Which of the following are typical costs the manufacturer may incur in ‘out of stock’ event?

A manufacturer is making a plan for strategic safety stock. To do so, they must analyse the probability of a stock out occurring and the cost impacts if it does.

Which of the following are typical costs the manufacturer may incur in ‘out of stock’ event? Select TWO that apply.
A . Extra costs for urgent transportation
B . Cost of equipment downtime
C . Costs for qualifying suppliers
D . Costs of handling inventory
Costs of approving the requisition

View Answer

Answer: A, B

Explanation:

The costs of stockouts – the costs of being out of inventory – include:

– Loss of production output

– Costs of idle time and of fixed overheads spread over a reduced level of output

– Costs of any action taken to deal with the stockout, such as buying from another stockist at an enhanced price, switching production, obtaining substitute materials

– Loss of customer goodwill due to the inability to supply or late delivery.

(Procurement and Supply Chain management – 9th Edition, K. Lysons and

B. Farrington, 2016) LO 2, AC 2.2