## Inventory Stock Out

A Stock Out occurs when there is demand for a product but the entity is unable to supply it from stock.

### Consequences

Financial loss — lost sales, lost contribution margin.
Loss of image / reputation — customers see the firm as unreliable.
Hampers customer relationships — repeat customers may switch to competitors.
May trigger emergency procurement at premium cost (link to Danger Level).

### Why this matters

Stock-out costs are often invisible in routine accounting but materially hurt long-run profitability. Proper Re-Order Levels, Safety Stock, and Danger Levels are designed to prevent stock-outs.

Worked example

### Example 1

Scenario: A retailer runs out of a fast-moving SKU during a festive sale. Direct lost sale = ₹2,00,000. Additionally, 5 regular customers shift to a competitor → recurring loss of future revenue. The implicit stock-out cost is far higher than the inventory carrying cost would have been.

⚠️ Common exam mistakes

Treating stock-out cost as only the direct lost sale — ignoring goodwill and customer-loyalty damage.
Setting safety stock to zero to minimize carrying cost without considering stock-out probability.

Reference:

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