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.
We frequently find it helpful to identify and rank order root and systemic causes of excess inventory. An example completed for a large HVAC client is depicted below. In this case the root causes in
The RightStock™ model also distinguishes between value added inventory (VAI) and excess, non-value added inventory (NVAI). Value added inventory is the sum of safety stock, lot size, and pipeline inventory. Those three types of inventory
Hedge inventory (HI) mitigates risks of potential sharp price increases, shortages in critical commodities, and extreme price and availability volatility for those same items. Fuel is a classic example of a commodity whose inventory may
Contingency and disaster inventory (CDI) insures against unexpected situations outside the realm of those covered by traditional safety stock inventory. Those situations include natural disasters, labor strikes, and other abnormal supply chain disruptions. For example,
Setup cost (SUC) is the cost to setup (prepare or changeover) a machine or production line to make a production run for a particular item or change between items. It is sometimes referred to as changeover cost (COC).
The purchase order cost (POC) is the cost of placing a purchase order from a vendor. The majority of those costs are related to sourcing, purchasing, and procurement salaries and benefits (italics) and include: Purchase
As a part of the National Science Foundation’s Japan Technology Evaluation Center I had the unique privilege to lead a major study for the U.S. government comparing U.S. and Japanese logistics systems. During the study
There are two conceptual models for inventory management – push and pull. The push inventory model is so called because the emphasis is on "pushing" speculative inventory, made-to-forecast (MTF) in response to forecasted demand, out
Order status communication should be proactive when there is an exception to the order contents, timing, or terms agreed upon at order entry. Order status information should be updated in real-time and should be available
For individual consumers, credit verification should take place before order release and inventory commitment. Credit verification should take place on-line and in near real-time. For large corporate customers, each customer should be classified as a: