Shortage costs definition
/What are Shortage Costs?
Shortage costs are those costs incurred by an organization that cannot meet demand because it has no inventory in stock. These costs include the loss of business from customers who go elsewhere to make purchases, the loss of the margin on sales that were not completed, and overnight shipping costs to acquire goods that are not in stock. These costs also trigger additional administrative costs to deal with rush inventory replacement orders, as well as customer contacts to placate them or convince them to purchase alternative products. A further loss that is less quantifiable is the loss of future business from customers who have decided to permanently take their business elsewhere.
Shortage costs are a major consideration when deciding upon how much inventory to keep in stock, especially for organizations that compete based on high levels of customer service.
Terms Similar to Shortage Costs
Shortage costs are also known as stockout costs.