Discuss the concept of stockout costs. How can a stockout cost be calculated?
What will be an ideal response?
Answer: Stockouts refer to situations where customers demand items that are not immediately available and stockout costs refer to the costs associated with not having items available. Calculation of a stockout cost first requires a company to classify potential customer responses to a stockout (e.g., delays the purchase, lost sale, lost customer). Next, the company needs to assign probabilities to the various responses as well as to assign monetary losses to the various responses. The respective probabilities and losses are multiplied together and then all costs are summed to yield an average cost of stockout.
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