What do "stockout costs" entail?

Stockout costs refer specifically to the financial implications that arise when a company runs out of inventory and thus cannot fulfill customer demand. This scenario not only results in an immediate loss of sales but can also lead to potentially long-term consequences, such as customer dissatisfaction and a damaged reputation. When a stockout occurs, customers may turn to competitors to find the products they need, which can result in a shift in customer loyalty.

Considering the other options, they pertain to different aspects of inventory and supply chain management. Excess inventory and storage costs represent the financial burden associated with holding too much stock, which can incur additional costs without necessarily resulting in lost sales. Costs from supply chain delays involve disruptions in the flow of goods that may affect timely delivery but do not directly connect to stockouts. Finally, expenses associated with production downtime relate to inefficiencies in manufacturing processes, which, while impactful, are not classified under stockout costs specifically. Understanding stockout costs is vital for businesses aiming to optimize inventory levels and maintain customer satisfaction.