Stock-out costs

These are the opportunity costs of running out of stock. They comprise:

1) The costs of lost customer sales, and therefore lost contribution to fixed costs.

2) Potential loss of goodwill with customers whose demand cannot be net.

3 Acquiring emergency supplies at higher prices to meet demand.

4) Cost production of finished goods, where raw material stock-outs occur.

The computation of safety stocks lingers on demand forecasts. The manager will have some notion (usually based on past experience) of the range of daily demand. That is the probability that exists for usage of various quantities.