What does a stockout cost in wholesale and distribution?
The customer waits, buys an alternative from you, or goes to a competitor.
Where you lose money
Missed margin. On the missing item, or in the worst case on the entire order it was part of.
Customer churn. Whoever bought from the competitor may not come back.
Rush deliveries and extra handling. Back-orders and partial deliveries cost more than one normal delivery.
Back-order administration. Every open line needs follow-up, communication and exceptions in your process.
How do you calculate it?
- Potential revenue = realised revenue / (1 − stockout% × (1 − retention rate))
- Lost revenue = potential revenue − realised revenue
- Direct margin loss = lost revenue × gross margin%
- Customer Lifetime Revenue (CLR) = lost revenue × customer horizon
- Customer Lifetime Value (CLV) = CLR × gross margin%
- Future lost revenue = CLR × churn rate
- Future margin loss = CLV × churn rate
- Staff time = team size (FTE) × % of time spent on stockouts × labour cost per FTE
- Total impact = direct + future margin loss + staff time
The costs
Converting to potential revenue corrects a common mistake: your revenue figures do not contain the missed sales, so calculating on realised revenue understates demand. In the literature this is called censored demand, and computing it is a research field of its own.
Be careful with what you enter. Most companies know their item availability, for example 95% of items in stock. That figure usually understates the problem, because stockouts hit the fast movers more often, with a bigger impact on revenue as a result. Five percent of your items can easily be a multiple of that in demanded revenue. So also measure your stockouts in euros of demanded revenue. And a blind spot remains: demand for items you never added to your range shows up in no system as a stockout. That too is why the outcome is a lower bound, and why it pays to review regularly what you keep in stock and what you do not.
How many customers you lose to a stockout is well researched for B2C retail. The Gruen and Corsten study of 72,000 customers in supermarket products found that 31% buy at another store and 9% do not buy at all; 45% pick a substitute and 15% postpone the purchase. For B2B wholesale such benchmarks barely exist, so estimate the retention rate from your own experience, or try to measure it.
That customers buy less later on after a stockout has been shown experimentally: Anderson, Fitzsimons and Simester measured at a mail-order company that customers ordered less in subsequent periods after a stockout.
Calculate it for your wholesale business
Estimate the impact of stockouts
Measure in % of demanded revenue, not in % of your items. 95% item availability can hit far more than 5% of demand if it is precisely your fast movers that sell out. Reference value: in supermarkets an average of 8% of items are not on the shelves (Gruen & Corsten, 2002). Note: that is at item level, not in % of revenue.
So 60% buy elsewhere. Reference value: in supermarkets 60% of buyers stay with the store: 45% pick a substitute and 15% postpone the purchase (Gruen & Corsten, 2002).
Reference value: at a mail-order company, demand from customers who experienced a full stockout was about 22% lower over the following 13 months (Anderson, Fitzsimons & Simester, 2006).
What your revenue could have been
Revenue
Margin
Staff time
Total
- Margin this year€46,392
- Margin in later years€34,794
- Staff time€33,000
Curious what this costs you?
A short conversation, then a personalised calculation for your situation.