Shortage Costs:

While the stock of an item gets exhausted, an order for that item should either wait until the stock is replenished or be cancelled. These cost accounts for the shortage cost. It is of two types (a) Lost scale, and (b) Back orders.

In addition to costs, the timing of these orders is a decisive factor that has impact over inventory cost. There are two ways of classifying inventory systems such as. Fixed-order quantity models (termed as Economic order quantity and Q-model) and fixed-time period models (also termed as periodic system and P-model). The major distinction between these two models is that Q-models are "event triggered" while P-model are "time-triggered". The key differences among them are tabulated in Table. A short discussion on Q-model is detailed now in coming paragraphs.

Table: Differences between Q-model and P-model