The shortage factor (SF) for an item is the portion of the sales price lost when inventory is not available for sale for that item. It is higher for items that are key to the sales of other items, that are critical to total customer service, that do not have an attractive substitute, and that have a high degree of competition. It is a judgment factor that a multi-functional team can decide.
The shortage factor 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.