Inventory Shortage Costs

What is the optimal days' sales in inventory? It depends! Too much in inventory will result in large opportunity costs. In other words, a company has cash tied up in inventory that costs the company money and does not earn a return. However, too little inventory can be problematic as the company can experience shortage costs. In this article, the costs of inventory shortages are explained. For example, although just-in-time delivery is popular, it does create problems in supply chain management. Not only does a company need to monitor its suppliers to ensure they will be able to meet obligations, but a company must also monitor the supplier of the company's supplier. A disruption at any point in the supply chain can result in an inventory shortage. So, how much does an supply chain disruption affect a company's value? One study indicates that supply chain disruption can reduce a company's value by up to 7 percent.