Inventory finance
Stockout Cost
By the Supply Chain Manager team · Updated October 16, 2026
Stockout cost is the total cost of running out of stock: lost margin, backorder handling, expediting, penalties and damage to customer relationships.
Some parts are easy to measure, like expedite freight and lost margin. Others are not, like customers who quietly move future orders elsewhere. Even a rough estimate helps when deciding how much safety stock a SKU deserves.
Stockout costs differ widely by customer and product. A missing consumable for a walk-in customer may cost one sale; a missing line on a large contractor's project order can put the whole account at risk. Assigning higher service levels to the items and customers where stockouts are most costly is how carrying cost is spent wisely.
How to calculate stockout cost
Stockout Cost ≈ Lost margin + Backorder handling + Expediting + Penalties + Estimated lost future sales
Stockout cost example
Illustrative numbers: a 5-day stockout on a SKU with $12 margin a unit and 30 units a day of demand. If half the demand is lost ($900), backorders cost $5 each to handle (75 × $5 = $375), and one $300 expedite is needed, the visible cost is $1,575 before any lost customer goodwill.
Why stockout cost matters for distributors
Comparing stockout cost with carrying cost is how you set sensible service levels: high for items where running out is expensive, lower where it is not.
Common stockout cost mistakes
- Treating stockout cost as zero because it never appears on an invoice.
- Using one stockout cost for every SKU and customer.
Examples on this page use made-up round numbers to show the calculation. They are not benchmarks or results from real businesses.