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Calculating The Cost of a Stockout


PurchTips - Edition # 212

By Charles Dominick, SPSM

 

How Much Does A Stockout Cost Your Organization?

It is no secret that companies have been keeping their inventories extremely "lean" in an effort to contain costs in the unstable economy of the past three years. But when sales are lost, there is a such thing as "too lean."

I was recently reminded of this when I went to have my car tires replaced and my preferred retailer was out of my size of tires and couldn't get them in before my state inspection was due to expire. So, I had to buy another set of tires from this retailer's competitor.

Tires aren't cheap - I spent about $700. I wondered if the tire retailer's headquarters is calculating the cost of its stockouts in order to realize the need to improve its inventory levels. Calculating the cost of stockouts can be done using a formula like this:

CS = (NDOS x AUSPD x PPU) + CC

Where,

CS = Cost of a Stockout

NDOS = Number of Days Out of Stock

AUSPD = Average Units Sold Per Day

PPU = Price Per Unit (some use Profit Per Unit)

CC = Cost of Consequences

Cost of Consequences generally will apply only to stockouts of raw materials or subassemblies, not finished goods. These consequences includes costs associated with a production line that has been idled or must be switched over to accommodate another process due to the stockout. They can also include penalties payable to customers for failure to deliver on time.

Most experts agree that carrying costs - the downside of having extra inventory - are 18 - 35% of an item's value for a year. This translates to 0.05% to 0.1% per day. Though profit margins are certainly tight in this economy, getting a sale is many times more profitable than avoiding inventory carrying costs.

The moral of the story is that, when it comes to inventory levels, be lean. But don't be too lean. Stockouts negatively impact your organization's revenue and put money in its competitors' pockets.

To learn more about warehouse and inventory management, consider the online course "Profitable Inventory Management and Control." Learn more by clicking here.

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Spotlight On Professional Development Opportunities

Are you setting yourself up for failure in inventory management? Bad inventory decisions can kill an organization's profitability, whittle away at its market share, and generally wreak havoc on the supply chain, but it doesn't have to be that way.

The course "Profitable Inventory Management and Control" will give you the skills you need to use inventory as a strategic weapon for boosting profitability and giving your organization a competitive advantage. You'll become an inventory management and control expert, you'll have fun doing so, and your organization's financial and operational performance will improve as you implement the easy-to-apply best practices taught in this course.

Learn more about Profitable Inventory Management And Control at:

www.NextLevelPurchasing.com/inventory



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