When an item is out of stock, you’re not just risking a single sale—you’re potentially damaging customer relationships and racking up hidden costs. Yet even large, sophisticated companies often fail to accurately track stockout costs, including lost sales. In this article, we’ll explore how to measure these costs, how to turn data into actionable insights, and why this often-overlooked metric is the most important one you aren’t tracking.
The actual cost of a stockout includes multiple factors that go well beyond lost revenue for that specific order:
When it comes to inventory performance, most companies focus heavily on fill rates—the percentage of customer orders that are filled from available stock. While fill rates are important, they are a flawed and incomplete measure. Fill rates only account for orders that customer actually place. But what about the orders that were never placed because the customer saw an “out of stock” notification and didn’t even bother adding it to their cart?
This is where stockout lost sales come into play. A fill rate of 95% might look solid on paper, but if your actual sales are 80% lower on out-of-stock days (i.e., a spill rate of 80%), then that 5% fill rate shortfall is driving significantly more lost revenue than you might expect.
Measuring fill rates is important and worthwhile, but we suggest also measuring your in-stock rate. This is simply the percentage of expected sales you were in-stock for at the start of the date (as opposed to fill rate, which measures the percentage of actual sales you were able to fulfill from stock).
To accurately measure stockout cost, we need to move beyond fill rates and start measuring spill rate—the percentage of potential sales that are lost when an item is out of stock.
Start by capturing daily inventory position snapshots. This data tells you whether an item was in stock at the beginning of each day. This is critical because most ERP systems don’t archive inventory levels over time, so you need to start collecting this data manually if it’s not already being stored.
Once you have daily inventory snapshots, choose a timeframe to compare sales when in-stock vs out of stock. We like to use quarterly data (e.g. ~90 days of inventory history). Filter for items that had at least one in-stock day and one out-of-stock day during the period in question, and compare the average daily sales across all such items when in-stock vs out-of-stock. Let’s say you find that average daily sales per item are $500 when in-stock, and $250 when out of stock. This means your spill rate is 50% – i.e. you are losing half of your potential revenue every day that the item is unavailable.
Now, extend this analysis across your entire product line. To get a high level approximation of lost sales, multiply your spill rate by the inverse of your overall, revenue-weighted in-stock rate. For example, if your annual sales are $100 million, your in-stock rate is 92%, and your spill rate is 50%… you are losing approximately $100 million * 8% stockout rate * 50% = $4 million of annual lost sales.
In addition to lost revenue, you need to account for:
One of the key benefits of tracking stockout cost is that it shifts the conversation from vague “inventory improvement” discussions to a firm ROI-driven analysis. For example, if you estimate that adding $500,000 in inventory will increase your fill rate in the example above from 92% to 94%, this should increase annual sales by ~$2 million (thanks to improved in-stock rates). Depending on your gross margins and cost of capital, the decision to make this investment becomes clearer.
Now that you understand the hidden costs of stockouts and the importance of ROI-driven inventory management, it’s time to take action. Implementing these strategies can transform your inventory from a source of frustration and lost revenue into a powerful driver of profitability and growth.
Our inventory optimization services provide the expertise and technology you need to gain control of your inventory and maximize profitability.
We offer a free assessment to calculate your current stockout costs and identify areas for improvement. Our month-to-month service combines cutting-edge machine learning, AI-powered planning, and expert consulting to deliver a proven ROI, typically 5-10x our fees.
Contact us today to learn how we can help you transform your inventory into a strategic asset that drives sustainable growth.
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