Freeze the SKU, horizon and evidence boundary
Inputs and records to align
- Choose one SKU or genuinely interchangeable stock group and one review horizon. (not complete)
- Use the same currency, indirect-tax treatment and unit definition throughout. (not complete)
- Reconcile available, on-order, reserved, backordered and unusable units before creating a scenario. (not complete)
- Use retained contribution per unit, not selling price, for a stockout lost-contribution scenario. (not complete)
- Keep unit cash cost, holding cost, markdown or disposal cost and realised recovery value in separate overstock rows. (not complete)
- Label short or excess units as observed, committed or assumed; do not present an unsupported demand probability. (not complete)
| Input | Unit | Evidence class | Boundary |
|---|---|---|---|
| Short units | units/SKU over the horizon | Observed lost orders or user scenario | Not a demand forecast |
| Retained contribution | currency units/sold unit | Reconciled order or product record | Revenue less included variable costs |
| Excess units | units/SKU at horizon end | Inventory record or user scenario | State whether units remain reusable |
| Unit cash cost | currency units/unit | Current purchase and landed-cost record | Cash exposure, not automatically economic loss |
| Realised or scenario recovery | currency units/excess unit | Disposition record or explicit scenario | Do not assume full resale |
Build two transparent downside cases
Stockout downside = short units × retained contribution per unit + named expedite and recovery costs
- short units
- Orders or units the scenario cannot fulfil during the horizon (units/SKU per horizon) — observed event or user-entered scenario
- retained contribution per unit
- Revenue less the variable costs avoided or incurred under the declared boundary (currency units/sold unit) — reconciled product or order record
- named expedite and recovery costs
- Only incremental costs caused by the shortage response (currency units/horizon) — invoice, quote or user-entered scenario
Do not use selling price as lost contribution and do not count a cost that would have been avoided when the unit was not sold.
Overstock downside = excess units × (unit cash cost - recovery value per unit) + named holding and disposition costs
- excess units
- Units remaining above the declared need at the end of the horizon (units/SKU) — inventory record or user-entered scenario
- unit cash cost
- Cash committed to one excess unit inside the chosen landed-cost boundary (currency units/unit) — current purchase and landed-cost record
- recovery value per unit
- Value actually recovered or explicitly assumed through later sale, return, reuse or disposal (currency units/excess unit) — realised disposition or user-entered scenario
- named holding and disposition costs
- Incremental storage, handling, markdown or disposal costs in the horizon (currency units/horizon) — business record, current contract or user scenario
Also display gross cash committed = excess units × unit cash cost. It is a liquidity exposure and must not be silently treated as the final economic loss.
- Reconcile the current unit position and freeze the comparison horizon.
- Create one stockout case with explicit short units, contribution per unit and incremental response costs.
- Create one overstock case with explicit excess units, unit cash cost, recovery and holding/disposition costs.
- Calculate economic downside for each case and display overstock cash committed separately.
- Change one uncertain input at a time before combining a downside case.
- Assign a review date, evidence owner and stop trigger rather than converting the scenario into an automatic purchase quantity.
Work a common-horizon comparison
Fictional 30-day SKU scenario
All values are neutral, tax-excluded currency units supplied by the scenario. They are not provider rates, inventory benchmarks or a demand forecast.
| Case | Inputs | Intermediate calculation | Scenario output |
|---|---|---|---|
| Stockout | 20 short units; 28 CU retained contribution/unit; 90 CU expedite cost | 20 × 28 = 560 CU lost contribution | 560 + 90 = 650 CU downside |
| Overstock cash exposure | 20 excess units; 18 CU cash cost/unit | 20 × 18 | 360 CU cash committed |
| Overstock economic downside | 12 CU recovery/unit; 40 CU holding/disposition | 20 × (18 - 12) = 120 CU unrecovered unit cost | 120 + 40 = 160 CU downside |
| Sensitivity | Calculation | Result | Decision meaning |
|---|---|---|---|
| Only 5 units short | 5 × 28 + 90 | 230 CU stockout downside | The shortage assumption drives much of the baseline result. |
| No recovery on excess units | 20 × (18 - 0) + 40 | 400 CU overstock downside | Recovery quality can reverse the apparent comfort of excess stock. |
| Holding/disposition rises to 120 CU | 20 × (18 - 12) + 120 | 240 CU overstock downside | A longer or more complex disposition path needs a fresh horizon. |
Compare symmetric trade-offs and boundaries
| Criterion | Stockout question | Overstock question | Boundary |
|---|---|---|---|
| Customer and service | Can backorder, substitute or communicate? | Can stock be reused across channels or later periods? | Do not assign a universal monetary value. |
| Cash | Does expedite or missed contribution affect dated cash? | When is supplier cash paid and when can stock recover? | Use a dated forecast for liquidity. |
| Operations | What recovery work or production interruption follows? | What storage, handling, ageing or disposal work follows? | Include only incremental named costs. |
| Reversibility | Can replenishment lead time be shortened? | Can orders be cancelled or inventory returned? | Use current supplier terms, not assumptions. |
- Using lost revenue instead of retained contribution for the stockout case.
- Treating all unfilled interest as a certain lost sale.
- Calling gross inventory cash committed the final overstock loss.
- Assuming excess inventory will resell at full value without a dated recovery case.
- Mixing one month of stockout exposure with a year of holding cost.
- Copying a provider rate, carrying-cost percentage or safety-stock benchmark into a Global scenario.
- Adding the same fulfilment, holding or expedite amount in more than one row.
Hand each calculation to its registered owner
Test the component decisions
- Stockout Cost Planner
Estimate lost contribution and expedite cost from an inventory shortfall
- Inventory Funding Gap Planner
Identify the peak cash funding gap between inventory payments and customer collections
- Open-to-buy Planner
Set a buying budget from planned sales, markdowns and stock targets
- Inventory Turnover Planner
Measure inventory turnover and target working-capital change
Finish with an auditable next step
- Record which inputs are observed, contracted or assumed. (not complete)
- Run the same horizon through the relevant registered tools. (not complete)
- Put inventory cash timing into the dated cash forecast. (not complete)
- Name the person who will refresh demand, lead-time and recovery evidence. (not complete)
- Set a review trigger, such as a confirmed order, supplier cut-off, ageing date or stock position—not an unsupported probability. (not complete)
Stockout and overstock questions
- Is overstock always cheaper than a stockout?
- No. The answer depends on recoverability, cash timing, holding/disposition costs, shortage quantity, retained contribution and operational consequences.
- Should lost selling price be used as the stockout cost?
- No. Use retained contribution under the declared boundary, then add only incremental shortage-response costs.
- Is cash committed to excess stock the same as its economic loss?
- No. Cash committed is a liquidity exposure. Economic downside depends on recovery and the additional holding or disposition costs.
- Does this comparison calculate how much stock to order?
- No. It prepares comparable downside cases and evidence triggers. Use the registered inventory planners and current supplier constraints for the next decision.
Calculation sources
- Stockout Cost methodology — Margin101: Product-owned short-unit, lost-contribution and expedite-cost boundary.
- Inventory Funding Gap methodology — Margin101: Product-owned inventory cash-commitment and timing boundary.
- Open-to-Buy methodology — Margin101: Product-owned buying-capacity workflow; it does not forecast demand.