On the Evaluation of Shortage Costs for Inventory Control of Finished Goods

This paper summarizes work performed in evaluating shortage costs associated with stockouts for each of a manufacturer's seven thousand catalogued line items. A modified version of a decision tree model proposed by Yu Chang is employed in a determination of estimated unit shortage costs for a stratified random sample of items. The data required by this model for describing customer behavior were obtained via direct interviews and an extensive mail survey, while the remaining data were extracted from records of the manufacturer. The results are extended to all items on the basis of an excellent correlation between, the evaluated unit shortage costs and unit gross profits of the items in the sample.