Email
sinha.rk.dr@gmail.com
Cost of stockouts is often the biggest cost in Supply Chains.
I have seen many supply chain teams working on supply chain transformation or cost improvement projects ignoring the cost of stockouts, which often turns out to be the biggest cost element. The reason is understandable. Cost of stockouts is rarely captured by companies. Even if it is measured, it doesn’t reflect in the prevailing cost accounting system.
If we reduce stockouts, the profit impact is huge. The incremental profit is the additional throughput (revenue – total variable cost) we would generate, as fixed expenses remain at the same level. I have seen cases wherein reducing the stockouts by half doubles the profit.
Stockouts can be reduced through better synchronization of supplies with demand. Concepts of Demand Driven Supply Chain (DDSC) and Theory of Constraints (TOC) help in this endeavour.