A Model for Measuring Stock Depletion Costs

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Abstract
This paper develops a model for calculating the cost of stock depletion (i.e., being out of stock) for a steel warehouse. A method is presented for computing expected stock depletion costs as a function of prior inability to meet a customer’s demands, both for one stock-out and for a series of future stock-outs. The model considers a set of possible outcomes following each stock depletion, the probabilities for these, and their conditional costs. Costs considered include those of emergency procurement, the opportunity cost of the typical order, and the opportunity cost of the future business to be obtained from the customer. In the problem treated here, one buyer was the sole, or at least the principal, customer for each stock item.

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