From the course: Inventory Management Foundations
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Costs of inventory
From the course: Inventory Management Foundations
Costs of inventory
- Managing your inventory cost is a balancing act. You're balancing the cost of not having enough inventory with the cost of having too much inventory. Most inventory decisions are driven by the cost of not having enough inventory. This is the most important of the traditional cost of inventory and it's called shortage or stockout cost. When your customer places an order, you're out of stock. Sometimes your customer will wait by placing a back order, but quite often you will lose the sale. For example, we've all shopped for groceries at some time. If bread is on your list and you don't find the kind of bread you normally buy, you simply pick another brand. For the bread company that's a lost sale. Let that happen about three times in a row and you will switch brands permanently, that's a lost customer possibly forever. So, a major goal of all companies is to hold enough inventory to reduce stockout costs and lost sales.…
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