Are your stockouts higher than you think?

Aug. 5, 2020
Doc Palmer says miscalculating stockouts, or not reporting missing parts, will affect an operation’s long-term reliability.

In my youth, a Readers Digest story caught my eye. In the olden days, the Texas flag had a single white star centered on a blue field. On the capitol building flag, a citizen reported the star was actually moving across the field toward the end of the flag! After some investigation, it turned out that instead of replacing the flag periodically, the maintenance folk were simply snipping off the frayed end. The star wasn’t moving; the flag was getting shorter!

About the Author: Doc Palmer

Our question is: Why didn’t they replace the flag? Maybe it was easier just to snip away. Maybe they were told to snip away. Maybe they were short staffed and didn’t have time to replace the flag. Maybe they had a tight budget and couldn’t afford to replace the flag. Then again maybe, just maybe, they had a storeroom to keep a spare flag, but didn’t have one when it was needed. The craftsperson went to the storeroom only to hear, “Sorry. We’re fresh out.” What’s a craftsperson to do? The craftsperson could have said, “Please order one for me.” But I’ll bet the craftsperson said, “No problem. I’ll take care of it” and snipped away the frayed edge. Problem solved. Our maintenance folk are great at getting things done. They are ingenious. And we respect their skills, efforts, and accomplishments. We really do.

You can see that the Texas storeroom had a “stockout,” meaning a normally stocked item was not in stock when needed. Many companies use the rate of stockouts to help know if they are carrying too many or too few of an item. Having about 3% stockouts is supposedly best practice. That is, only 3% of the time when someone needs a stocked item, the storeroom is out. If the stockouts are above 3%, perhaps the storeroom is under-stocked for the current state of plant asset health and maintenance maturity. If the stockouts are below 3%, perhaps the storeroom is overstocked.

But can you also see that although the Texas storeroom had a stockout, it did not record a stockout because the craftsperson did not put a demand on the system? Because of this practice, many of our storerooms commonly report a stockout rate of practically zero percent. But we do have stockouts, often way more than we think because the stockouts are not recognized. And so our managers deduce they are overstocked.

Let’s say a storeroom carries $10 million worth of spares costing a company $200,000 annually in carrying costs. Management cuts the storeroom to $9 million to start saving $20,000 each year. But we may have been the victim of ingenious maintenance folk who frequently tell the storeroom, “No problem, I’ll take care of it” and do jobs another way.

How do crafts do jobs another way, and who cares? Maybe we use an inferior part. Maybe we cannibalize another piece of equipment. Maybe we use a more expensive alternate part. Maybe we use a purchasing credit card and bypass the storeroom. Maybe we do the job without any parts and snip off the end of the flag. These jobs risk compromising reliability if they don’t use acceptable parts. Or they increase maintenance cost if they use more expensive alternate parts or procure parts (that are supposed to be stocked) individually by credit card. Do you get that? We are increasing plant cost by lowering reliability. At the very least, we are increasing plant cost by using more expensive parts or using alternative procurement methods for stocked parts. Carrying costs are expensive, but the real money involves plant reliability that produces a profitable product. But the worse is yet to come. By improperly lowering storeroom capacity due to a false sense of low stockouts, we cripple future maintenance jobs further lowering reliability and profit.

We have these great craftspersons everywhere taking care of us. We are them ourselves. (Pogo: “We have met the enemy and he is us.”) We are great at “making do.” Lost a gas cap on a mower? “No problem, I’ll take care of it,” and we replace duct tape when we fill up. Radiator thermostat clogged up? “No problem, I’ll take care of it,” and we cut a gasket from cardboard whose fibers swell and make a great seal. This stuff is happening all around us. The storeroom reports 0% stockouts, management cuts stock levels more, we rely on the storeroom less, and we suffer poor reliability.

What’s the solution?

1. Realize that the storeroom itself has trouble accurately tracking stockouts. A better sense of stockouts comes from craftspersons. Have a checkbox or some way whereby crafts can report if the storeroom did not have something it should have had, even if they did the job another way. (Avoid telling craftspersons never to do a job another way or you might create a climate of vicious compliance.)

2. I prefer stockouts as a measure, but consider also looking at %RAV (the storeroom value as a percent of replacement of asset value of the plant) and turns (the ratio of inventory cost issued to the cost of inventory on hand). Nonetheless, each of these measures also has its own shortcomings. Nothing is perfect.

3. Don’t over rely on KPIs anyway. Get out of your office and get a sense of what crafts think of the storeroom. Manage by walking around. Action item: Go ask your storeroom today what was its stockout rate for last year, and then ask ten craftspersons if they agree.

4. Consider telling crafts if the storeroom is out of something, and order it even if you end up doing the job another way. That will accomplish two things. It will force the storeroom to record a stockout and to order something it should have on the shelf. Then next week, when the storeroom calls you to say your part came in, tell them you don’t need it after all and they can put it in stock. But I hate manipulating the system to “help” someone else do their job.

Work together with the storeroom to get great support for maintenance. The rate of stockouts is a great measure of support. But a simplistic reliance on the storeroom to measure stockouts can actually cripple plant reliability. Stockout information best comes from craft feedback because our crafts are so good at taking care of us. “No problem, I’ll take care of it.” And don’t mess with Texas.

Palmer's Planning Corner

This article is part of our monthly Palmer's Planning Corner column. Read more from Doc Palmer.

About the Author

Doc Palmer | PE, MBA, CMRP

Doc Palmer, PE, MBA, CMRP is the author of McGraw-Hill’s Maintenance Planning and Scheduling Handbook and as managing partner of Richard Palmer and Associates helps companies worldwide with planning and scheduling success. For more information including online help and currently scheduled public workshops, visit or email Doc at [email protected]. Also visit and subscribe to

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