Stock-Out Costs

Posted in Operations and Supply Chain Terms, Total Reads: 10531

Definition: Stock-Out Costs

Stock-out Costs is the cost associated with the lost opportunity caused by the exhaustion of the inventory. The exhaustion of inventory could be a result of various factors. The most notable amongst them is defective shelf replenishment practices. Stock-outs could prove to be very costly for the companies. The subtle responses could be postponement of purchase. The more disastrous ones are the consumers may get frustrated and switch stores or even purchase substitute items (brands).  Various retailers follow the concept of “Safety Stock” in order to avoid the situation of stock-outs. Stock-outs could occur at any point of the supply chain.

Effective Inventory management is the solution to avoid stock-outs. Regular audits of the inventory are carried out to check the frequency of stock-outs of different items. Advanced modelling tools and frameworks are used to determine the economic order quantity that will minimize the stock out and also the inventory carrying cost.

For example: Newsvendor problem that combines the concept of statistics and operations is one of the advanced tools used by companies to avoid stock-out costs.


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