Shortage cost, also known as deficit cost, refers to the loss caused by the interruption of inventory supply, including the loss of shutdown caused by the interruption of material supply, the loss of delayed delivery and the loss of sales opportunities caused by the shortage of finished goods inventory (including the loss of goodwill that needs subjective estimation). If the production enterprise solves the emergency situation of stock material interruption by purchasing substitute materials urgently, then the out-of-stock cost is manifested as the cost of emergency outsourcing (the expenditure of emergency outsourcing will be greater than that of normal procurement).

Whether the out-of-stock cost can be used as the relevant cost of decision-making depends on whether the enterprise allows different situations of inventory shortage. If the shortage is allowed, the shortage cost is inversely proportional to the inventory quantity, that is, it belongs to the decision-related cost; On the other hand, if the enterprise does not allow out-of-stock situation, the out-of-stock cost is zero at this time, so it does not need to be considered.

Simple calculation of out-of-stock cost;

Many enterprises will consider maintaining a certain safety stock or buffer stock to prevent the uncertainty of demand, but the existence of safety stock will naturally lead to a certain inventory cost. At the same time, it should be noted that every increment of safety stock will reduce the benefits. The insurance inventory of the first unit that exceeds the expected demand provides the greatest preventive effect on the shortage, while the preventive effect provided by the second unit is slightly less than that of the first unit, and so on. When maintaining a certain level of insurance inventory, the cost of storing additional inventory plus the expected shortage cost will have a minimum value, which is the maximum level. If it is above or below this optimal level, there will be a net loss.

In order to determine the necessary inventory, it is necessary to determine the losses caused by the shortage.

The first step is to analyze the possible consequences of shortage, including delayed delivery, sales loss and customer turnover.

The second step is to calculate the cost related to the possible results, that is, the loss of profits.

The third step is to calculate the cost of the shortage.

If there is internal shortage, it may lead to production loss (idle machinery, equipment and personnel) and delivery delay. If the whole production line is shut down because of the shortage of one item, the shortage cost may be very high, especially for enterprises that produce on time. In order to make the best decision on insurance inventory, manufacturing enterprises should have a comprehensive understanding of the cost caused by the shortage of raw materials. First, determine the hourly or daily productivity, then calculate the production reduction caused by shutdown, and finally get the loss of profit.