loss and pushes you to over-stock.
Cost per stockout event
The direct cost misses the future business a stockout drives away: the customer who does not come back, the review that deters others. That loss is real but hard to measure, so it is carried as a separate, labelled allowance rather than hidden inside the direct figure, either as a flat rupee amount or a percentage uplift:
Expected annual stockout cost
You only pay the cost per event when you actually stock out, which is far from every cycle. Scale it by the number of stockouts you expect in a year, entered directly or built as order cycles per year times the chance of running dry in any one cycle (one minus your service level):
Why this is the number that sets your buffer
Safety stock and stockout cost are two sides of one decision. Carrying more buffer costs you holding cost every year but makes stockouts rarer and cheaper; carrying less saves holding cost but raises the expected stockout cost. The economically right service level is where the carrying cost of one more unit of buffer equals the expected stockout cost it avoids. The expected annual figure here is exactly what you weigh against the carrying cost on the Safety Stock page.
Where this sits in the chain
The safety stock and reorder point tools decide how much buffer to carry and when to reorder; EOQ decides how much to order each time. This estimator prices the consequence of getting those wrong, so it gives the buffer decision a rupee figure to aim at rather than a service-level percentage picked by habit.
Terms used on this page
- Stockout
- A period when demand arrives for an item and you have no stock to meet it.
- Lost sale
- Demand that walks away during a stockout; the customer buys elsewhere and the sale is not recovered. Costs you the contribution margin on each unit.
- Back-order
- Demand that waits during a stockout; the customer still wants the item and you fulfil it once stock arrives, at the extra cost of expediting it late.
- Contribution margin
- Selling price minus the variable cost of the unit: the part of the price you actually keep, and the honest cost of a lost sale.
- Lost goodwill
- The future business a stockout drives away that does not appear in the stockout itself: customers who shift to competitors, reputation damage, contracts not renewed.
- Expected annual stockout cost
- The cost per stockout event multiplied by how many stockouts you expect in a year: the figure to weigh against the carrying cost of more safety stock.
Common questions
What is stockout cost?
Stockout cost is what it costs you when demand arrives and you have no stock to meet it. It is one of the four inventory cost categories, alongside ordering cost, holding cost, and capacity cost. A stockout resolves one of two ways: the customer waits, and you pay to expedite and back-order the sale, or the customer goes elsewhere, and you lose the margin on that sale. The full cost also includes the harder-to-see damage to future business when a customer who was let down does not come back.
How do you calculate the cost of a stockout?
Start with the units you fall short by during the out-of-stock period. Split that shortfall into the part that is lost outright and the part that is back-ordered. The lost part costs you the contribution margin per unit, the price you would have kept after the cost of the goods. The back-ordered part costs you the extra expediting, freight, and admin to fulfil it late. Add the two and you have the direct cost of that one stockout. To get the cost per event, add an allowance for lost goodwill; to get the expected annual cost, multiply by how many stockouts you expect in a year.
Why is lost margin used instead of the full sale price?
When you lose a sale you do not lose the whole selling price; you never incurred the cost of the goods for that unit, because you never had it to sell. What you actually lose is the contribution margin: selling price minus the variable cost of the unit. Costing a lost sale at the full price overstates the damage and pushes you to carry more safety stock than you need. Margin is the honest figure for the lost-sale part of a stockout.
What is the difference between a lost sale and a back-order?
A lost sale is demand that walks away when you are out of stock; the customer buys from someone else and you never recover that sale. A back-order is demand that waits; the customer still wants the item and you fulfil it once stock arrives, but you pay extra to do so, through rush freight, partial shipments, and the admin of tracking it. Real demand is usually a mix: some customers wait, some leave. The split between the two drives most of the cost, which is why it is the first thing the calculator asks for.
How do I account for lost goodwill and future business?
Lost goodwill is the demand you do not see in the stockout itself: the let-down customer who quietly shifts to a competitor, the review that costs you future buyers, the contract not renewed. It is real but hard to measure, so it is carried as a deliberate, separate allowance rather than dressed up as precise. You can express it as a flat rupee figure per stockout, or as a percentage uplift on the direct cost. Keeping it visible and labelled is more honest than burying a guessed number inside the direct calculation.
How does stockout cost connect to safety stock and service level?
These are two sides of one decision. Holding more safety stock costs you carrying cost every year but makes a stockout rarer; holding less saves carrying cost but makes stockouts more frequent and more expensive. The right service level is where the carrying cost of one more unit of buffer equals the expected stockout cost it avoids. That is why this estimator sits next to the Safety Stock and Reorder Point tools: the expected annual stockout cost it produces is exactly the number that justifies how much buffer to carry.
Next in the chain
This is your starting number, not your final answer. Validate it against your own margins, expediting costs, and stockout history before you act on it.