Shortage cost is the cost incurred when demand exceeds supply and a company fails to fulfill orders. It includes lost sales, backorder processing, customer dissatisfaction, and long-term brand damage. Shortage costs are often hidden and difficult to measure but can significantly impact profitability and market share. Avoiding shortages is a key goal of inventory and supply chain management. Inventory optimization minimizes shortage costs by maintaining optimal stock levels, identifying risk areas, and automating replenishment. Some systems even assign monetary values to potential stockouts to aid decision-making.
