Stock-out Costs
These are the penalty costs associated with delays in meeting the demand or the firm's inability to produce the product due to shortage of stock. The purpose behind holding inventory is to avoid stock out costs. These costs are also referred to as shortage costs.
The stock-out cost mainly includes the loss of sales caused by shortage of stocks. Shortage of stocks leads to:
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Loss of future sales as customers who were not served on time may shift to competitors' products
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Additional costs associated with urgent purchases
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Loss of customer goodwill
Operations managers decide on the order quantity and inventory levels to be maintained after giving due consideration to above mentioned costs.
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