KNOWLEDGE LIBRARY

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Shortage Factor

The shortage factor is the % of an item’s unit selling price (USP) that is lost in the event of a stockout and subsequent lost sale. It is used to compute the lost sales cost. For example, if the shortage factor is 20% and the item sales for $100, then the lost sales cost per unit for the item is 20% of $100, or $20. If the shortage factor for an item is 300% and the item sales for $1000, then the lost sales cost per unit for the item is $3000. It is a judgment factor that a multi-functional team can decide. The shortage factor is highest when there is limited ability to substitute, intense competition, the item is very popular, and the customer is very popular.

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