What does a stockout cost a manufacturing company?

In a manufacturing company the damage from a material shortage is not a lost sale but lost time: a line that stops, starts up more slowly, or has to be reshuffled. The calculation therefore counts three items you can measure per year: downtime, rush shipments, and the time planning and purchasing spend absorbing shortages.

Be careful with availability percentages. That 95% of your materials arrive on time says little: the line only runs once everything is there, and that one missing part brings the whole line to a stop. So weigh materials by what they can bring to a standstill rather than by their price or their share of your item count. A cheap part that stops the line deserves the same attention as an expensive one.

The hardest input is the cost per downtime hour. Add up three things for it: the machine cost per hour, the labour cost of the crew standing by, and the contribution margin you are not producing in that hour. To give an idea of the scale at large industrial companies: according to the Siemens report The True Cost of Downtime, the cost of unplanned downtime in the automotive industry goes up to $2.3 million per hour, and the world's 500 largest companies together lose around $1.4 trillion a year to it, 11% of their revenue.

Penalties for late delivery and customers who start out unhappy with a new purchase are deliberately left out of the calculation: they vary too much per contract and per customer to compute generically. The estimate is therefore a lower bound on the real cost.