The Real Cost of Stockouts and Overstock
Managing inventory means balancing the risk of running out with the risk of having too much. Stockouts and overstock both come with costs that affect your business. Knowing these costs helps you make better decisions.
What Is a Stockout?
A stockout happens when you do not have enough inventory to meet demand. This can lead to lost sales, unhappy customers, and damaged reputation. It can also cause extra costs, such as rush shipping or emergency restocking fees.
What Does Overstock Mean?
Overstock means you have more inventory than you can sell in a reasonable time. Overstock ties up your cash, uses valuable storage space, and often leads to markdowns or write-offs if products expire or become obsolete.
The Cost Breakdown
Stockout Costs
- Lost sales revenue
- Decreased customer loyalty
- Increased shipping or sourcing costs
- Potential loss of future business
Overstock Costs
- Storage fees
- Reduced cash flow
- Inventory write-downs or write-offs
- Obsolescence or spoilage risk
Simple Calculator: Find Your True Inventory Costs
Use this basic formula to estimate your costs:
Stockout Cost Formula
Stockout Cost = (Number of Stockouts) x (Average Lost Sale Value) + (Emergency Shipping Cost)
Overstock Cost Formula
Overstock Cost = (Units Overstocked) x (Cost per Unit) x (Storage Time in Months) x (Storage Cost per Month)
Example:
If you had 10 stockouts last month, lost $100 per sale, and spent $200 on rush shipping:
Stockout Cost = (10 x $100) + $200 = $1,200
If you have 50 units overstocked, each unit costs $20, you will store them for 2 months, and storage costs $1 per unit per month:
Overstock Cost = 50 x $20 x 2 x $1 = $2,000
Why This Matters
Understanding these costs shows how small inventory mistakes add up. By calculating your real costs, you can set better reorder points and avoid wasted money.
Conclusion
Stockouts and overstock both hurt your business. Use the simple calculator above to find your total costs and guide your inventory decisions. A small effort in tracking can lead to significant savings.
