|
The Shortage Cost is the cost of not having sufficient inventory, usually due to an attempt to reduce carrying costs (the cost of holding items). It is the opportunity cost of not having sufficient inventory to fulfill demand.
As mentioned, shortages costs are usually incurred due to poor management of inventory when attempting to reduce carrying costs . The shortage cost is hard to measure because often times having a shortage of goods can result in implicit costs (costs that cannot be measured) to a firm such a losing its customers. Firms that attempt to reduce their ordering cost inadvertadly reduce their chance of facing a shortage while also increasing their carrying costs. |
